It is estimated that foreclosures will make up 40 percent of home sales. (Photo: respres / flickr)
Close to 40 percent of buyers are first-time home buyers.
Realtytrac reported a slight drop in August from the record pace of foreclosure notices reported in July, but the 358,471 foreclosure actions in the month were still the second highest on record. This corresponds to an annual rate of more than 2 million foreclosures, assuming an average of two notices for each foreclosure.
This means both that mortgage modification programs are still having a very limited effect in slowing the pace of foreclosure and that foreclosures will continue to glut the market with houses for sale. With combined new and existing home sales running at close to 5.5 million a year, the resale of foreclosed properties will comprise close to 40 percent of this market.
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Dean Baker | Higher Energy Prices Push CPI Up 0.4 Percent in August â€¢
Interestingly, foreclosures fell sharply in some of the former bubble states, with Nevada, Arizona, and California experiencing declines of 8.4 percent, 9.6 percent, and 14.6, respectively. In California, foreclosures are down by 9.2 percent year over year, although it still has the third highest foreclosure rate in the country. In some of these markets, prices have probably hit bottom. They are unlikely to have any sharp rebound any time soon, but the bubble has deflated and house prices are likely to move upward more or less with inflation in the years ahead.
In contrast to the situation in these former bubble markets, foreclosure rates rose across most of the New England states, although part of the rise is likely due to changes in methodology. With a 15.6 percent rise in foreclosure filings from July, Massachusetts now ranks 16th in the country in foreclosure filings. Massachusetts has yet to see any substantial decline in prices, even though its market had one of the larger bubbles in the country.
At this point, it is still too early to assess the impact of the first-time buyer's tax credit. The credit does not expire until the end of November, but anyone hoping to complete a closing by this time (a requirement to get the credit), will have to be in the market now. Over the course of October, the impact of the credit on new contracts should dwindle, as people seeking the credit will have already bought their home. If Congress chooses to extend the credit, the extension will almost certainly have much less impact, since most potential first-time buyers will have already purchased their homes.
As noted before, there is a strong likelihood that price declines will resume later this fall. The uptick in sales driven by the credit has led to a substantial increase in the number of homes offered for sale at just the time that the boost from the credit is dwindling. The inventory will also be a much larger drag in the slow-selling winter months than in the spring and summer. This imbalance is also taking place against a backdrop of rising unemployment, falling rents in many areas, and house prices that are still 10-15 percent above their trend level as a nationwide average.
The one big plus for the housing market continues to be extraordinarily low interest rates. The Fed's actions in buying up mortgage-backed securities have succeeded in keeping rates much lower than they otherwise would be. This is one part of the Fed's special lending that will be difficult to unwind any time soon.
The Fed's efforts to maintain low mortgage rates will get considerably more difficult if there is any evidence of rising inflation. In this respect, the August data on producer prices and import and export prices were not good news. The indices showed somewhat higher inflation than most economists had predicted. While current rates of inflation clearly are not a problem, and there is no plausible story of the inflation rate rising to dangerous levels any time soon, these facts will not prevent the markets from becoming concerned.
The Fed may find itself having to confront the fear of inflation rather than actual inflation. This may cause the Fed to backtrack from its commitment to buy mortgage-backed securities, which in turn will lead to higher mortgage interest rates.
Higher Energy Prices Push CPI Up 0.4 Percent in August
Wednesday 16 September 2009
The housing glut continues to hold down inflation.
The overall CPI rose by 0.4 percent in August, driven by a 4.6 percent jump in energy prices. The core CPI increased by just 0.1 percent for the second consecutive month. The overall CPI has risen at a 4.9 percent annual rate for the last quarter, compared to a drop of 1.5 percent over the last year. The core CPI has risen at a 1.6 percent annual rate over the quarter, almost identical to its 1.4 percent rate of increase over the last year.
There were few notable anomalies in the data. The price of new vehicles was reported as falling 1.3 percent, which presumably reflects the timing of sales. This knocked close to 0.1 percentage point off the core rate of inflation for the month. Hotel prices reportedly rose 0.5 percent in August after falling 7.8 percent over the last year.
Even with this jump in hotel prices, shelter costs rose just 0.1 percent. The record housing vacancy rate, together with a glut of hotel rooms, is keeping shelter costs from rising. In fact, the inflation rate in the shelter component over the last quarter has been zero. This has been a big factor in depressing the core inflation rate. Apart from shelter, the core rate of inflation rose at a 2.2 percent annual rate over the last quarter.
The inflation in the core comes largely from the usual sources. Health care costs rose 0.3 percent in August and have risen at a 2.7 percent rate over the last quarter. Education costs rose 0.5 percent for the month and have risen at a 5.8 percent annual rate over the quarter. Tobacco costs rose just 0.1 percent in August, but have risen at a 13.2 percent rate over the quarter, driven by higher taxes. This increase added almost 0.2 percentage points to the core inflation rate over the quarter.
There are some signs in the August producer price indexes and import/export price index that inflation could be edging upward in future months. The overall finished goods index in the PPI rose by 1.7 percent in August, driven by sharply higher food and energy prices. However, even the core index rose by 0.2 percent. The overall finished goods index has risen at a 10.4 percent annual rate in the quarter, while the core index has risen at a 2.4 percent rate.
The overall intermediate goods index rose 1.8 percent, while the core index increased 0.6 percent. The overall crude goods index rose 3.8 percent, with the core crude goods index rising by 6.0 percent. On the import side, non-fuel import prices rose 0.6 percent. Most of the increase was in raw material prices, but prices of many manufactured goods are also rising.
For the most part, these recent price increases are just reversing price declines that took place late last year or early this year. The finished goods index is still 12.3 percent below its year ago level, while the core index is 2.3 percent higher. The core intermediate goods index is down 8.2 percent, while the core crude goods index is down 30.0 percent from year ago levels.
However, the path going forward is likely to be one in which rising commodity prices and import prices do put some upward pressure on the overall inflation rate, with at least some of the price pressure showing up in the core indexes. This will have two important implications for the recovery. First the higher inflation, even if it still modest, may lead to growing fears in financial markets that could send interest rates higher. Ironically, the source of inflation has nothing to do with expansionary fiscal and monetary policy, but any uptick in inflation may increase political pressure to tighten policy.
The other problem is simply that higher inflation will erode wages, leaving workers with less money to spend. In the context of an economy that is likely to be losing jobs at least into the first months of 2010, the prospect of declining real wages does not augur well for consumption growth.