The $4 trillion housing headache

House prices have returned to 2002 levels, but mortgage debt hasn't deflated from its bubbly highs.

NEW YORK (Fortune) -- House prices are taking a long ride in the wayback machine. Unfortunately, Americans' housing-related debt isn't going anywhere fast.

Prices in big U.S. cities posted their biggest-ever decline in the first quarter, according to the most recent S&P/Case-Shiller National Home Price index. After nearly three years of declines, house prices nationwide are back at 2002 levels -- and still falling.

Yet as bad as that is for overburdened homeowners and their bankers, the mighty mountain of mortgage debt Americans have taken on is an even bigger concern - especially for those who believe an economic recovery is in sight.

Even though the amount of home mortgage debt outstanding declined in 2008 for the first time since the Federal Reserve started keeping track in 1945, mortgage debt levels remain distressingly high.

Home mortgage debt outstanding was 73% of gross domestic product last year, according to government data. That's the third-highest reading on record, after the 75%-plus bubble years of 2006 and 2007.

Getting that ratio down to a more manageable number will mean more lean years ahead, as Americans further cut spending to rebuild their savings and banks struggle to boost their capital amid heavy loan losses.

How long this process might take is a key question for those trying to gauge the prospects for an economic recovery.

To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data.

We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy - a course of action that will do little to solve the problem of too much debt.

Of course, these figures reflect only back-of-the-envelope estimates. Depending on the level of interest rates and how successful officials are in restoring the vigor of the lending markets,mortgage debt may or may not need to drop that far to relieve some of the stress on consumers.

Still, there is little doubt that above-average debt levels will impede the sort of consumer-driven economic rebound that has taken place after the last few recessions.

"I don't think that there is any magic to the '90s debt levels," said Dean Baker, an economist at the Center for Economic and Policy Research in Washington. "The point is that with higher debt levels, people will be consuming less."

Borrowers who are overstretched on their mortgages are less able to spend money on other goods and services, and more apt to fall behind on payments. That could mean more painful writedowns ahead for already troubled banks.

The scale of the mortgage overhang may help explain why, even after banks such as JPMorgan Chase (JPM) and Citigroup (C) received generally upbeat stress test results, some prominent skeptics of the housing bubble are warning that the financial system's problems aren't over.

"There is still a very large unfunded capital requirement in the commercial banking system in the United States and that's got to be funded," former Fed chief Alan Greenspan said last week in an interview with Bloomberg. He added that "until the price of homes flattens out we still have a very serious potential mortgage crisis."

California's unsold home backlog shrinks

California's unsold inventory index -- the number of months needed to deplete the supply of homes on the market at the current sales rate -- fell to 4.6 months in April, compared with 9.8 months a year ago.

The California Association of Realtors reported Thursday that the median number of days it took to sell a single-family home declined to 48.7 days, compared with 51.8 days in April 2008

Home sales increased 49.2 percent year over year, while the median price of an existing home declined 36.5 percent, CAR reported.

Closed escrow sales of existing, single-family detached homes in California totaled 540,360 in April at a seasonally adjusted annualized rate, according to information collected by CAR, and the median price of an existing, single-family detached home in California during April was $256,700, a 36.5 percent decrease from the revised $404,470 median for April 2008.

Statewide, the 10 cities with the highest median home prices in California during April were Santa Barbara, $870,000; Los Gatos, $870,000; Newport Beach, $853,500; Santa Monica, $820,000; Cupertino, $811,000; Danville, $725,000; Arcadia, $686,090.50; Redondo Beach, $660,000; San Clemente, $659,500; San Ramon, $630,000, and San Francisco, $625,000.

Get your $8,000 HUD tax credit now

HUD tweaked stimulus tax incentive so first-time home buyers get instant assistance with down payment and closing costs.

NEW YORK (CNNMoney.com) -- First-time homebuyers will now have access to quick cash to help them with their down payments.

On Friday, the U.S. Department of Housing and Urban Development (HUD) announced that first-time homebuyers using FHA-approved lenders can now get an advance on the $8,000 tax credit created by the stimulus package and apply it toward their down payments or closing costs.

"We believe this is a real win for everyone," said HUD secretary Shaun Donovan in a speech before the National Association of Homebuilders (NAHB). "Families will now be able to apply their anticipated tax credit toward their home purchase right away. What we're doing today will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing."

As part of the stimulus package, Congress created a refundable first-time homebuyers tax credit in hopes of helping on-the-fence buyers to take the home-purchase plunge. But buyers couldn't collect the $8,000 credit until tax time, rather than at closing time -- when it's needed.

The delay created an obstacle to reigniting the housing market because most first-time buyers -- the ones who would buy much of the available inventory -- have only saved enough to cover 4% of the purchase price, according to the National Association of Realtors.

The mechanics of the new program, according to NAHB economist Robert Dietz, allow lenders to purchase tax credits from the buyers and then collect the rebate from the IRS.

The initiative also authorized similar programs already offered in Colorado, Missouri, New Jersey, Pennsylvania, Tennessee, Washington and other states. To quickly infuse cash into their housing markets, the housing finance authorities in these states created bridge loans to allow buyers to borrow against the $8,000 credit and then repay it with their tax refunds.

The first state to launch such a plan was Missouri, which rolled out its Missouri Housing Development Commission Tax Credit Advance Loan program on January 14 -- a month before Congress approved the stimulus package. Since then, Missouri has approved applications by more than 360 borrowers and closed on 166 of them.

Lamar Cherry and his wife, Chrishanna, used the program to augment their down payment when they bought their home in Kansas City.

The couple purchased a four-bedroom, three-bath split-level home for $150,000, putting about 6% down. Much of that $9,000 came from the loan program, which they tapped so they wouldn't have to drain their reserves.

"We had money saved up that we were going to use for the down payment," said Cherry. "Now we can use some of that to buy some things we need for the house."

At closing, the Cherrys, like all buyers in the program, signed for their first mortgage, plus a second mortgage issued by the state. The second note is good for 6% of the price of the home, up to $6,750; there is a $350 set-up fee, but no interest is charged if the debt is repaid by June 2010.

In Missouri, borrowers can only access $6,750 of the $8,000 credit for down payments. "We wanted them to have a cushion below that $8,000 in case other tax liabilities show up," said Greg Spurgeon, the single-family homeownership administrator for the Missouri Housing Development Commission.

If borrowers don't pay off the note, it becomes a 10-year fixed-rate mortgage with an interest rate one-half percentage point above that of their first mortgages. For example, borrowers paying 6% on their first mortgages would be charged 6.5% on the second.

So far, Spurgeon said, a significant proportion of participating homebuyers have repaid their loans. He expects most of the others to do the same before the deadline.

Cherry has claimed the federal tax credit on his 2008 taxes, but he hasn't gotten his refund yet. He definitely intends to repay the loan before the 2010 deadline because, he said, not doing so would add about $75 a month to his house payments. 

Mortgage Rates Largely Up

Mortgage rates were mostly higher again this week as long-dated Treasury yields continued to increase, according to Freddie Mac's (FRE) weekly survey of mortgage rates, released Thursday.

Mortgage rates had fallen in recent months as providers try to entice buyers amid the housing market downturn. But many consumers are wary of making the commitment to purchase a home - and many prospective buyers face challenges getting financing amid the tight credit market.

The 30-year fixed-rate mortgage averaged 4.91% for the week ended Thursday, up from last week's 4.82% average and down from 6.08% a year ago. Rates on 15-year fixed-rate mortgages were 4.53%, compared with 4.50% and 5.66%, respectively.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 4.82%, up from 4.79% last week and well below their 5.62% average a year ago. One-year Treasury-indexed ARMs were 4.69%, down from 4.82% and 5.22%, respectively. 

Job Losses Spur Mortgage Defaults

Rising unemployment is leading to more mortgage defaults, a new survey shows.

About 12% of first-lien home mortgages in the U.S. were overdue or in the foreclosure process at the end of March, the Mortgage Bankers Association reported Thursday. That's up from 8.1% a year earlier. The trade group's quarterly survey covers mortgages on one- to four-family residences. At the end of the latest quarter, 8.2% of the loans were at least 30 days overdue and 3.9% were in the foreclosure process.

What started in 2006 as mainly a problem among subprime loans, those for people with weaker credit records, continues to spread to more prime borrowers. People who lose their jobs and find that they owe far more than the current value of their homes are more likely to give up on making payments. 

Mortgage rates: 30-year still rising

Home lending rates jump higher, with the 30-year fixed rate spiking to 5.45% in the week ended Wednesday.

Home mortgage rates jumped in the most recent week, pulled higher by rising Treasury yields, according to a report released Thursday.

The average 30-year fixed mortgage rate rose to 5.45% in the week ended Wednesday, up from 5.24% last week, according to a weekly national survey from Bankrate.com.

"Investors' nerves were rattled by a potential General Motors (GM, Fortune 500) bankruptcy and a week of substantial government borrowing," which "agitated would-be bond investors," the report said.

Mortgage rates move in tandem with Treasury yields. In particular, the 30-year fixed mortgage rate tracks the benchmark 10-year Treasury yield. In recent days, that benchmark yield has spiked to levels not seen since November 2008.

"Now the ball is in the Federal Reserve's court, as they could step up the pace of their bond buybacks in an effort to reverse some of this week's increase," the report said.

Even as mortgage rates continue to rise, they still remain much lower than last year, when the average 30-year fixed mortgage rate was 6.20%, according to Bankrate.com.

To translate the difference in mortgage rate into dollars for a homeowner, consider a $200,000 loan. At 6.2%, the monthly payment would come out to $1,224.94, or $95 higher than the $1,129.31 monthly payment at 5.45%.

With the government spending hand-over-fist to jumpstart the economy, the Treasury has been forced to sell unprecedented amounts of debt. The volume of supply has pushed down prices, sending yields higher. Yields and prices move in opposite direction.

Rising mortgage rates could slow a housing recovery, which the Obama administration has been working hard to jumpstart in an effort to start pulling the economy out of its recession.

Bankrate's national weekly mortgage survey is conducted each Wednesday from data provided by the top 10 banks and thrifts in the top 10 markets.

Other rates: The average 15-year fixed rate mortgage jumped to 4.86% from 4.74% the week prior.

The average jumbo 30-year fixed rate ticked up to 6.6%. Loans are considered "jumbo" when they are too large to be purchased or guaranteed by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). Jumbo loans have higher rates than smaller "conforming" loans, which do have guarantees.

Adjustable-rate mortgages were mixed, the report said, with the average 1-year ARM inching higher to 5.03% and the 5-year ARM sinking to 4.94%.

Mortgage Applications Slide 14%

Mortgage applications filed last week fell a seasonally adjusted 14.2% from the week before, as rates on 30-year fixed-rate mortgages ticked up, according to the Mortgage Bankers Association's weekly survey, released Wednesday.

Applications were up 28.5% for the week ended May 22 compared with the same week in 2008. The MBA survey covers about one-half of all U.S. retail residential mortgage applications.

Refinance applications were down an unadjusted 18.9% last week versus the week before. Applications for mortgages to purchase a home were up a seasonally adjusted 1.0%, compared with the previous week.

The four-week moving average for all mortgages was down 4.7%.

Existing Home Sales Climb 2.9%

Home sales rose in April as buyers pounced on foreclosures, but inventories shot up and prices kept tumbling, delaying a housing sector recovery.

Existing-home sales increased 2.9% to a 4.68 million annual rate from 4.55 million in March, the National Association of Realtors said Wednesday. About 45% were foreclosures and short sales.

Distressed property sales are pressuring prices downward. The median price for an existing home last month dropped 15.4% to $170,200 from $201,300 in April 2008.

"With supply overhang still huge and mortgage financing difficult to obtain, home prices are likely to decline considerably further in the quarters ahead," said Joshua Shapiro, chief U.S. economist at MFR Inc.

Lower prices, combined with historically low borrowing costs, have increased affordability. The average 30-year mortgage rate was 4.81% in April, down from 5.00% in March, Freddie Mac (FRE) data show. Realtors also hope demand is stirred by the $8,000 tax credit for first-time home buyers included in the Obama administration's economic stimulus package.

Home Prices Drop 19% In 1Q

Those thinking the housing market is near bottom might want to reconsider.

U.S. home prices continued their multiyear tumble in March, according to the closely watched S&P Case-Shiller home-price indexes, as the worst downturn in decades shows no near-term signs of abating.

With price stabilization important for recovery -- many potential buyers remain fearful values aren't finished plummeting - Tuesday's results dampen recent optimism that has emerged as home builder confidence and foreclosure sales increase.

"Prices are still declining. The rate of decline isn't gaining momentum, but it hasn't decelerated either," said Robert Curran, Fitch Ratings' lead home-building analyst. "To establish that things have hit bottom, you'd want to see stability. And we still don't see that."

S&P/Case-Shiller 20-city home price index

Metro area 1-year change (%) Phoenix -36.0% Las Vegas -31.2% San Francisco -30.1% Miami -28.7% Detroit -25.7% Minneapolis -23.3% Tampa -22.4% Los Angeles -22.3% San Diego -22.0% Chicago -18.6% Washington -18.4% Seattle -16.4% Atlanta -15.7% Portland -15.3% New York -11.8% Charlotte -9.3% Cleveland -9.0% Boston -8.0% Dallas -5.6% Denver -5.5% Composite-20 -18.7%

Source:S&P/Case-Shiller

Orlando, FL : New-home backlog tops among big metro areas

Orlando has the biggest supply of vacant new homes of any major U.S. metropolitan area, according to a Metrostudy analysis of housing data from the markets it surveys nationwide.

The four-county metro area has an 11.7-month supply of finished-but-empty residential properties, compared with a normal supply of one-and-a-half to three months for most major markets, the Houston-based company said last week.

"The higher the months of supply, the greater the downward pressure on starts and prices, and Orlando and coastal Southern California, along with Las Vegas and San Diego, have the most severe problems," said Brad Hunter, Metrostudy's chief economist.

The Orlando market has been cutting into its built-but-unsold inventory, with 18,423 move-ins and 12,000 starts during the 12 months that ended March 31. But other markets are making faster progress: Atlanta, for instance, had more than 20,007 move-ins and fewer than 9,000 starts for the same period.

HBA cutbacks

The dubious distinction of having the nation's largest backlog of new homes, as measured in months of supply, wasn't lost on the region's home-construction stalwarts.

"The builders are doing what they should be doing, which is not building," said Beth McGee, chief executive officer of the Home Builders Association of Metro Orlando. "But it's incredibly painful on a personal level to watch the people who were trying to make a living in this industry."

As a result of the chill on home-building activity, the membership association has cut its staff salaries 20 percent by going to a four-day work week, McGee said.

McGee said she has been cautious about predicting when the area's housing market will hit bottom, but she predicted a turnaround within a year based on pent-up demand from potential buyers who at the moment are putting off large purchases for fear of losing their jobs and income.

Construction

Skanska USA Building Inc. has been selected in a joint venture with JCB Construction as construction manager for the $21.8 million renovation of the Winter Park Ninth Grade Center at 528 Huntington Ave. in Winter Park. The project includes a new, 80,000-square-foot classroom/media center/cafeteria. DLR Group is the project's architect. ...

Altamonte Springs-based general contractor and construction manager Roger B. Kennedy Inc. completed the $25 million, eight-story, 224-unit Westgate Town Center Building 6100 in Kissimmee for Westgate Resorts Ltd. The project was designed by Bergmann Associates-Architects of Jacksonville.

Kissimmee-based Terry's Electric Inc.'s recent contracts include: an addition to Osceola County School District's 23,831-square-foot Pleasant Hill Elementary School in Kissimmee; the $27 million, eight-story, 184,762-square-foot Westgate Town Center Building 4000 in Kissimmee; the 22,000-square-foot Gulfside Regional Hospice in Zephyrhills; and the multimillion-dollar, eight-story, 259,100-square-foot Vacation Village at Parkway Resort in Kissimmee.

Sales

The Orlando office of Apartment Realty Advisors has been hired to market 160 multifamily units in the Milan Condominiums in the Apopka area. ARA Florida's Distressed Assets Solutions Group is the exclusive agent for the bank-owned units, which constitute two-thirds of the complex. Milan's previously sold units went for an average of $162,000 each. ...

Exit Realty plans to open two offices in the Daytona Beach area. Aswin Suri, owner of Exit Realty of Daytona Beach, said the firm will open offices this month at 1600 Big Tree Road, Port Orange, and on Beach Street in Daytona Beach. ...

NAI Realvest recently negotiated the $435,000 sale of a 5,250-square-foot industrial building at 134 Mingo Trail, Longwood. Michael Heidrich, principal, negotiated for sellers Steve and Theresa Wheeler of Sanford. George and Ana Groetzner of Longwood were the buyers, represented by Martina Leonard of Coldwell Banker. Realvest also negotiated the $160,000 sale of a 2,500-square-foot office building at 3021 E. Washington St. in downtown Orlando. Company principal Michael Heidrich negotiated the sale for the seller, Hayes Property Group LLC of Orlando. Orlando-based Timoneer Development Group purchased the property and was represented in the transaction by John Pocock of Coldwell Banker.

Leases

Realty Capital of Orlando completed several transactions: Jelpy Lopez leased 1,200 square feet at 2600 Boggy Creek Road in Kissimmee; Thomas Cook Destination Services Inc. renewed for 3,654 square feet at 1650 Sand Lake Road in Orlando; Orlando Sentinel renewed for 6,250 square feet at 904 Jan-Mar Circle, Clermont, with outside broker Cushman & Wakefield; DragonFire Industries Inc. leased 2,398 square feet at 4065-4085 L.B. McLeod Road, Orlando; and Gentiva Health Services leased 2,730 square feet at 3296 Greenwald Way North, Kissimmee. ...

Cushman & Wakefield announced some Orlando-area commercial leases and a lease renewal, including: Coco Moka Café Inc. leased Suite 103 in Lighthouse Plaza at 6400 International Drive, Orlando; National University leased 1,700 square feet in SODO, the mixed-use development south of downtown Orlando; Morse Enterprises Ltd. leased 1,200 square feet at 1155 Louisiana Ave. in Winter Park; Hunt Club Cleaners renewed a lease for 1,500 square feet in The Shoppes at Hunt Club in Longwood; and a new Sherlock's European Café leased space in Davenport, in Osceola County. ...

Lake Buena Vista Resort Village & Spa has a deal with German real estate brokerage firm Engel & Voelkers Group to market its properties to international prospects.

Loans

The Dallas and Miami offices of Holliday Fenoglio Fowler LP secured refinancing loans of $18.25 million for Harbor at Lake Howell, a 408-unit community in Casselberry. Working on behalf of LaSalle Investment Management, HFF placed the seven-year, adjustable-rate loan with Freddie Mac.

Median US Home Price Down 14%

Foreclosures and short sales weighed down median homes prices in most markets during the first quarter, while existing-home sales remained sluggish in many parts of the country, according to data from the National Association of Realtors.

Home prices have dropped steadily during the 19-month credit crunch, though some industry watchers have noted a deceleration in the rate of decline in some markets.

First-time buyers, seeing improved affordability conditions, accounted for half of all purchases during the period, as 134 of 152 metropolitan areas reported lower median existing single-family home prices year over year. 

Chicago-area home sales fall 26.4% in first quarter

Chicago-area home sales fell more than 26% in the first quarter compared with the same period last year, a bigger year-over-year drop than in the fourth quarter, according to the Illinois Assn. of Realtors.

Sales in the city plunged 37% compared with the first quarter of 2008, the Realtors’ group said in a release Friday. The median sale prices in both the Chicago-area and the city also decreased significantly from the first three months of last year.

The Realtors’ group said tougher standards for getting mortgages “had a resounding effect” on first-quarter sales.

In the nine-county Chicago region, 10,306 single-family homes and condominiums were sold in the first quarter, compared with 14,012 sales in first-quarter 2008, the association said.

In the city of Chicago, sales fell to 2,909 homes in the first quarter, compared with 4,617 in the same period last year.

The year-to-year rates of decline in the area and city were higher than in the fourth quarter. Chicago-area sales fell 22% in the fourth quarter compared with the fourth quarter of 2007, and dropped 28.7% in the city, the Springfield-based Realtors’ group said.

The 26.4% first-quarter decline in Chicago-area sales was slightly higher than for full-year 2008, when sales fell almost 25.9% compared with 2007.

“We see a sliver of good news in the growing number of units which are being sold, reflective of the absorption of the distressed properties in the Chicago market,” David Hanna, president of the Chicago Assn. of Realtors, said in the release. “The problem, however, which remains, is inadequate access to financing, with restrictive lending guidelines limiting the number of viable potential buyers from purchasing a home. The guidelines for lending are still not rational and are keeping good buyers out of the marketplace.”

The Chicago-area median price — where half the homes sold for more and half sold for less — was $187,500 in the first quarter, down 22.8% from $243,000 in first-quarter 2008, the Realtors’ group said.

The median price in the city was $216,000 in the first quarter, down 26.8% from $295,000 in the same period last year.

Statewide sales fell 23.5% in the first quarter to 16,748 homes, compared with 21,902 in the first quarter of 2008, the Realtors’ group said.

The Realtors group's sales figures include new and existing homes. The nine-county Chicago Primary Metropolitan Statistical Area consists of Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry and Will.

Construction Up First Time In 6 Mos

Total U.S. construction spending rose for the first time in six months in March, beating analyst expectations as public sector outlays increased.

U.S. construction spending rose 0.3% to a seasonally adjusted annual rate of $969.7 billion during the month, the Commerce Department reported. Analysts expected construction spending would fall by 1.3% in March.

U.S. construction spending has been falling since September, taking with it thousands of construction jobs. It has fallen more than 11% on a year-over-year basis.

In revising February's construction spending estimates, the Commerce Department on Monday said spending fell 1.0%, slightly more than its original estimate of a 0.9% drop.