Patterns Develop in a Roiling Market

The national housing market slumped in the 3^rd quarter of 2010 following the end of the Federal tax credit.  This pattern persisted in the 4^th quarter, but the dynamics at the local level were different.  A slim majority of the 152 markets monitored in the 4^th quarter saw an increase in the median home price relative to the same period in 2009, but more important was a shift toward slower rates of price decline and toward modest growth.  Sales, though down from the 4^th quarter of 2009, moved toward a bottom, while employment expanded in a majority of markets.  Foreclosures remain a widespread problem with signs that the 3^rd quarter slowdown will spawn a resurgence of fresh foreclosures in the future.  In the absence of government intervention, the market is acting as it should to heal itself.

Demand for homes slumped in the 3^rd quarter of 2010 following the end of the Federal tax credit and every state as well as the District of Columbia experienced a decline in home sales relative to the 3^rd quarter of 2009.  On the face of it, this pattern continued into the 4^th quarter where every state monitored experienced a decline in year-over-year sales except for Idaho, which grew by 7.3% after falling 8.5% on a year-over-year basis in the 3^rd quarter.  Given that the initial first-time home buyer tax credit expired in October of 2009 causing a spike in home sales in the 4^th quarter of 2009¹, one would expect a sharper drop in sales over the 4 quarters ending in December of 2010 than September.

However, the year-over-year decline shrank between the 3^rd and 4^th quarters in 23 markets, suggesting that the sharp slide that followed the May end of the tax credit eased over this period.  This pattern was evident in several of the markets hit hardest by the sub-prime crisis including Nevada, Arizona, and California.  These markets were among the top 5 most resilient between the 3^rd and 4^th quarters.  Texas and Utah, both of which arrived late to housing boom and bust, were in this group as well as several states in the Midwest, which experienced modest echoes of the national boom and bust including Iowa, Kansas, Wisconsin, Ohio, Nebraska, Oklahoma, and North Dakota. On the east coast, Delaware, New Jersey and New York shared this pattern.  Sales growth worsened in the South.  From Maryland down to Florida, nearly every state experienced an extension of the pattern of decline from the 3^rd quarter.  The notable exceptions were Louisiana, Mississippi, and South Carolina.  This pattern was also evident in New England and the Northwest.  South Dakota and Indiana in the Midwest were both hit hard and softened this quarter.  South Dakota had the largest year-over year decline at 38.5%, while Pennsylvania followed closely at 33.4%. Relative to the 3^rd quarter, Washington, DC experienced the sharpest extension of the year-over-year sales decline falling from a 9.1% deficit in the 3^rd quarter to a 23.1% deficit in the 4^th quarter.

4-quarter Change	4th quarter	3rd quarter
Turned Negative	12.7%	25.0%
Decline Accelerated	16.0%	13.2%
Decline Decelerated	19.3%	12.5%
Turned Positive	15.3%	21.1%
Expansion Accelerated	15.3%	9.2%
Expansion Decelerated	21.3%	19.1%

The steep decline in home sales during the 3^rd quarter took a toll on prices.  Among metros, 51.6% experienced a decline in the median home price over the 4 quarters ending in September of 2010.  However, by the 4^th quarter a slim majority of 51.3% of markets were positive.  Comparing the change in year-over-year price growth between quarters illuminates a pattern of fewer markets turning negative, but acceleration in price patterns at the extremes and nearly equal shares of expanding as contracting markets that decelerated relative to the 3^rd quarter.  The share of markets that swung from positive 4-quarter price growth to decline fell from 25.0% to 12.7% between the 3^rd and 4^th quarters.  Among them was Little Rock, which slipped from a 1.9% 4-quarter growth rate in the 3^rd quarter to a 4-quarter decline of 0.2% in the 4^th quarter of 2010.  Anaheim, Los Angeles, and Charlotte along with other markets that experienced a shallow price recovery were among this group.  In addition, the share of markets which experienced a deceleration in negative 4-quarter price growth rose from 12.5% to 19.3% over this same time period.  This pattern was evident in markets in Washington State, Ohio, and Florida.  Palm Bay, for instance, eased from a 15.0% 4-quarter decline in the 3^rd quarter to a 5.0% decline over the 4 quarters ending in December.  The share of markets that experienced an acceleration of their 4-quarter decline increased from the 3^rd to the 4^th quarter.  Finally, the share of markets that turned positive fell over this same time period, while the share of markets whose expansion accelerated between the 3^rd and 4^th quarters increased.

The intent of the Federal tax credit was to reduce the supply of homes on the market and to drive the housing market toward equilibrium where prices would stabilize until the economy could take over, re-igniting demand through income growth, job creation, and household formation.  In the wake of the tax credit, sales plummeted and confidence was shaken, but the economy has slowly progressed.  The share of markets covered in this report that experienced an increase in employment over the 12 months ending in the middle of the 3^rd quarter was just 53.4%, but that figure rose to 63.2% by November before slipping to 62.6% in December.  The average 12-month growth rate for employment was just 0.1% in October, but grew to 0.3% by November.  Subsequently, the share of markets experiencing positive 12-month employment growth jumped to 73.6% in January of 2011 with an average growth rate of 0.7%.   In the Northwest Yakima and Kennewick-Pasco were two of the strongest markets in December, while Spokane slid.  Every market in Texas showed positive growth over this period.  San Jose and Salt Lake City were positive as well as Southern California excluding Riverside-San Bernardino.  Parts of the central South along with large sections of the Midwest, upstate New York and New England performed well.  Boise, Phoenix, Sacramento, and Las Vegas, continued to deteriorate.  Overall, though, the economy is headed in the right direction, albeit at a slow rate.

Construction remained weak.  Only 28.8% of markets experienced year-over-year growth in the issuance of new permits for construction in December.  In most cases, the increase in construction was from a depressed level in 2009 and showed only modest growth.  Many of these markets were in areas that missed some or most of the boom like Syracuse, Rochester, and Buffalo in up-state New York as well as parts of the Midwest including Des Moines, Lincoln and Topeka.  Surprisingly, there were a number of markets in California that experienced a modest gain in permits from 2009 including Los Angeles, Anaheim, San Diego, San Jose-Sunnyvale, and even Riverside-San Bernardino, one of the markets hardest hit by the sub-prime crisis.  Not all permits result in ground breaking, but this pattern suggests that builders have confidence in the viability of local pockets of demand and the absorption of excess inventories.  It might also suggest that the current inventory of foreclosures in the California markets does not meet the demands of prospective buyers.  However, in a clear majority of markets, construction remains depressed, which will help to contain inventories, but hurt local employment growth. While new construction remains constrained, a rise in delinquency rates suggests that the flow of foreclosures may rise in the future, creating upward pressure on inventories.  The share of markets that experienced an increase in the 60-day delinquency rate over the 6-month period ending in August was 11.3%.  This figure surged to 65.6% for the 6-month period ending in November.  Unsuccessful short sales and the sharp price declines that followed the end of the Federal tax credit likely pushed more home owners into delinquency over this period.  This same pattern was evidence for 90-day delinquencies; the share of markets that experienced a 6-month increase in the 90-day delinquency rose from just 13.8% in August to 49.7% in November.  This pattern suggests that barring a strong improvement in incomes, job growth, or home prices, the foreclosure rate is likely to follow suit.  It should be noted that the foreclosure rate declined in only 4 markets over the 6 month period ending in November despite declines in the 60 and 90 day delinquency rates in a majority of markets over the 6-month period ending in August.  The self-imposed moratorium on foreclosures and REO sales enacted by several large banks in October of 2010 likely propped up the foreclosure rate during the fall.  This rate may ease in the short-term as banks resume foreclosures and sales of REO properties, but it will rise in the longer term as the growing volume of delinquencies makes its way through the pipeline.

After a sharp slide in national housing market in the 3^rd quarter of 2010, the 4^th quarter may be the first insight into how local housing markets will behave without government stimulus.  Sales, though down from a year ago, appeared to move toward a bottom, while prices improved in a slim majority of markets.  Construction remained limited, but delinquency rates rose, which could weigh on prices in the future.  Employment is on the mend with the majority of markets showing signs of growth.  As the economy grows, job creation and income growth will help to extend the stabilization, but this pattern will take time as the construction sector sits on the sideline.

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[1] The program was later extended through May of 2010 and expanded to all buyers.