On a national level, the number of vacant homes is declining, as is the percentage of mortgages in serious delinquency. However, the demand for housing hasn't picked up, nor have prices.Housing ; Housing - Prices

Bryan J. Noeth

Rajdeep Sengupta

English

Research Papers in Economics

20   The Regional Economist  |  January 2011
P o s t - R e c e s s i o n
T
he housing market has been a drag on 
the economy since the real estate bubble 
burst a few years ago.  As news continues 
to emerge from the housing market, it is 
important to look at the overall trends of 
different aspects of the U.S. market since  
the downturn. 
Higher delinquencies and foreclosures 
have been a consistent feature of the mort-
gage market since 2005.  Figure 1 shows  
the increasing foreclosure rates for the past 
two years.  As of October 2010, the fore- 
closure rate stood at about 3.3 percent.  In 
contrast, the percentage of mortgages in 
serious delinquency peaked in early 2010 
and has been on the decline since, drop- 
ping to about 4.1 percent in October.   
Have the Trends in Housing 
Bottomed Out?
continued on Page 22
By Bryan Noeth and Rajdeep Sengupta
(We define a mortgage as seriously delin-
quent if payments have been past due for 
over 90 days but the mortgage has not been 
foreclosed upon.)  A decline in serious 
delinquencies would imply that foreclosure 
rates in the near future are likely to fall, 
absent any surge in new delinquencies.  Of 
course, there is little doubt that these rates 
are significantly higher than normal and 
that mortgage markets in the U.S. are still 
under significant stress.  To put things in 
perspective, seriously delinquent rates and 
foreclosure rates averaged 0.84 percent 
and 0.46 percent over the first half of the 
decade, respectively.
Another Sign of Hope
On a brighter note, inventories of vacant 
homes have begun to come down after 
increasing consistently over the past few 
years (Figure 2).  According to the Census 
Bureau, the total number of housing units 
increased to 130.68 million in the third 
quarter of the year.  Although the levels of 
housing units are always increasing, the 
upward trend has been dampened since the 
crisis.  Of the total housing stock, roughly 
18.77 million units—or 14.4 percent of the 
total—were vacant in the third quarter of 
2010.  These levels are down from the second 
quarter of the year, although relatively 
elevated compared with the vacancy rate of 
less than 13 percent in 2005.  Naturally, the 
increase in foreclosures has contributed to 
the high percentage of vacant homes. 
At the same time, there has been a sharp 
decline in the demand for housing.  Hous-
ing starts have been decreasing slightly 
over the past few months, although the 
overall trend has not seen a significant 
change since starts bottomed out in Janu-
ary 2009 at a bit less than 500,000 a month.  
(See Figure 3.)  This October, there were 
519,000 housing starts, about 69,000 fewer 
than in September.
The decrease in housing demand is  
best viewed in terms of loan application  
indices compiled by the Mortgage Bankers  
Association.
1  Loan applications for 
purchases in recent years have remained 
significantly low and substantially below 
loan applications for refinances.  Refinances 
typically occur in booms, usually at times of 
low rates (because households seek to reduce 
obligations by switching to a lower mortgage 
rate) or at times of high price appreciation 
(because homeowners tend to cash out the 
equity appreciation).  As shown in Figure 4, 
applications for refinances have increased 
with decreases in the conventional mortgage 
rate.
2  There have been two refinance booms 
since mid-2008.  The first occurred with a 
drop in the mortgage rates around the end 
of 2008 and the beginning of 2009.  The 
second occurred with another drop in the 
mortgage rates around the second half of 
2010.  In early December, the conventional 
mortgage rate was roughly 4.46 percent, 
which was up from the low of 4.17 percent  
in mid-November.
Another summary indicator of the hous-
ing market is the home prices themselves.  
Figure 5 shows the Federal Housing Finance 
Agency house price index and the Case-
Shiller Home Price Composite 20 index.  
In September, housing prices decreased 
between 0.68 percent and 0.80 percent, 
depending on the index.  These indices are 
significantly down from their peak.  
More recently, the mortgage market  
showed some signs of recovery.  The 
National Association of Realtors Index 
tracks home contracts that have been 
signed but not closed.  The index gained 
10.4 percent in October, suggesting a jump 
in overall existing home sales at least for 
November. 
photo © Lance Iversen/san FrancIsco chronIcLe/corbIs
of the total housing stock, roughly 18.77 million units—or 14.4 
percent of the total—were vacant in the third quarter of 2010.  
these levels are down from the second quarter of the year, 
although relatively elevated compared with the vacancy rate  
of less than 13 percent in 2005.E n dnO T E s
  1  For details on the creation of the index, 
see Frumkin.
  2  The mortgage rate given here is for a 30-year, 
fixed-rate, prime, conventional, conforming 
mortgage.  For details, see www.freddiemac.
com/pmms/abtpmms.htm
  3  See Elul et al.
R E f E R E nc E s
Elul, Ronel; Souleles, Nicholas S.; Chomsisen-
gphet, Souphala; Glennon, Dennis; and 
Hunt, Robert M.  “What ‘Triggers’ Mortgage 
Default?”  Working Paper No. 10-13, Federal 
Reserve Bank of Philadelphia, April 1, 2010.  
See http://ssrn.com/abstract=1596707
Frumkin, Norman.  Guide to Economic Indica-
tors.  Fourth edition.  London: M. E. Sharpe, 
2006, pp. 182-84.
The Regional Economist  |  www.stlouisfed.org   21
Jan. 05 July 05 Jan. 06 July 06 Jan. 07 July 07 Jan. 08 July 08 Jan. 09 July 09 Jan. 10 July 10
6
5
4
3
2
1
0
Seriously Delinquent
Foreclosure
U.S. Delinquency and Foreclosure Rates
FIGURE 1 
SOURCE:  Staff calculations based on data provided by LPS Applied Analytics
A mortgage is de‡ned as seriously delinquent 
if payments have been past due for over 90 days 
but the mortgage has not been foreclosed upon.
2005:Q3 2006:Q3 2007:Q3 2008:Q3 2009:Q3 2010:Q3
15.0
14.5
14.0
13.5
13.0
12.5
12.0
11.5
Percentage of Vacant Homes in U.S.
FIGURE 2 
SOURCES:  Haver Analytics, Census Bureau
U.S. Housing Starts
FIGURE 3 
Oct. 05 April 06 Oct. 06 April 08 Oct. 08 April 09 Oct. 09 April 10 Oct. 10 Oct. 07 April 07
2500
2000
1500
1000
500
0
S
E
A
S
O
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A
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L
Y
 
A
D
J
U
S
T
E
D
 
I
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H
O
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S
A
N
D
S
SOURCES:  Haver Analytics, Census Bureau
U.S. Mortgage Applications, Mortgage Rates
FIGURE 4 
8000
7000
6000
5000
4000
3000
2000
1000
0
SOURCES:  Haver Analytics, Mortgage Bankers Association and Federal Home Loan Mortgage Corp.
Nov. 08 May 09 Nov. 09 May 10 Nov. 10
Purchase
Re‰nancing
30-Year Conventional Rate
6.50
6.00
5.50
5.00
4.50
4.00
3.50
3.00
U.S. House Price Indices
FIGURE 5 
SOURCES:  Haver Analytics, Standard & Poor’s Fiserv, MacroMarkets LLC and Federal Housing Finance Agency (FHFA)
Case-Shiller Composite 20
FHFA House Price Index
220
200
180
160
140
120
100
Jan. 05 Jan. 06 Jan. 08 Jan. 09 Jan. 10 Jan. 07
230
220
210
200
190
180
170eleven more charts are available on the web version of this issue.  among the areas they cover are agriculture, commercial 
banking, housing permits, income and jobs.  Much of the data is specific to the eighth District.  to go directly to these charts, 
use this UrL:  www.stlouisfed.org/publications/pub_assets/pdf/re/2011/a/1-11data.pdf
U.s. aGrIcULtUraL traDe FarMInG cash receIpts    
05 06 07 08   09 10
75
60
45
30
15
0
NOTE:  Data are aggregated over the past 12 months.
Exports
Imports
October Trade Balance
B
I
L
L
I
O
N
S
 
O
F
 
D
O
L
L
A
R
S
05 06 10 07 08 09
190
170
150
130
110
90
NOTE:  Data are aggregated over the past 12 months.
August
Crops Livestock
B
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I
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A
R
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cIvILIan UneMpLoYMent rate Interest rates    
05 06   07 08 09 10
11
10
9
8
7
6
5
4
P
E
R
C
E
N
T
November
05 06 07 08 09 10
6
5
4
3
2
1
0
10-Year Treasury
Fed Funds Target
November 1-Year Treasury
P
E
R
C
E
N
T
NOTE:  On Dec. 16, 2008, the FOMC set a target range for 
the federal funds rate of 0 to 0.25 percent.  The observations 
plotted since then are the midpoint of the range (0.125 percent).
InFLatIon-InDeXeD treasUrY YIeLD spreaDs rates on FeDeraL FUnDs FUtUres on seLecteD Dates
3.0
2.5
2.0
1.5
1.0
0.5
0.0
–0.5
–1.0
–1.5
–2.0
–2.5
–3.0
NOTE:  Weekly data.
5-Year
10-Year
20-Year
P
E
R
C
E
N
T
Dec. 10
06 07 08 09 10 Dec. 10 Jan. 11 Feb. 11 March 11 April 11 May 11
0.20
0.18
0.16
CONTRACT MONTHS
P
E
R
C
E
N
T
8/10/10
9/21/10
12/14/10
11/3/10
reaL GDp GroWth consUMer prIce InDeX
05 06 07 08 09 10
Q3
8
6
4
2
0
–2
–4
–6
–8
NOTE:  Each bar is a one-quarter growth rate (annualized); 
the red line is the 10-year growth rate.
P
E
R
C
E
N
T
05 06 07 08 09 10
6
3
0
–3
P
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November
CPI–All Items
All Items Less Food and Energy
e c o n o m y   a t   a   g l a n c e
22   The Regional Economist  |  January 2011
The Role of the Overall Economy
Needless to say, the future path of house 
prices will depend not only on the trends in 
housing but also the condition of the overall 
economy, including the unemployment rate. 
As of November, the national unemployment 
rate stood at 9.8 percent with continuing 
insipid growth in the economy overall. If the 
unemployment rate continues to increase 
and the economy suffers further job losses, 
higher default rates on mortgages could 
occur, leading to lower prices.  A fall in house 
prices could imply that more mortgages are 
underwater—that is, the amount homeown-
ers owe on their mortgages exceeds the cur-
rent market price of their homes.  As recent 
research has shown, this could lead, in turn, 
to further defaults, exacerbating the stress in 
mortgage markets.
3  
Expectations of economic conditions and 
future house prices also play a significant 
role, as do interest rates.  If prospective buy-
ers expect home prices to decline, they are 
more likely to postpone purchasing a home 
in favor of renting.  Also, if long-term rates 
rise, the recent slide in mortgage rates could 
reverse; such a move, in turn, would dampen 
mortgage demand.
Weaker job growth and higher mortgage 
rates are unlikely to spur demand for hous-
ing.  Until people feel the economy’s pros-
pects are definitely getting better, they will 
remain less likely to buy a home. 
Rajdeep Sengupta is an economist and Bryan 
Noeth is a research analyst, both at the Federal 
Reserve Bank of St. Louis.  For more on Sen-
gupta’s work, go to http://research.stlouisfed.
org/econ/sengupta/
continued from Page 20

Have the trends in housing bottomed out?

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Have the trends in housing bottomed out?

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