Flat Pending Home Sales; Eroding Mortgage Credit Quality

MBA (3/7/2008 ) Velz, Orawin
The number of potential homebuyers signing contracts to buy previously owned homes remained flat in January. The National Association of Realtors’ (NAR) Pending Home Sales Index was unchanged at 85.9, following two consecutive monthly declines.
From last January, the index was down 19.6 percent. Regionally, pending home sales increased in two regions, jumping 13.0 percent in the West and edging up 0.6 percent in Midwest. They dropped 4.1 percent in the Northeast and 6.1 percent in the South.

The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closing, as the signed contract for the purchase of a home generally precedes its closing by one to two months. Last month, NAR reported that January’s pace of total existing home sales was the weakest in its nine-year history of the combined data of single-family detached homes and condos. Since pending home sales have not increased in the past four months, existing home sales should stabilize at the slow sales pace in the coming months.

Recent aggressive actions by the Federal Reserve have failed to spur housing demand, given tighter lending standards, a softening labor market and higher risk premiums. While the 10-year Treasury yield—the benchmark for fixed mortgage rates—declined considerably in January and remained low in February, the spread between the 10-year and conforming mortgage yields has now widened to about 250 basis points.

Yesterday, yields on agency mortgage-backed securities rose to a 22-year high relative to Treasuries. The spread between Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and the 10-year Treasury note yields widened to 227 basis points, the biggest difference since 1986. The spread helps determine the mortgage rates that homebuyers and refinancers will pay for conforming loans. In addition, the spread between jumbo and conforming rates continues to be elevated at about 85-90 basis points.

A separate report showed that mortgage credit quality deteriorated in the final quarter of 2007. The Mortgage Bankers Association’s National Delinquency Survey reported that foreclosures and delinquency rates increased in the fourth quarter of 2007. The total delinquency rate increased 23 basis points from the third quarter to 5.82 percent—the highest level since 1985. While the delinquency rate increased for the third consecutive quarter, the increase in the fourth quarter was smaller than increases in either of the previous two quarters.

The share of homes entering foreclosure process (or foreclosure starts) rose from to 0.78 percent in the third quarter to 0.83 percent, a record high. The increase in foreclosure starts was concentrated in adjustable-rate mortgage loans (ARMs). While subprime ARMs represent 7 percent of the loans outstanding, they represent 42 percent of foreclosure starts during the fourth quarter. Prime ARMs, which account for 15 percent of the loans outstanding, represent 20 percent of foreclosures starts.

California and Florida continue to represent a disproportionate share of foreclosure starts in the country. Those two states represent 21 percent of all loans outstanding, but accounted for 30 percent of foreclosure starts.

Stock markets declined sharply in response to the report showing rising mortgage delinquency and foreclosure rates. The Treasury market rallied as a result of a flight to quality. The yield on 10-year Treasuries fell six basis points and hovered around 3.61 percent by mid-Thursday afternoon.