(Foreclosure Monitor is an effort by MHP to help public officials determine how best to use their resources to help homeowners and neighborhoods hard-hit by foreclosure).
By Tim H. Davis
BOSTON, Jan. 15, 2013 --- There's no shortage of headlines declaring that the housing recovery is underway. We regularly hear and read news about the market "heating up" and foreclosure activity "slowing down." The more complicated questions are when will Massachusetts' home prices approach pre-recession levels and when will the hangover of foreclosure activity fully wear off?
To try to gauge when we might expect to see prices and foreclosure activity return to pre-recession levels, Foreclosure Monitor looked at the characteristics of four previous housing recessions and the pace in which these housing markets declined and recovered. Then, Foreclosure Monitor tried to estimate when we might expect home prices and property distress to return to pre-recession levels, based on the pace of recovery from the early 1990s recession, which in many ways is the most applicable to this one.
Given the unprecedented drop in prices and high foreclosure activity of this recession, our estimates are sobering, especially given that all current economic trends - more jobs, increasing home values, lowering distress - are good. Weighing down on these positive factors is our analysis that there are still 52,000 mortgages that are either 90 days delinquent or in some stage of the foreclosure process. Given this backlog and the pace of previous recoveries, it's going to take a few more years of recovery before prices and foreclosure activity are likely to return to pre-recession levels.
Comparing recessions
Our first step in grappling with the question of when the housing market might return to its pre-recession level was to understand the rise, fall and recovery of national and state housing markets in four previous post-World War II recessions.
Nationally, there are few instances in the history of the U.S. housing market that compare to the most recent recession. Robert Shiller, one of the fathers of the S&P/Case-Shiller Home Price Index, created a U.S. home price index for his book Irrational Exuberance that stretches from 1890 to Q2 2012. A portion of this price index, for 1934 to Q2 2012 (Chart 1) reveals that the most recent housing boom and bust is unlike any other in recent history.
Rapid price increases followed the end of World War II, and preceded the recessions of the early 1980s (a double dip recession), the early 1990s, and the late 2000s. Of these rapid price increases, the price increases of the post-WWII period were the most substantial (60 percent, from 1942 to 1947), followed by the 2000s, with a 52 percent increase from Q1 2001 to Q1 2006.
The housing bubbles before the 1980 and the early 1990s recessions each saw price increases of 19 percent over a five-year period. Of these four housing booms, the most recent has been followed by the deepest home price decline, declining 42 percent from Q1 2006 to Q1 2012, compared to a 15 percent decline in the early 1980s, a 14 percent decline in the early 1990s, and a milder, seven percent price decline in the late 1940s.
In order to determine which boom and bust cycle is most applicable to Massachusetts, it is important to look at Massachusetts real estate data. Home Price Index data from the Federal Housing Finance Agency from 1975 to the present allows us to compare the early 1980s, the early 1990s, and the most recent recession. Such a comparison reveals that while the nation experienced a housing recession in the early 1980s, Massachusetts did not, as prices continued to rise throughout this recession.
This leaves us with the early 1990s recession as the most appropriate comparison. The early 1990s recession and the most recent recession both had substantial declines in prices (-12 percent and -16 percent, respectively) and a substantial number of foreclosures completed. Since prices began to decline in Q2 2006 to Q3 2012, 59,235 foreclosure deeds have been filed in Massachusetts. During a similar timeframe in the 1990s, 53,127 foreclosure deeds were filed.
Predicting the pace of price recovery given a double dip
Using the 1990s as a comparison, prices bottomed out in 1994 and took three years to recover to their previous high. If the current recession was exactly like the 1990s, that would mean that a full recovery could be expected sometime in 2015, given the median sales price hit bottom in the first quarter of 2012.
But the recessions aren't exactly alike. Complicating this comparison is the fact that the most recent recession had a double dip and saw larger price declines than the 1990s. This recession saw a 16 percent overall dip in Massachusetts' median sales prices, with a double dip as prices increased during 2010, only to decline again in 2011.
The longer, deeper decline in home prices during this recession means it is going to take longer for prices to recover. Given this difference, it is useful to look at the pace of the recovery in prices, which was one percent per quarter during the 1990s. Applying the same rate of recovery to the current period, we would see prices approaching pre-recession levels in the second half of 2016. Chart 2 tracks the changes in home prices over the two recessions, indexed to the bottom/trough of the boom/bust cycle.
Recovery from the foreclosure crisis
Predicting the recovery from the foreclosure crises is more difficult than predicting the recovery in home prices. The number of owners in foreclosure distress is linked to a variety of factors, including:
1. The type of mortgage loan (e.g., sub-prime)
2. Whether or not the home is worth less than the mortgage ("underwater")
3. A family's personal circumstance (e.g., unemployment).
4. How quickly lenders deal with their foreclosure pipelines, based on their capacity to process foreclosures, mitigation policies and external factors such as the national settlement by five lenders with 49 state attorneys general.
Again, the early 1990s recession can serve as a model with which we can compare the current foreclosure crises, though the differences should be noted. Both the early 1990s and the current recessions were characterized by high levels of mortgage distress and foreclosure activity, with over 3,000 foreclosures completed (foreclosure deeds) each quarter at the peak (3,293 in Q2 1992 and 3,984 in Q2 2010).
However, overall mortgage distress - seriously delinquent mortgages, foreclosures in process and completed foreclosures - is much higher in this recession than it was in the 1990s. At the peak in Q2 1992, 4.1 percent of all loans were seriously delinquent, in the foreclosure process, or had a foreclosure completed. In comparison, at the peak in Q4 2009, 8.6 percent of all loans were in the same condition (see Chart 3 at top).
During the 1990s recovery, it took almost nine years (35 quarters) for the rate of foreclosure completions to return to pre-recession levels. As for the percent of loans that were seriously delinquent (90+ days late), the level of distress never returned to pre-recession levels. Eight years after the peak in distress, 0.3 percent of mortgages were 90+ days late, compared to 0.2 percent before the early 1990s recession.
Again, as with sales prices, it is useful to measure the rate of improvement in mortgage distress. In the 1990s, serious delinquencies and mortgages in foreclosure declined, on average, 0.1 percentage points per quarter. Since the 2009 peak in distress, serious delinquencies and mortgages in foreclosure have declined, on average, a healthier 0.2 percentage points a quarter.
At this rate of decline, we would reach pre-recessionary levels of serious mortgage delinquencies and mortgages in foreclosure (0.7 percent of mortgages) sometime in 2018, over eight years after the peak in foreclosure activity.
Lenders shift toward refinances, short sales
There is an additional difference between these two recessions worth noting: while the number of loans resulting in a foreclosure deed is similar, the percentage of delinquent loans turning into foreclosure deeds is smaller in this recession than the early 1990s.
Taking a closer look at Chart 3, it becomes apparent that serious delinquencies are not turning into foreclosure deeds at the same rate as in the 1990s. At the peak in Q1 1992, foreclosures were completed on an estimated 1.3 percent of outstanding mortgages, compared to 0.4 percent of outstanding mortgages at the peak in Q2 2010.
Possible reasons for the lower percentage of foreclosure deeds include short sales, loan modification programs, the efforts of foreclosure prevention programs, as well as lender delays in processing and completing foreclosures.
It appears that lenders are shifting toward allowing more refinances and short sales as a resolution to foreclosure. In Q3 2011, according to MHP analysis of Warren Group data, 58 percent of resolutions of properties in foreclosure distress (a foreclosure petition had been filed) resulted in a foreclosure deed (either purchased at auction or taken by the lender). In Q3 2012, the percent resolved with a foreclosure deed declined to 45 percent, with both property sales (usually a "short sale") or a mortgage refinance both increasing substantially (see Chart 4).
While it is good news that the number of foreclosure deeds has not been higher, the high number of loans that remain in distress is worrisome. Since prices began to decline in early 2006, over 59,000 foreclosures have been completed in Massachusetts. However, according to Mortgage Bankers Association data, 23,000 mortgages remained in the foreclosure process, and an additional 27,000 mortgages were 90+ days delinquent as of Q2 2012. That means there are over 50,000 homeowners still in mortgage distress, down from a peak of 70,000 in Q4 2009.
In other words, it is clear that the foreclosure hangover and resulting headaches could be with us significantly longer.