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Foreclosure Hike Tied to Single-Family Permit Drop in Most States
Rising foreclosure rates show a strong correlation with declining single-family housing permits, according to a new research study from NAHB economists, but market dynamics vary so widely that there are “extreme” variations in how foreclosures, production, house prices and homeownership rates match up on a state by state basis.
The study takes a hard look at unfamiliar trends in many local housing markets over the past year or two — including rising foreclosure rates, declining production and prices of owner-occupied housing and a falling homeownership rate.
In California, for example, the rate of all mortgages going into foreclosure was 1.04% during last year’s fourth quarter and 4.62% for subprime loans, increases of 158% and 146%, respectively, from the same period of 2006.
Meanwhile, single-family permits for the period were issued at a seasonally adjusted annual rate of 47,912 in the last three months of 2007, a historically low number for the state and a decline of 43% from the 84,493 posted in the fourth quarter of 2006, which itself was down more than 40% from the fourth quarter of 2005.
The purchase-only housing price index of the Office of Federal Housing Enterprise Oversight (OFHEO) showed that California’s house prices dropped 11.5% on average between the fourth quarter of 2006 and the fourth quarter of 2007. The state’s homeownership rate over that same period fell 2.3 percentage points, from 60.0% to 57.7%
Accompanying the special study are tables providing statistics on these four variables for all 50 states and the District of Columbia from the first quarter of 2000 through the fourth quarter of 2007, as well as results from the research on particular relationships among the variables. The tables are available only to subscribers of HousingEconomics.com.
Of the variables analyzed, rising foreclosures were the strongest predictor of a downturn in housing production.
“The most immediate impact from a rise in foreclosures is an increase in existing homes on the market and competing with new construction for customers,” according to the report. “This is one factor that will tend to drive new production down, and the correlation is one way to measure the strength of this effect.”
But more homes becoming vacant is not the only “indication of distress” in the marketplace, the report says.
“The most frequently cited causes for increased foreclosures in this time period have been falling house prices, unaffordable mortgage loans and rising unemployment. Falling house prices will also chill new production as builders attempt to reprice existing inventory and find ways to reduce costs to compete at lower price points,” the study says.
“Falling house prices can also cause mortgage rates and availability to tighten, which eliminates some buyers and reduces demand. Rising unemployment also reduces demand as households see declines in their income. Hence, the rise in foreclosures has both a supply and a demand impact on the housing market and one reaction is lower production.”
Single-family permits take a bigger hit from rising foreclosures than multifamily permits, the report points out, because foreclosures tend to depress homeownership and increase demand for multifamily rental properties.
The NAHB research found the strongest correlation between rising foreclosures and declining single-family permits in Michigan, California, Massachusetts and Nevada — “states where the anecdotal evidence of problems in housing and mortgage markets has been quite strong.”
And while the relationship between foreclosures and permits was “generally strong and persistent,” the negative correlation between supbprime foreclosures and single-family permits was not found in three states — Alaska, Maryland and Iowa — and the negative correlation between total foreclosures and permits was not found in 13 states, for various reasons.
The study identified other strong correlations between such factors as changes in house prices and foreclosures a year later, “but the state-to-state variation proved to be extreme. For this reason, it would be wise to avoid general conclusions for the country as a whole and focus instead on the pairwise correlations among foreclosures, production, house prices and homeownership one state at a time."
For more information, e-mail Paul Emrath at NAHB, or call him at 800-368-5242 x8449.
 Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).
Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
 Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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