Just as home sales begin to find some lift we're reminded of the worsening state of housing foreclosures which continue to threaten a sustained housing recovery.
The big picture is that residential investment finally showed a gain in the third quarter (20% annualized) after years of declines as housing starts and construction spending turned higher. Despite a stunning October decline in housing starts they remain 10% above the April low.
The rise in supply followed a strengthening of demand. Home sales have risen in six of the last seven months as tax credits helped to lift existing home sales 20% since August.
Home prices continue to fall but at a slower pace. In October, new homes were prices just -0.5% below the year ago level. Existing homes prices, under the drag of foreclosures, were down -7% from a year earlier.
As house values fall so does the ratio of home equity to mortgage principle. Negative equity, when that ratio is below 1.0, reached nearly 10.7 million homeowners in the third quarter. That is a large 23% of mortgages outstanding.
These underwater mortgages are more likely to find their way to foreclosure and thereby further boost the inventory of homes for sale, helping to push prices still lower and self-perpetuating the foreclosure and housing problems. Even those who bought as recently as this year are showing an 11% rate of negative equity.
For now watch the price moves as the best indicator of trouble in housing. Low prices, low mortgage rates and the tax credit for first time home buyers has provided the lift to underlying demand. But the price decline continues and pulls foreclosures and typically low quality inventory in with it.
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