by Calculated Risk on 1/02/2008 02:59:00 PM

This morning I excerpted from Goodman and Bajaj's article in the NY Times: In the Land of Many Ifs. Here is the story in graphs (NY Times excerpts in italics):

"An era of free-flowing credit and speculation has led to a far-flung empire of vacant, unsold homes — 2.1 million, or about 2.6 percent of the nation’s housing stock ..."

Click on graph for larger image.

The first graph shows the homeowner vacancy rate since 1956. A normal rate for recent years appears to be about 1.7%. The current homeowner vacancy rate is 2.6%.

This leaves the homeowner vacancy rate almost 1% above normal, or about 750 thousand excess homes.

But this only part of the excess housing inventory story. The rental vacancy rate is 9.8% - off the 2004 record of 10.4% - but still significantly above the normal rate. And new home inventory is also near record levels.

Here is a rough estimate of the excess inventory (see this post for details):

Source	Units
Rental Units	700,000
Vacant Homeowner Units	750,000
Excess Builder Inventory	250,000
Total	1,700,000

"... economists suggest ... national home prices [will] fall by at least 15 percent from their peak. So far, prices have dropped a little more than 5 percent, according to the Standard & Poor’s Case-Shiller home price index."

This graph shows the S&P/Case-Shiller index is 5% off the peak, and the OFHEO index declined slightly last quarter.

To put this potential price declines into perspective, this graph shows 15% and 30% nominal price declines for the S&P/Case-Shiller U.S. National Home Price Index and the OFHEO, Purchase Only, SA index.

A 15% nominal price decline would take prices back to late 2004 for both indices. A 30% price decline for Case-Shiller would take prices back to mid-2003; 30% for OFHEO would take prices back to late 2002.

... default rates on loans to homeowners with relatively good credit ... are rising sharply ... This is a potentially ominous sign ... The spike in foreclosures is happening even before many mortgages have reset to higher rates, suggesting that borrowers are falling behind because their homes are worth less.

Here is a graph of the overall MBA mortgage delinquency rate since 1979.



This is the overall delinquency rate, and it is at the highest rate since 1986. As noted, delinquencies are getting worse in every category - including prime fixed rate mortgages - and getting worse at a faster rate in every category.

Through the recent era of multiplying housing prices, Americans have turned increased home values into cash via sales, refinanced mortgages and home equity loans — more than $800 billion a year from 2004 to 2006, according to several analysts. The pace of this flow has slowed sharply in recent months.

Here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction through Q3 2007, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

For Q3 2007, Dr. Kennedy has calculated Net Equity Extraction as $133.0 billion, or 5.2% of Disposable Personal Income (DPI).

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, both in billions of dollars quarterly (not annual rate), and as a percent of personal disposable income. As homeowner equity declines sharply in the coming quarters - household real estate equity declined $128 Billion in Q3 - combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

And from the NY Times graphic:

"In the last 50 years, most recessions have been preceded by a sharp drop in residential investment. Some economists worry the historical pattern doesn't bode well for the economy in 2008."

This graph shows Residential Investment (RI) as a percent of GDP since 1960.

Residential investment, as a percent of GDP, has fallen to 4.51% in Q3 2007, and is now below the median for the last 50 years of 4.56%.

Although RI has fallen significantly from the cycle peak in 2005 (6.3% of GDP in Q3 2005), RI as a percent of GDP is still well above all the significant troughs of the last 50 year (all below 4% of GDP). Based on these past declines, RI as a percent of GDP could still decline significantly over the next year or so.