Harrisburg PA Mortgage Market Recap - Nov 20 2012
All the hype and hoopla that centered on shadow inventory and its ability to depress the housing market earlier this year seems a little overdone in retrospect.
Indeed, shadow inventory has almost become a non-issue these days, and heading into 2013 it will likely become 
even less of an issue. We say that because the Mortgage Bankers Association reports mortgage delinquencies hit a four-year low in the third quarter. At the same time, the foreclosure inventory rate fell 20-basis points, posting the lowest quarterly drop since the MBA began surveying the market.
The delinquency and foreclosure trend has actually been on the decline since peaking two years ago. We expect it will continue to decline through 2013, and very likely beyond. There are a number of reasons we think distressed properties won't spoil the recovery.
For one, negative equity is declining. Zillow reports that negative equity declined 30% in the third quarter of 2012, the largest percentage decline Zillow has ever reported.
The decline in negative equity is the corollary to rising home prices. Over the past year, we've continually, and almost without fail, reported on rising home prices. Keeping the streak alive, we report this week that Zillow's data show home values rose 1.3% in the third quarter compared to the second quarter, with the national median home price rising to $153,800.
A dearth of inventory will keep home prices rising, and thus further reduce the negative-equity overhang. New-home inventory is at record lows. The National Association of Realtors will report existing-home inventory next week, and most industry watchers are expecting inventory levels will be down sharply year over year in October. Low supply plus rising demand equals rising prices.
The current interest-rate environment should continue to ensure a minimum level of demand going forward. We are all aware that mortgage lending rates are at multi-decade lows, and that's unlikely to change through 2013.
Underwriting is the more pressing issue these days. Lending standards remain tight, particularly with lower-rated borrowers. A less diverse lending environment is one reason they remain restrictive. Private investment has yet to return in mass following the financial-sector meltdown in 2008.
Risk aversion is another reason. Lenders are rightfully concerned with the costs Obamacare will impose on the economy next year. They are also concerned with the fiscal cliff, which would mean tax-rate hikes and spending cuts. It also appears more likely that Europe could fall into recession. If that occurs, the probability rises that the United States could fall into recession too.
The fiscal cliff is the most oppressive concern these days. Democrats and Republicans have attempted to pound out various compromises. We've heard some chatter that the mortgage income tax deduction is on the table. One bipartisan plan would limit the deduction to $25,000 worth of mortgage interest annually. Other proposals include eliminating the deduction for taxpayers earning $250,000 or more, ending the deduction on second homes, and even ending the deduction entirely (this last option is unlikely).
In short, there is a heckuva lot of uncertainty in the financial markets today. Until some of the uncertainty is removed, we can expect mortgage rates to remain low, but we can also expect for underwriting standards to remain elevated.
Courtesy of Jessica Regan.
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