Monday, December 20, 2010

Housing Is The Bellwether Of Our Economy, And The News Isn't Good

Ownership Is Down. Foreclosures Are Up. Supply Is Up. Demand Is Down. And Values Are Down.

Housing is not recovering, and until it does there can be no economic recovery in the US.

Home ownership has declined in the US for the third year in a row. And since 2005, home ownership has declined by 3 million households, according to a report from the US Census Bureau.

A combination of spiking foreclosures, high unemployment, falling wages and a lack of savings for a down-payment (once again a required 20 percent) have eroded the American dream of home ownership.

The share of households that own their homes has been sliding since the housing bubble burst in 2006. The rate fell again in the second quarter of this year to 66.9 percent — the lowest since 1999 — from a peak of 69.4 percent in 2004, the Census Bureau says.

However, millions of houses on the verge of foreclosure threaten to send homeownership to its lowest level in 50 years. According to new industry estimates, the rate could plummet to about 62 percent as early as 2012 and almost certainly by the end of the decade. Homeownership rates haven't been that low since they hit 61.9 percent in 1960.

There are not enough first time-buyers, or those with adequate credit, to thwart the slide.

More than half of applicants (53 percent) don't have a high enough FICO score to get the best mortgage rates. Even worse, 35 percent of US consumers—some 70 million people—are now considered sub-prime and simply cannot qualify for credit. This huge segment of Americans cannot get a mortgage and are not participants in the housing market. That, alone, significantly hurts demand.

Some Americans cannot afford to own a home. Others see ownership as a bad investment, at present. And millions more have lost, or are about to lose, their homes. The combination is crushing home ownership.

Yet, even those who own their homes, and who do not appear to at risk of losing them, are facing their own unique struggles.

CoreLogic reports that 10.8 million, or 22.5 percent, of all residential properties with mortgages were in negative equity at the end of the third quarter of 2010, down from 11.0 million and 23 percent in the second quarter. However, this decline is due primarily to foreclosures of severely negative equity properties rather than an increase in home values.

During this year the number of borrowers in negative equity has declined by over 500,000 borrowers. An additional 2.4 million borrowers had less than five percent equity in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.

That will eventually spur even more defaults and foreclosures. As it stands, the housing inventory data is muddled due to the number of foreclosures that are not yet listed for sale.

The decline in ownership is having a negative effect on prices. Supply is easily exceeding demand. The Census Bureau reports that 18.8 million homes are currently vacant.

US homes will lose a whopping $1.7 trillion in value in 2010. About $9 trillion has been lost since June 2006, according to report from These losses are simply stunning.

Worse, Fitch Ratings forecasts that home prices will drop an additional 10 percent next year.

An excess housing supply—due to defaults, pending foreclosures, or vacant homes—is holding down home prices. And, according to many analysts, there is every indication that excess supplies and falling prices will continue into next year. It's not hard to imagine.

The so-called 'shadow inventory' continues to grow. According to Morgan Stanley, 8 million foreclosure-bound homes have yet to hit the market.

Laurie Goodman, senior managing director at Amherst Securities, reports that 1 in 5 distressed homeowners in the US faces, or may face, foreclosure. She says 11.5 million home loans are non-performing or highly distressed at present.

All of that excess inventory will eventually push housing prices even lower than they already are, which will result in even lower equity for millions of homeowners. That could, in turn, make millions of homeowners more vulnerable to foreclosure.

Homeownership has generally built personal assets. But for millions of Americans, that is no longer the case. The most valuable asset of millions of Americans continues to decline.

With unemployment hovering near 10 percent, and housing showing no signs of a bottom, any sort of recovery seems like a very distant prospect.


  1. A worthy companion piece.

    [The Automatic Earth] December 23 2010: About that 90% drop in home prices...

    "So when do we see this come to fruition? Well, price discovery in a housing market, which is always prone to inertia, since people can stay put and fool themselves about the true value of their homes, can take a while to develop. But it will come. US banks will at some point need to offload foreclosed properties, They play a delicate game between the marked-to-whatever value they carry the homes for in their books, which makes them appear solvent, even as they get no income from the homes, and, on the other hand, getting that income. Banks are desperate for cash-flow, but for now, who cares if the Fed provides cash at 0.0078%?

    The way we at The Automatic Earth see it play out is that the entire house of cards will fall within 2-5 years, and, within that timeframe, sooner rather than later. While there can be any number of inside and outside factors that can speed it up, we see practically none left that could slow it down. Of course there can be people in a few years time who claim by hell and high water that their homes are still worth $500,000, but they will have neighbors who sold for $100,000, $50,000 or less. Price discovery can be in the eye of the beholder, until you must urgently sell."

  2. The impact all these foreclosures will have on the solvency of US banks has been highly under-reported by the media, as you know, Livio. This has the potential to wipe out some of the biggest banks, and take the entire banking system with them.