A key factor in the recession in the United States and Alabama has been the downturn in housing prices and subsequent drops in real estate sales and construction activity. With the U.S. foreclosure rate at 4.6 percent in the fourth quarter of 2010 (and the seriously delinquent rate at 8.6 percent), foreclosures also remain a concern for struggling housing markets and economies overall.
While not hit as hard as such states as Florida, California, and Michigan, Alabama and its metro areas have been no exception to these problems. As is true with most of the nation, housing prices in Alabama fell during the recession and have continued to fall in spots since. The House Price Index compiled by the Federal Housing Finance Agency clearly shows that while Alabama and its metro areas did not experience as big of a price run up boom as many parts of the country, their housing markets have shown continued decline following peaks generally around 2008.
Data from the Alabama Center for Real Estate confirms this fact; the year-to-date peak median sales price for 2011 is down about 4 percent from 2010, and about 11 percent from 2008.
Alabama’s mid-sized metros are a mixed bag. Prices in Montgomery have remained relatively flat, while Mobile’s peaked rather high, probably due to its coastal location and demand for vacation homes. While home values in Mobile continue to fall, Huntsville’s have remained steady following significant increases from 2006 to 2009. Huntsville’s housing market is buoyed by a better than average unemployment rate and relatively high incomes brought by large proportions of professional and technical workers.
Falling prices threaten to compound the problem of foreclosures. The trend of falling prices has probably been exacerbated by the fact that incomes have been largely stagnant since the recession. This, of course, has negatively affected demand for housing. Furthermore, studies on foreclosures have demonstrated that high-risk loans (sub par mortgages) are more likely to end in foreclosure, even after controlling for other characteristics.
No surprise there.
Data indicates that most of Alabama had a higher proportion of high-risk loans (defined as loans with rates of 3 points or more above the U.S. Treasury rate) than the nation as a whole. Alabama saw high risk loan rates of 10 percent from 2007-2009, compared to 6.7 percent for the U.S.
A predictive model for foreclosure rates created by the U.S. Department of Housing and Urban Development, which utilizes unemployment rates, percentage of high-risk loans, and the percent drop from the peak of the house price index, was also used to create foreclosure estimates for Alabama and its metro areas. The model predicts Alabama’s foreclosure rate at 6.2 percent, near the national rate of 6.4 percent. Mobile has the highest predicted foreclosure rate of all Alabama metro areas at 7.1 percent.
The housing bubble was relatively weak in Alabama; therefore, the state has avoided the full-blown foreclosure crisis a precipitous drop in values might have caused. However, the prospect of foreclosure rates remaining relatively high, or even increasing, in the state in the long term is a serious concern.
Alabama’s high homeownership rate, which has remained several percentage points above the U.S. rate throughout the recession, increases its exposure to problems like foreclosures, since foreclosure rates that are similar to the rest of the nation will result in more foreclosures overall in Alabama.
All of these factors illustrate serious concerns about the housing markets in Alabama and Mobile in particular. This is especially troubling considering the fact that the unemployment rate has worsened or shown little improvement in the past few months.
Therefore, positive labor market trends helping the housing markets seem unlikely in the near term. However, we have some hope locally that the previously announced new jobs by Austal and others might help the local picture.
If high rates of foreclosure continue, they will strain housing markets, as short sales by banks as well as households exiting the homeownership market will hold prices down. This will in turn have a negative impact on new construction and the economy in general.
I apologize for the gloomy report. I don’t enjoy reporting this stuff.