Homeowners with the best credit are the next big risk for the housing market.
An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index.
"There will be continuing foreclosures, and not just subprime, it will be prime mortgages," said Shiller, a Yale University professor. "This is creating a huge shadow inventory of homes that are still owned, but they're going to be on the market in the next year or so."
The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller and Case said.
Employers have cut more than 7.2 million jobs in the last two years, the biggest employment loss since the Great Depression. Measured annually, the jobless rate probably will average 10 percent in 2010, according to the median estimates of economists surveyed by Bloomberg. That would be the highest rate in government records dating to 1948, after rising to a 26-year high of 9.3 percent last year.
"Unemployment is not respecting income boundaries," Case, of Wellesley College, said. "It's affecting rich people, poor people and middle-income people, and they all have mortgages." The nation may begin to see some signs of a housing recovery this year, he said.
The foreclosure inventory of prime adjustable-rate loans rose to 10 percent in the third quarter, more than doubling from a year earlier, while prime fixed-rate loans more than doubled to 1.95 percent, said Jay Brinkmann, chief economist of the Mortgage Bankers Association. The surge in prime ARM foreclosures occurs as rates are resetting lower, reducing monthly payments, he said.
"If you have a prime adjustable-rate mortgage resetting in 2010, you probably are going to see your rate go down," Brinkmann said. "Still, prime ARMs are defaulting at a higher rate because these borrowers were the risk-takers who chose the initially lower payments so they could stretch to get into a house."
While an increase in prime foreclosures will slow the housing recovery that began in September, it won't be enough to knock it entirely off track, Case said. Home resales in November rose to the highest level in almost three years, the third consecutive monthly gain, and the supply of new homes for sale is at the lowest level in almost four decades.
"That's taking some of the pressure off," Case said. "Hopefully in 2010 we'll see some recovery."
Foreclosures are declining for the type of subprime mortgages that sparked the 2008 global financial meltdown. New foreclosure starts among subprime ARMs fell to 4.92 percent in the third quarter from 6.47 percent a year earlier after the bulk of loans were either modified by lenders or the properties repossessed and sold, according to the MBA.
"What makes the rising default rates on prime loans so insidious is these are not folks who took out some crazy new type of mortgage," said Brad Hunter, chief economist at MetroStudy real estate research in West Palm Beach, Fla. "These are people who probably took out what would ordinarily be a responsible mortgage."
Rising unemployment and the lackluster housing market have been at the center of the worst economic contraction since the 1930s and remain a challenge for President Obama as he enters his second year in office.
