Obama Needs to Focus on Housing, Not Health Reform

While eyes have been on the Winter Olympics, a menacing avalanche gathers force. Not in Vancouver but right here on our doorstep. Remember the housing crisis? It hasn't gone away. It's gotten graver.

Today, median prices for single-family houses nationwide are down by slightly more than 30 percent from their early 2006 peak. Over the near term, excess inventories are expected to push prices down by a further 10 percent.

The sheer number of empty homes overhanging the residential real estate market—7 million—points to lower prices. No fewer than 7.7 million homes and condos are behind on their mortgage payments. Over 4 million are now delinquent and going through some form of foreclosure. Fannie Mae's 90-day delinquency rate is now roughly 5.5 percent, double what it was a year ago. That shadow inventory sooner or later will hit the market. Furthermore, adjustable rate mortgages issued between 2004 and 2007—some $230 billion worth—are coming due, so the higher interest rates that are likely will mean more foreclosures. The average loan in foreclosure is 18.5 months overdue today, compared with 11 months a year ago.

Home sales are depressed, too, by competition from some 6 million vacant rental units, or 11 percent of supply. Homeowners have to contend with an apartment market where median asking rents declined by an estimated 3.5 percent over the past year—and that decline is accelerating.

Roughly 1 in 4 mortgages today exceeds the house's value. Remarkably, 1 in 15 mortgage delinquents is actually current on credit card debt. It's an unprecedented reflection of how much mortgages exceed home values. Consumers are just unwilling to put more money into their homes. Research shows that when a home's value falls below 75 percent of the outstanding mortgage debt, homeowners seriously think about walking away.

With declining prices beginning to hit the middle to higher ends of the housing market, we are looking at another foreclosure wave. Here's the gravity of the crisis: Roughly $750 billion of residential mortgages are upside down. That's equivalent to the entire fiscal stimulus program.

There's no cheer in new numbers, either. January's sales of new homes plunged by more than 11 percent month over month to an annual rate of 309,000 units, the weakest on record. Last March, the low was 332,000. Economist David Rosenberg reminds us that then, "everybody thought the world was coming to an end." Yes, indeed. Builders sold only 9,000 new homes in January. It now takes them a record 14.2 months to sell a finished house; in the boom years, it took approximately three months. Mortgage applications are at the lowest levels since May 2007.

The unsold backlog is now at roughly a 9.1-month supply, the highest overhang since last May, (up from the 8-month supply in December and the 7.3-month supply in October). The median price of new homes sank 5.6 percent month over month in January, to $203,500, the lowest level since December 2003, pushing more and more homeowners into a situation where they owe more than their real estate is worth.

Given that home equity has long been the largest asset on the balance sheet of the average American family, the government must urgently expand and simplify its unsuccessful Home Affordable Modification Program. It was designed to keep homeowners in their homes by adjusting their mortgages, but it has been a dud. Fewer than 70,000 homeowners have benefited. The program needs retrofitting because an empty foreclosed home generally incurs a 10 to 15 percent drop in value almost immediately, and it is the foreclosed home that determines the value of every home on the street.

If foreclosures soar out of control, we may be facing another crash. This avalanche is much more worthy of the administration's urgent attention than selling its expensively flawed healthcare plan. 

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