Posted on 09/23/2010 9:46:19 AM PDT by Kaslin
The disappearance of home equity value is a lead weight on the recovery
Why has housing been such a core element in the story of American civilization?
Culturally a decent house has been a symbol of middle-class family life. Practically, it has been a secure shelter for the children, along with access to a good free education. Financially it has been regarded as a safe store of value, a shield against the vagaries of the economy, and a long-term retirement asset. Indeed, for decades, a house has been the largest asset on the balance sheet of the average American family. In recent years, it provided boatloads of money to homeowners through recourse to cash-out refinancing, in effect an equity withdrawal from their once rapidly appreciating home values.
These days the American dream of home ownership has turned into a nightmare for millions of families. They wake every day to the reality of a horrible decline in the value of the home that has meant so much to them. The pressure to meet mortgage payments on homes that have lost value has been especially shocking—and unjust—for the millions of unemployed through no fault of their own. For the baby boomer generation, a home is now seen not as the cornerstone of advancement but a ball and chain, restricting their ability and their mobility to move and seek out a job at another location. They just cannot afford to abandon the equity they have in their homes—and they can't sell in this miserable market.
American homeowners have experienced an unprecedented decline in their equity net of mortgage debt. The seemingly never-ending fall in prices has brought an average decline of at least 30 percent. Furthermore, the country is now going through an unprecedented nationwide slide in sales, despite the fact that long-term mortgage interest rates nationwide plummeted recently to a record low of 4.3 percent before rising slightly. The result is that home occupancy costs for home purchases are now down to roughly 15 percent of family income, dramatically lower than the conventional, affordable figure of 25 percent of family income devoted to home occupancy costs. Yet new home sales, pending home sales, and mortgage applications are down to a 13-year low.
The economics of home ownership could hardly be more disastrously opposite to the expectations of generation after generation. Millions of homes have been foreclosed upon. About 11 million residential properties, or about 23 percent of such properties with mortgages, have mortgage balances that exceed the home's value. Given the total inventory, and the shadow inventory of empty homes, many experts expect prices to fall another 5 to 10 percent. That would bring the decline to 40 percent from peak-to-trough and expose an estimated 40 percent of homeowners to mortgages in excess of the value of their homes.
The growing risk of disappearing equity invites more strategic defaults on mortgages. Homeowners with negative equity are tempted simply to mail in their keys to their friendly lender even if they can afford the mortgage payment. Banks don't want to take the deflated properties onto their books because they will then have to declare a financial loss and still have to worry about maintaining the properties.
Little wonder foreclosure has not been enforced on a quarter of the people who haven't made a single mortgage payment in the last two years. A staggering 8 million home loans are in some state of delinquency, default, or foreclosure. Another 8 million homeowners are estimated to have mortgages representing 95 percent or more of the value of their homes, leaving them with 5 percent or less equity in their homes and thus vulnerable to further price declines. A huge percentage will never be able to catch up on their payment deficits.
The pace of foreclosures was briefly slowed by loan modifications brought on by government programs. Alas, the programs have not been working as hoped. Half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50 percent. The foreclosure pipeline remains completely clogged. As it unclogs, a new wave of homes will come on the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.
A well-balanced housing market has a supply of about five to six months. These days the supply is more than double that, as inventory backlog has surged to about a 12½ months' supply this summer, up from 8.3 months in May. This explains why average sale prices have been declining for so many, many months. The high end of the market, in particular, is under great pressure.
The mortgage market doesn't help. It is virtually on life support from the government, which now guarantees about 95 percent of the mortgage market. The rare conventional lenders are now actually insisting on a substantial down payment and making other more stringent financial requirements. Household formation is also shrinking now, down to an annual rate of about 600,000, compared to net household formation during the bubble years, when it was in excess of a million annually. The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was. So it is not too difficult to understand why demand for housing has declined and will not revive anytime soon.
This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and then through every recession since. Each time, residential construction preceded the recovery in the larger economy. This time, in the Great Recession, a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings, and current spending. Every further 1 percent decline in home prices today lowers household wealth by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over 5 million jobs in residential construction.
That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3 percent of GDP at its recent peak in 2005 and 2006. It has fallen to the level of 2.4 percent this year. This is significant if you recognize that a 3 percent top-to-bottom decline in real GDP constitutes a serious recession.
Government programs to stimulate housing sales have not helped. There have been eight of them. One, which expired most recently (in the spring), was an $8,000 tax credit for housing contracts. All of these have done little more than distort the pattern of housing demand and actually pulled forward hundreds of thousands of units at the expense of future growth.
There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis, and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.
The sad fact is that housing problems never left the recession of the last several years and it doesn't look as if they are going to leave anytime soon. The ultimate solution remains the same as the solution to the country's broader economic crisis. That is, getting millions of people back to productive work.
Yep. We grew up in a Chicago bungalow, Mom, Dad and two kids in 1100 square feet with one bathroom. Never felt poor, either.
My opinion is not based on the outside looking in. They freely tell us their business without us asking.
It’s shocking how they live and what they think they should live like.
It’s really sad.
The fact that you even thought about where the market was and where it was heading, that you even looked at a graph of the housing market, that you even considered at all anything but your desire and need for a house, puts you ahead of most home buyers, especially first time buyers. Most people were riding on the age old idea that real estate always gains in value over the long run. That idea has been blown to smithereens now and the housing market will never be the same.
I sure hope so.
The house my father built, and I grew up in, is illegal now. Too low ceilings, too small a lot, septic system instead of a Title 5., too narrow rafters and floor joists....I could go on. ( They were fine houses and are still standing and looking good. )
Just and unjust prices is a Marxist view. Capitalism has no ‘just’ price. Price is what ever a buy and seller agree on and has no set price. This non ability to set/force/command/plann prices is the reason Socialist planners can never plan their ideal society. Prices change.
Of course most of us grew up in, have been maleducated into, and can not understand that there is no set price for anything.
Historically houses, in general, have never gained in value. Fixed for inflation.
A thirty year house, should no more be more valuable then a thirty year old car.
I bought my second house in 2000 (a modest, 1800 sq ft colonial), with about 10% down and have been paying a little extra on it for 10 years. I’m still easily $50000 underwater. Prices are down up to 70% in our area. Smart or stupid had nothing to do with it.
I remember that speech - Man was I ticked off at Bush for that. After working 2 jobs to scrape up 15% down on my first home, a $37,500 2-bedroom flat condo, and after paying mortgage insurance for 3 years, and after paying "through-the-nose" 13.25% interest rates for 3 years, he decided that it was wise to give all these deadbeats a free ride. I EARNED my first home - and he was going to take my hard-EARNED money and give it away.
If the democrats weren't exponentially worse, I would have considered voting "D" in 2004.
The county valued my house at $360k. I told them they could have it for $350k. Of course, they were not interested.
Generally true, with one caveat:
If you DO become unemployed, and are offered a job outside of commuting distance to your home, and cannot sell it because you're too far upside down, it is a detriment to your ability to take that opportunity. Or say the neighborhood ghettofies (very common thanks to liberalism) and you can't escape to a safer place. That's just a couple examples but there are situations where a person thinking only of a place to live could still have problems due to this.
bttt
Hmmm, intesting perspective. My parents bought a new house in 1963 for 28k and my mother sold it in 92 for 212k. Are you saying that if they had bought a new car in 63 for say, 3,000 dollars it would have been worth $22,000 in 92?
Just before our boys left home we drilled into the that what they saw around them (our house and what was in it) took over 20 years of plugging away and saving, and for them not to expect everything at once. One listened and is in Fat City, even today. The other didn't and has declared bankruptcy twice.
not everyone has the amazing ability to walk on water and know the future.
People believed home prices were a stable fact of life. the 2005 bankruptcy reform was written with the notion that NOBODY would ever walk away from their home.
Banks used apprasers to fraudulently inflate home prices to put their money out via the default swaps. (remember the papers were sold based on the DEFAULT VALUE PRICED INTO THE SALE)
now nobody knows who owns the notes and the courts are focused on clearing dockets and not the law.
Well if she bought a 63 vette, no problem...
Restored nicely, yep!
I meant houses, in general. Naturally there would be single extremes.
But, let me expand a bit on my notion.
I first got it on a study done on stable, white, lower working class neighborhoods, in and around Boston. Pretty much everything was held to a social constant. The neighborhoods had commonly three to four generations in them. No gentrification, no ghettofication. Culturally they stayed the same, white, working class, lower professional Catholics. Further, these were triple deckers, with minimal lot lines, so there was no room for McMansions.
Anyways, held for inflation, prices remained the same.
Another view.
The used car view. Houses are things. For instance I’m a carpenter. A house is a house. It’s a box. You think of your house as a home. Something romantic, personal. Everyone in the trades, the real estate bidness, the banks, it’s just a house, a commodity.
Anyways, why should a used, near worn out, style dated, performance dated product increase in time? It shouldn’t, and doesn’t. ( In a free market )
However, what if through continued zoning, land use planning, you suppress the natural rate of house/neighborhood building? That makes existing supply, worn out as it is, increase in price. Like used Chevy parts in Cuba.
But neither the house itself, nor the used Chevy part increases in value. It is an artificial increase caused by political intervention.
Buffalo NY has ten thousand abandoned free houses. Why? Politics. Politics chased out the industries, the labor left. Lose half your labor, lose more than half your house prices. Ditto Detroit, Cleveland and hundreds of other cities.
We have to throw out house prices in cities that are being politically killed and its citizens fleeing.
We have to throw out rural Texas towns were new fled arrivals from the political death zones have bought O’l Earl’s place that he raise chickens and worked on cars.
Anyways, back to my general statement. House prices are tied to income. Everything held constant, houses rise with income and the inflation rate, such that they require the same amount of labor time to buy. Which makes sense in that a house is really a big pile of skilled, semi and non skilled labor. These two prices or costs, labor and house prices are tied.
(there are other things that cloud the price level of house. Finance as we have all seen these last few years. Taxes, construction innovations( nail guns ).)
A chart by Robert Shiller of Yale on historical home values.
http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html
ghettofies= Section 8. Move’m out of the city to the country.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.