Bullish on houses, not so fast !

delinquency rate on residential mortgages (DRSFRMACBS) compared to the S&P Case-Shiller 20-City Home Price Index (SPCS20RSA), 2000 to 2013

There has been lots of bullish chatter about US house prices, especially so since over the past year we’ve seen the largest increase since 2006.

But some folks – including Robert Shiller himself – are not convinced. Why? There still seems to be lots of downward pressure on housing prices and here is just one of the reasons: the chart above shows two series, first the delinquency rate residential mortgages (DRSFRMACBS, in percent, measured quarterly) compared to the S&P Case-Shiller 20-City Home Price Index (SPCS20RSA, baselined at 100 on January 2000, measured monthly)

Before The Great Recession delinquency rates averaged 1.90%, jumping to 10.47% after. Housing prices are driven largely by supply & demand dynamics. Supply can be increased by many ways, the most destructive to prices being foreclosure and forced sale i.e., the borrower doesn’t pay their mortgage, the property foreclosed then repossessed by the lender and finally sold to satisfy the debt.

Delinquency is the first step towards default. Until the delinquency rate reverts to long run norms the supply of houses is subject to sharp increase. Hardly positive.

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