Home Prices Fall as Delinquencies Rise

by Amy Lillard

New reports released this week revealed decreased home prices, increased delinquencies, and a population of borrowers eager to shed their adjustable rate mortgages.

Home prices in 20 major cities in the U.S. dropped 2.5% in December 2008, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. In addition, home prices in these cities were down a record 18.5% from December 2007. In the original 10-city index compiled by Case-Shiller, prices were down 2.3% in December, and a record 19.2% from the previous year.

On average, home prices are at levels similar to late 2003, wiping out years of appreciation in the process. The biggest declines were seen in Phoenix, Las Vegas, and San Francisco, where prices were down over 30% from the previous year.

As home prices continue to decrease, equity is reduced, and interest rates reset for many borrowers, delinquencies are accelerating. In the fourth quarter of 2008, bank loan delinquencies were growing faster than at any other time since the Fed started collecting data in 1985, the Federal Reserve reported Tuesday.

In residential real estate, the delinquency rate rose to a record 6.3%, increasing from 5.2% in the third quarter and 3% in 2007. The seasonally adjusted delinquency rate, combining loan delinquencies for residential and commercial real estate, as well as consumer credit cards, rose to 4.6%, up from 3.7% in the third quarter. It’s the highest delinquency rate since 1992.

In an environment like this, with depressed real estate and uncertain loans, new data show American homeowners are bypassing adjustable rate mortgages and aiming for the traditional and the secure.

Of those prime borrowers who refinanced adjustable rate mortgages in fourth quarter of 2008, 97% opted for a fixed-rate mortgage, according to a quarterly report from Freddie Mac. Of those homeowners who already had fixed-rate mortgages and refinanced, 99.7% chose to remain with fixed-rate mortgages.

“The very low interest rates for fixed-rate loans compared with ARM rates in the fourth quarter, combined with worries that rates may rise in the future when the economic recession ends, enticed refinancing borrowers to seek the security of long-term fixed-rate mortgages,” said Freddie Mac chief economist Frank Nothaft in a statement. “When borrowers can lock in a rate of 5 percent or less for 15 years or longer, it’s hard to find a reason not to take it.”