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US housing market report
With US facing the fears of a double dip recession, investments in real estate remains sluggish. However, continuous fall in home prices and mortgage rates have brought in a great opportunity. Though the post-crisis over-cautious approach of lenders and borrowers is still playing spoilsport, current valuations and demographic dynamics may soon change the scenario.

Housing crisis continues

Housing boom in the US that began in the late 1990s led to an exponential growth in home sales. In fact, the demand remained quite strong during the period and outpaced the supply of new built as well as old homes on sale. As per reports, average sales of houses stayed at around five million per year. But with the economic crisis coming into picture, demand dipped thick and fast from over five million to less than four million. Since then, inventories have been on a painfully slow drift downward as a drop in demand offset much of the impact of the collapse in home building. However, by August of this year, combined new and existing homes listed for sale have fallen to 3.6 million units, having completed roughly 70% of the journey back to normal.

Mortgage payment at record low

With a sharp dip in mortgage rates, US Families have to leash out very low rates out of their income to pay for mortgages. As per Freddie Mac, by October 7, 2011 mortgage rates have fallen to an average annual level of 3.94%. Assuming the use of a fixed rate mortgage with 20% down, it will make the median mortgage payment on a single family existing home just 6.9% of per household personal income, compared to an average of 14.4% since 1966. While this presents a downside market, it also emphasises on the long-term gain that one can achieve by investing in the cheaper than average houses locking in cheaper long term financing available at present. Because, any demand pull in future will also pull these prices up.
Attractive buying opportunity

Cost of renting and cost of owning a home remained very close between 1988 to the start of 2005, with the implied median mortgage payment just 5% higher than median rent. However, with a big boom in real estate market the implied median mortgage payment was about 50% higher than the asking rent by the mid of 2007. Hence, owning a home became much dearer. But then tides took another turn and by the third quarter of this year, it is estimated that the implied median mortgage payment have fallen to just 78% of the median asking rent. In other words, at current mortgage rates, home prices will have to rise by 35% in order to get back to their average relationship to rents.

Recovering delinquency rate

Going by experts the problem of foreclosures is set to get worse as there is a backlog of pending ones that is being suppressed by litigation and legislation aimed at preventing foreclosures. With all such legislative attempts, the only thing noteworthy is that the mortgages issued after 2008 have less 90 plus days of pending instalments compared to the 2007-08 boom period. At the end of second quarter of 2011, it stands at 3.6 % compared to over 5% in 2008. In simple words, people are paying their loan dues more regularly which is also supposed to bring more confidence among the lenders. Experts believe that this trend will make lenders chip in more money to finance home buyers.

Valuations to remain low

The million dollar question remains: Despite positive signs, why are prices not picking up? Well, the answer lies in the expectations and perceptions of Americans. As a recent poll suggests, only 13% of Americans expected the price of their home to go up in the next year, and 36% thought it would go up over the next five years. On the other hand, a similar survey in 2006 showed that 81% expected the value of their home to increase. The attitude of lenders is also a problem. Lenders are trying to use every cautionary measure that they missed in the fury of 2008 and this overcautious approach is not allowing enough financing in the housing sector. However, as this reluctance is slowly fading, the housing sector may soon get going.

By:- Ashish Kumar

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