The most recently released house price index data has begun to indicate some stabilization in the housing market through shrinking rates of decline.  The monthly OFHEO index covering the nine US Census Divisions reported stabilizing numbers for six out of the nine divisions.  Three divisions were reported to have appreciation from the April to May period with the largest being in the Pacific region.  The S&P/Case-Shiller Indexes, the most draconian indexes, have reported stabilization in fifteen of the twenty regions covered in its monthly Composite-20 index.  Although the data is not showing a drastic turn around, indications are for slightly slowing levels of price decline and in seven regions, appreciation from the prior month.

      Although the two index creators continue to indicate a very different picture on the national level of depreciation since the recent housing boom, it is encouraging to see consistencies in the direction of index results in some important regions.  The OFHEO reports that the housing market peaked in April of 2007 and has since declined 4.8%.  S&P/Case-Shiller reports the housing peak to have occurred in June of 2006 and has since declined 16%.  The critical difference between the two indices, that OFHEO’s data set excludes non-agency loans and consists of purchase only transactions, is clearly the catalyst driving their opposing views of the current state of housing.  What is important in the recent index reports is that both providers are showing slight signs of stabilization in California (see graphs below).  Since California loans were an overwhelmingly large portion of the collateral securitized in the now defunct non-agency mortgage bond market, signs of performance improvement in that state will greatly boost credit perceptions on a large portion of the residential ABS secondary market.  Reviving demand in that non-agency secondary bond market is the most important first step in revitalizing the new origination mortgage markets.



      An important driver of performance turnaround is the increasingly better job that is being done by servicers processing the backlog of REO liquidations and delinquency workout modifications.  Currently about a third of home sales are from supply as a result of foreclosure.  This is a massively larger portion when compared to that during the housing boom cycle.  Processing this supply will help to establish market clearing levels as these homes are typically sold at a reduced value.  This will increase the number of homes sold and reduce the excess supply.  MIAC has been leveraging its servicing relationships to gather data on foreclosure timelines to aid housing stock projections and refine our loss modeling.  In addition to REO sale productivity, servicers are helping to slow the rate of home value decline by performing loan modifications more frequently.  The results are that more borrowers stay in their homes leaving less housing supply to hit the market through foreclosure.

      The largest risk to downside home price movement is that too many jumbo sized REO properties hit the market at the same time without purchase financing.  With the strong liquidity presence in agency eligible origination guidelines but lack of non-agency jumbo programs in today’s market, the supply of REO property will be met without demand where lending is not conforming balance, agency eligible.  The risk for continued depreciation is that these properties start establishing clearing levels at a price determined by the highest obtainable loan limit.  REO properties that last sold for high amounts could contribute large declines in sales pair data with limited large balance loan availability.  A better scenario for price stability would be where loan modifications account for enough reduction in housing supply making the volume of properties that do hit REO manageable for banks to provide financing.

      MIAC believes that national peak to trough decline will be in the 24% to 28% range with opportunity for less decline to come as a result of progression in the federal government assistance programs.  It is likely that traction made in this space could trigger buyer participation from investors and speculators that are currently on the side-lines.  Although it is unlikely that aggressive loan origination programs will enable buyers to escalate housing values to recent highs, the start of the rebound could take shape faster than expected.  The catalyst will likely come from the correctional focus that governments and servicers have made coupled with the education that the next generation of investors have received learning from the publicity of past mistakes.