Measuring Progress in U.S. Housing and Mortgage Markets
U.S. housing and mortgage markets have experienced
historic distress over the past three years. Housing starts
dropped from more than 2 million units in 2005 to only
553,000 in 2009, while foreclosures soared from 780,000
to about 3 million during the same period. However,
the signs of eventual recovery are beginning to emerge.
Home price declines have boosted affordability, which
in turn helped to push existing home sales in the fourth
quarter of 2009 to their highest level in almost three
years. Meanwhile, a number of government initiatives,
from mortgage modification programs to outright
purchases of mortgage-backed securities (MBS), have
been put in place to help stabilize these highly
After more than three years of mostly unremitting bad
news from the housing and mortgage sectors, analysts
are now trying to evaluate the tentative signs of stabilization
that emerged in late 2009. For example, home
prices, by some measures, rose slightly on average for six
consecutive months through November. Does this
signal the "all clear" for homeowners and mortgage
lenders? The answer is certainly “no.” At the same
time, the combination of more affordable home prices,
reduced inventory, and a leveling-off of home prices
does suggest that a new equilibrium in the housing
sector might not be that far off.
What worries analysts is that the mortgage delinquencies,
foreclosures, and distressed sales that have driven
home prices sharply lower since 2006 will outlast the
policy support that has been slowing foreclosures, lowering
mortgage rates, and encouraging first-time homebuyers
to enter the market. This chartbook examines
U.S. housing and mortgage markets for tentative signs
of recovery and evaluates those hopeful signs against
the challenges that remain.
Housing: Signs of Recovery
After more than three years of decline, the beleaguered
U.S. housing market has shown some apparent signs of
stabilizing in recent months. Inventories are down,
existing home sales are up, and residential construction
activity has stopped falling, at least for the time being.
In relative terms, these trends represent a welcome
departure from the continuous deterioration of market
conditions that began in 2006.
Sales, Construction, and Inventories
The inventory of unsold new homes in December
was 13 percent lower than one year ago (see
The months' supply of existing homes on the market
has fallen to the lowest levels since late 2006, while
the supply of new homes on the market has also
dropped from an all-time high of 12.4 months in
Home sales increased during 2009 in markets across
the South, West, Northeast, and Midwest (see
Housing construction made its second consecutive
positive contribution to gross domestic product
growth in fourth quarter 2009, after more than three
years of decline.
Residential real estate investment rose again in
fourth quarter 2009, increasing at nearly an
8 percent annual rate, albeit from an already
Continued Progress Hinges on Prices
Just as falling home prices came to represent the fundamental
source of uncertainty in mortgage markets after
2006, so too will a sustainable recovery in housing
markets depend on the stabilization and slow recovery
of home prices. This is why indications of a leveling-off
in home prices at more affordable levels during the
second half of 2009 represent a hopeful sign that housing
activity and mortgage credit distress may soon stabilize
or even improve.
The S&P/Case-Shiller 10-city home price index
registered a sixth consecutive monthly increase in
November, with a 0.24 percent gain, following more
than two years of declining prices (see Chart 4).
Recent price trends may be either a sign of sustained
recovery ahead or a temporary lull that will give way
to further price declines once government stabilization
programs begin to expire in early to mid-2010.
Home price declines and low interest rates have
contributed to dramatically improved housing
affordability during the past two years.
The National Association of Realtors' Housing
Affordability Index stood at 163.8 in December
2009 (see Chart 6). This means that a family earning
the median income had about 164 percent of the
income needed to qualify to purchase the median-priced
home using a standard mortgage.
Affordability has particularly improved in some of
the higher-priced coastal markets. In California, a
family earning the median income can now qualify
to purchase a home worth 115 percent of the
median price, up from a level of just 60 percent in
Foreclosures Cloud an Uncertain Future
Among the biggest challenges to a recovery in the
housing market is the near-record high level of foreclosures
and the excess inventory and distressed home
sales those foreclosures could impose on the market.
The more than tripling of the annual number of U.S.
foreclosures since 2006 has destabilized the housing
market and placed additional downward pressure on
home prices in what became a self-reinforcing cycle.
If both foreclosures and unemployment continue to
increase, the housing market could retrench in coming
months and the tentative recovery in housing fundamentals
Delinquencies and foreclosures have now spread into
prime space. In fourth quarter 2009, the past-due
rate for prime loans was near a record high 6.7
percent. Prime fixed-rate loans accounted for 35
percent of the foreclosure starts during the quarter
(see Chart 8).1
The abundance of foreclosure resales has contributed
to continued home price depreciation.
In California, nearly 5.6 percent of all mortgages
were in foreclosure in fourth quarter 2009.4
Although foreclosure resales in California are declining,
they remain an important consideration for
both home buyers and sellers, accounting for 40
percent of existing home sales in fourth quarter 2009
(see Chart 10).
The risk posed by still-rising foreclosures is that they
will increase the pending supply, or shadow inventory,
of homes not yet on the market. Shadow inventory
is generally made up of current foreclosures and
homes owned by delinquent borrowers that are
likely to transition into the foreclosure pipeline.
Shadow inventory, which is estimated to be 1.7
million units as of third quarter 2009, may increase
the already high proportion of distressed or foreclosed
Credit Availability: Continued Strains
While the national housing market is showing some
signs of recovery, credit markets for residential mortgages
continue to be stressed. Tightened credit standards,
declining consumer net worth, rising delinquency
and foreclosure rates, the lack of private MBS issuance,
and the collapse of the subprime market have limited
funding channels and lending opportunities. Government
programs and agencies have filled the void largely
through policy initiatives and implicit or explicit
Tightened Credit Standards
Poor mortgage loan performance has prompted tighter
Residential credit quality has deteriorated. The
noncurrent ratio for one-to-four single-family
mortgages increased to a record high 9.9 percent in
fourth quarter 2009, nearly double the level of one
Banks have tightened credit standards on residential
mortgage loans. The Federal Reserve's January
survey indicated that banks tightened lending standards,
on net, for both prime and nontraditional
mortgages (see Chart 11).
The volume of jumbo mortgage originations for
2009 now appears on track to match 2008 levels.
The change in mortgage production has created a
fundamental shift in the composition of mortgage
The government-sponsored enterprises (GSEs)
Fannie Mae and Freddie Mac and the government
mortgage insurance program Ginnie Mae together
account for more than 95 percent of total MBS
issuance since 2008.7
Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) guaranteed mortgage loan originations accounted for almost
one-quarter (24 percent) of mortgage originations
through third quarter 2009, up from a low of 2.7
percent in 2006 (see Chart 13).8
FHA-insured mortgages will remain a strong force in
the mortgage market, but the rate of increase may
slow as the result of the recently announced tightening
The GSEs' higher conforming loan limits and the
FHA's higher mortgage limit are helping to support
housing markets by increasing the availability of
mortgages for homes in higher-priced areas.
Government Adds Liquidity to the Market
Throughout 2009, the government added liquidity to
the flagging mortgage credit markets as the Federal
Reserve and the U.S. Treasury became primary purchasers
of agency MBS.
The Federal Reserve's net purchases of agency
during 2009 totaled $1.11 trillion,
representing 65 percent of the total $1.71 trillion in
agency MBS issued during 2009.9
The government is likely to remain a major investor
in the flagging mortgage market for now with its
commitment to purchase a total of $1.25 trillion in
agency MBS by the end of first quarter 2010.
Together, the Federal Reserve and Treasury hold
an estimated 12 percent of total agency MBS
The GSEs have spurred issuance of MBS by adding
liquidity to a constrained mortgage market. The
$1.71 trillion dollars of agency MBS issued during
2009 represents nearly a 47 percent increase from
2008 (see Chart 14).11
Refinance originations surged to 76 percent of originations
in the first half of 2009. Refinancing activity
slowed around mid-year as mortgage rates increased,
but it picked up again in the second half of 2009 as
The Mortgage Bankers Association expects that
total mortgage production in 2009 rose by about
40 percent to $2.1 trillion, largely on the strength of
Total originations are expected to decline by 40
percent in 2010 to $1.3 trillion, as the drop in refinancing
originations in 2010 will far outweigh the
expected 5 percent increase in purchase originations.
A key question going forward is the extent to which
mortgage rates may rise in 2010 as some government
support programs expire.
The U.S. housing market showed tangible signs of
improvement in 2009 as home price indices stabilized,
inventories declined, and housing affordability reached
historic high levels. Improvements in these fundamentals
are still tentative, however, and are at risk of faltering
after the withdrawal of the exceptional government
support that helped to stabilize the housing and mortgage
markets in 2009. Even if the signs of recovery
continue, residential construction, home prices, and
lending activity may remain subdued for years. But after
more than three years of historic turmoil, a return to
stable and self-sustaining housing and mortgage markets
would bring welcome relief to lenders, homeowners,
and the U.S. economy as a whole.
Authors: Cynthia Angell, Financial Economist Robert M. Miller, Economic Analyst
1 Mortgage Bankers Association, National Delinquency Survey, Fourth
2 National Association of Realtors, news release, January 25, 2010.
3 FDIC estimates based on data from the Mortgage Bankers Association’s
National Delinquency Survey for fourth quarter 2009.