February 9, 2010  
Editor's Note: This is part one of a two-part Weekly Market Update focused on the growing problems in the residential housing market. This week we outline the scope of the problem, and next week we will review what steps are being taken to address it. The recent and rapid run-up in the unemployment rate has been a topic of much concern for politicians, economists and the public. However, another issue is becoming a growing problem and may soon eclipse unemployment as a focus of attention: the rapidly rising rate of delinquencies and foreclosures on residential housing. An Overview of the U.S. Housing Market Every two years, the U.S. Census Bureau conducts its American Housing Survey. The most recent data, despite being from 2007 (just prior to the start of our Great Recession), are a reasonable starting point to get a perspective on the scope of the housing problem in the U.S. (The 2009 survey results will not be available until this autumn.) As the table below summarizes, the U.S. has approximately 110.7 million occupied housing structures. 75.7 million (or 68%, consistent with reported home ownership rates for the U.S. from other sources) are owner-occupied, with the great majority of these being single unit housing structures. Approximately 50.6 million owner-occupied housing units have some form of mortgage financing attached, whether it is a primary mortgage, a home equity line of credit, or some combination of mortgages and/or home equity lines of credit.
Notes: (1) Includes attached and detached units. Rising Delinquency Rates The U.S. Federal Reserve measures delinquencies on loans secured by one- to four-unit properties, including home equity lines of credit. As the chart below illustrates, this measure of delinquency has skyrocketed since the end of 2007 to approximately 10% of the value of mortgages.
The "good news" in this worrying trend is that the problem is fairly localized geographically. Four states-California, Arizona, Nevada and Florida (sometimes referred to as the "Sun and Sand States")-have a disproportionate share of residential mortgage delinquencies. And together, they had approximately 45% of all foreclosures started in the second and third quarters of 2009. In fact, the Mortgage Bankers Association (MBA) reports that one in four residential mortgages in Florida were either delinquent or in foreclosure as of the start of the fourth quarter last year! What happened in these four states was clearly a speculative real estate bubble that built up over much of the past decade. The more recent and worrying trend is that as unemployment grows and persists at near record-high levels, states that never experienced a major real estate bubble are now seeing their rates of mortgage delinquency and foreclosure rise. States which have been particularly hard hit by rising unemployment such as Michigan, Illinois and Ohio are seeing rapid increases in mortgage delinquencies and foreclosures. Subprime and Prime Mortgages Just as this crisis has a geographical "ground zero," until recently it was also largely contained to a variety of subprime mortgages involving initial low teaser rates, very low or no down payment requirements, minimal or no credit checks on the borrowers, and so on. However, similar to the problem of growing delinquencies and foreclosures beyond Sun and Sand States, we are now also seeing a trend in rising delinquencies and foreclosures with prime loans. The MBA's quarterly National Delinquency Survey covers residential first lien mortgages and lines of credit on one- to four-unit housing structures (approximately 45 million in total) with about 85% coverage of all U.S. residential housing mortgages. Unlike the Federal Reserve data, the MBA counts delinquencies and foreclosure rates on an incidence (not dollar value) basis. They also measure delinquencies by several categories including 30-59 days, 60-89 days, and greater than 90 days delinquent. (This last category is called "seriously delinquent" and is a good indicator of the flow of new foreclosures.) Based on the trends reported in their third quarter 2009 survey, we can see the worrying trend of problems in the prime mortgage market using two measures: 1) all loans at least 30 days delinquent (light green line) and 2) a combined measure of seriously delinquent loans (greater than 90 days delinquent), plus those in inventory for foreclosure (i.e. where the process is under way or about to begin).
According to the MBA survey, the overall level of residential mortgage delinquencies is at an all-time high based on their data going back to 1972. The MBA's chief economist Jay Brinkmann also noted that "The outlook is that delinquency and foreclosure rates will continue to worsen before they improve [in part because] it is unlikely the employment picture will get better until sometime next year and, even then, jobs will increase at a very slow pace." One contributing factor to the expectation of further rises in delinquencies and foreclosures rates for prime mortgages is that they have been held down so far by other financial resources like personal savings, which borrowers have been able to tap in order to keep up with payments. As these resources dwindle, some expect a substantial spike in prime mortgage delinquencies and foreclosures. And as foreclosures increase, this places pressure on housing prices as banks and other financial institutions seek to quickly discount and sell these properties rather than keep them on their books. While the current officially reported housing inventory (homes for sale) is about 8.2 months of current sales, the "overhang" of seriously delinquent mortgages along with properties in the foreclosure process could easily double supply at a time when housing prices have just begun to stabilize in many regions. Recent and Current Efforts to Stem the Rise In March 2009, the government launched a $75 billion Home Affordable Modification Program (or HAMP) designed to stem the rise in foreclosures. But so far, HAMP has not slowed the record rate of foreclosures. Some 2.5 million households were threatened with foreclosure in 2009 according to RealtyTrac, a company that tracks foreclosure filings nationwide. The company estimates that figure could rise to 3.5 million this year. Another approach the government has taken to stimulate housing demand is an $8,000 tax credit to people who have not owned a home for at least five years. It expired at the end of November, and December sales of existing homes fell 16.7%. The Internal Revenue Service has since extended the program through April and expanded it with a $6,500 tax credit for current homeowners who have lived in their homes at least five years but want to buy another home as their new principal residence. However, some argue this is nothing more than a housing version of the "Cash for Clunkers" program, which temporarily increased car sales until it expired last August. Putting people back to work is the ultimate solution, but with high unemployment expected to persist for this year, something else will be needed to stem the tide of rising delinquencies and foreclosures in the interim. Next Week: We examine what has been attempted to help keep people in their homes, why it isn't working and what new plans and proposals are being considered. Contact one of our Investment Consultants to learn more. Investment return and principal value will fluctuate and it is possible to lose money by investing. The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only. You should consider a fund's investment objectives, risks, and charges and expenses carefully before you invest. Click here for a prospectus, which contains this and other information about the fund, and should be read carefully before investing. American Century Investments is not responsible for and does not endorse any comments, content, advertising, products, advice, opinions, recommendations or other materials on or available directly or via hyperlinks from Facebook, Twitter or any third-party website. Facebook is a registered trademark of Facebook, Inc. Twitter is a service of Twitter, Inc.
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