American Housing Market in further Decline

The number of house sales in US fell 2.6 per cent in the year to April 2007. There is now a backlog of homes not being sold; supply is greater than demand. The average selling price for homeowners who do find a buyer has also started to fall.

There is little evidence that the worst of the US housing market recession is over. The collapse in the sub prime market means that banks and building societies are no longer lending to people with bad credit histories. This is a big chunk of the market.

Furthermore, many with existing mortgage deals will soon becoming to the end of their introductory rates, therefore, in a few months there will be an increasing number of people who struggle to meet their mortgage payments. Many mortgage experts predict a continued rise in the number of home repossession.

There are concerns the recession in the US housing market may be mirrored in the UK. Although, house prices in the UK had a similar exponential rise, at the moment demand is still greater than supply. Also, the sub prime market in the UK is much smaller.

• American Housing Market
• American Mortgage defaults grow
• US housing market deteriorates Independent
  

American Housing Market

The American Housing market has experienced a significant boom and bust in the past 12 months.

US house prices have been rising at a faster rate than incomes and rents for several years. For example the average house price to incomes reached 190% in 2005, compared to 100% in 1952.

There are several reasons to explain the collapse of the US housing market.

In addition to house prices rising above trend for a long time. There are several other reasons which contributed to the rapid rise and then fall in house prices. These include

Sale of discounted sub prime mortgages. These maintained demand at the expense of increasing risk.

Rising interest rates have made many of these sub prime mortgages unaffordable for low income and bad credit homeowners.

See also:

• Dangers of Sub prime mortgages
• Defaults in US mortgage industry
• Will mortgage defaults in US cause Recession?
• US Housing market to cause recession
• End of the American Housing Boom
  

Defaults in UK and US Mortgage Industry

Is the UK mortgage industry likely to experience same problems of debt default as US mortgage industry?

Defaults on American mortgages have been making headline news recently with a record number of defaults; up to 4.95%. For the sub prime market this rate of defaults has reached 13%. Some are concerned that there are similarities between the American housing market and the UK housing market and in the future the UK could experience a similar level of defaults. However it is worth pointing out that there are differences between US mortgage industry and UK.

1. The number of 100% mortgages is much lower in the UK. 100% mortgages are quite rare, especially in the bad credit or sub prime sector. In the US 50% of sub prime mortgages were 100% mortgages

2. UK mortgage dealers are generally more risk averse. Even for self-cert mortgages there is more checking of income than in the US. See dangers of sub prime mortgages.

3. House prices are not falling. In the US many now have negative equity with no possibility of Remortgaging. Some believe the UK housing market is overvalued, however it is worth remembering that supply constraints in UK the may enable house prices to keep rising. see house prices to keep rising

4. Interest rates in the US have shot up sharply. US interest rates have increased from 1% to 5.25%; this is the main reason for loan defaults in the US. Interest rates have risen by more than people expected. In the UK interest rates move much more gradually. E.g. in the last 8 months there has been 3 increases of 0.25%

5. In the UK fixed rate mortgages are more common than in the US. These give additional security against rising interest rates.


However it is worth bearing in mind that

1. UK house prices could fall. The house price to earnings ratio is at an all time high and it has made it difficult for first time owners to buy. House prices could fall

2. UK consumers have a high % of indebtedness. This makes them susceptible to any future rise in interest rates.

3. The sub prime market in the UK is likely to grow. Figures by Datamonitor show 9.1 million people of working age were refused credit by mainstream lenders during 2005. In 2010 this figure is predicted to rise to 9.4 million.


Reference

Independent

Dangers of Sub Prime mortgages

In the past week headlines about the US mortgage industry have dominated the news. In particular the number of defaults on mortgage payments is growing very rapidly. These defaults are concentrated on the sub prime sector. These mortgages are aimed at those with bad credit or non-status. Often these mortgages are approved without making any checks about the income status of the borrower. In the UK there has been a similar increase in the number of self-certification mortgages and other non-conventional mortgages.

The growth in sub prime mortgages has been very significant. In the US it has allowed over 6 million people to be able to buy a house for the first time. However the success of the sub prime market was mostly dependent on rising house prices. Rising house prices enabled borrowers to remortgage (refinance); this means that after a couple of years they were able to switch their mortgage and get a better deal. Rising house prices were particularly important for people who were getting 100% mortgages. This is a mortgage with no deposit. Because of the risk traditionally these 100% mortgages lead to higher interest payments. However if house prices rise it means the mortgage becomes a smaller % of the value of the house.

Unfortunately the situation is that US house prices are now falling. This means that homeowners are unable to remortgage and in many cases are left with negative equity. (house worth less than the mortgage debt)

Dangers of “Teaser” Mortgage Terms.

Another feature of sub prime mortgages is that often there was a special introductory rate to make mortgages more attractive. For example in the first year or two the interest rate on the mortgage was much lower than subsequently, this had the effect of encouraging borrowers to take on a mortgage that becomes increasingly difficult to pay back. Therefore as more sub prime mortgages reach the end of their introductory period the number of defaults is likely to grow.

The Guardian (16^th March 2007) report the story of Simeon Ferguson an 85 year old father with dementia. Unwittingly he took on a new mortgage with a fixed rate for 30 years. The introductory teaser rate offered him a monthly payment of $1,482, however after 3 years this jumps to $4,200. It is only at this point that the mortgage involves capital repayment. However the pension of Simeon Ferguson is only $1,100 a month. This is an extreme example of how US mortgage companies have been willing to ignore the most basic of credit checks in order to be able to sell as many mortgages as possible.

from Guardian

• See also More defaults on US mortgages
• Non Status Mortgages
• Shakedown - sub prime jitters in US at Economist
  

More Defaults on American Mortgage

The troubled American Mortgage industry suffered a further set back yesterday with record levels of defaults. The concerns created in the US housing market set share prices tumbling over renewed fears of the prospects of an impending US recession

The Mortgage Bankers Association revealed that

4.95pc all loans tracked were in arrears of 30 days or more, the highest since the depths of the 2002 recession. Deliquencies on sub-prime loans have reached 13.3pc, even though the economy has barely begun to slow.

Furthermore with falling house prices US Federal Reserve governor Susan Bies said the problems in the sub prime mortgage industry would deepen. This is because many were bought on the assumption of rising house prices. For example some in the sub prime industry bought interest only mortgages, or got a mortgage with a heavily discounted period for first 6 months.

As house prices fall it makes it more difficult to deal with mortgage arrears

American Mortgage defaults grow.

There is an increasing worry that problems in the US housing market is spreading to medium risk mortgage loans. Worries about the sub prime market (highest risk type of loans) has been in evidence for a while. HSBC for example is getting ready to write off $11 billion in bad debt loans. However according to David Liu, a mortgage analyst in UBS. THe number of defaults for US mortgages in the medium risk category has doubled to 2%, this is forecast to rise to 5% as the American Housing market continues to suffer from falling house prices. There are also concerns about rising interest rates and a general slowdown in the economy.

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