2008 Mortgage Outlook: Delinquencies, Foreclosures, Too Much Inventory & New Home Construction Sinks

Implications: 2008 isn't shaping up as a good year for the mortgage industry as delinquencies hit record highs, foreclosures reach record levels, builders are faced with too much inventory and in December 2007, applications for building permits fell by 8.1%, which marked the seventh consecutive monthly decline and reflects the fact that builders have been slashing production plans in an effort to deal with a glut of unsold homes in the U.S. Another indicator that the housing market downturn isn't over is the decline in new home construction, which was down 14.2% in December 2007 and down 25% in 2007, from 2006, which is the largest amount in 27 years. The delinquency rate on mortgage loans was 5.59% in 3Q07, up from 5.12% in 2Q07, which is the highest level of delinquencies since 1986 and the value of those delinquencies surpassed $200 billion. Housing construction fell by 30.8% in the Midwest and was down 25.8% in the Northeast and 19.6% in the West and the South had the lowest decline at 3.3%.

Analysis: Drive or walk through almost any neighborhood and/or borough in the U.S. and you'll see numerous "For Sale" signs up, which is a result of record delinquencies, record foreclosures of 1.5 million in 2007, too much inventory on the market, a decline in home sales and value and we may not reach a national bottom until late 2008, due to the heavy amount of inventory on the market and it may be 2009 before the housing market rebounds. Builders are struggling with slumping demand, too much inventory, rising home defaults and tighter lending standards, which may point to housing sales continuing to fall. 

1.  FL & CA have the most mortgages outstanding; resulting in increases in foreclosure rates and in FL and CA. FL, CA and other states overbuilding has created difficult selling conditions for borrowers who are finding it virtually impossible to keep their homes. FL and CA also had a high number of investors buying properties during the real estate boom and now face delinquencies and foreclosures since the market has burst

2.  Subprime ARMs accounted for 43% of all new foreclosures in 3Q07 and Prime ARMs made up 18.7% of foreclosures started in 3Q07 and spillover is occurring into fixed rate mortgages that are held by homeowners who need to sell their homes but can't because they live in depressed housing markets.  When Subprime ARMs reset in 2008 and 2009, to a higher mortgage rate, this could ultimately lead to a jump in foreclosures as many of these borrowers can't afford the higher payment and may have a difficult time refinancing or selling their home

Takeaway:  In order for the mortgage crisis to improve, home prices would need to drop, gains would have to occur in employment and household income to make conditions more affordable for potential and existing borrowers and builders would need to offload the surplus of inventory. However, on the flip side, this could be an opportune time for potential borrowers and investors interested in refinancing their homes at a lower interest rate or for investors interested in investment property. Both parties may view the U.S. housing slump as a "buyers market" and could walk away with a home or property investment at a bargain price.