Here's wishing that 2011's debut was brighter. The corner we hoped we had turned in 2010 looks more like a long blind bend in a never-ending road. We face the risk of another major downturn in the housing market, a so-called double dip that seems on the way with the news that, according to the S&P/Case-Shiller index, home prices fell by 1 percent in November from October after declining 1.3 percent in October from September across 20 major markets—and fell for the fourth month in a row. This now represents the greatest strategic threat to the recovery of the economy.
Millions of homes and condos stand empty. We have had a dramatic decline in prices and home equity values. The latter has declined by some $9 trillion since 2006, according to Zillow.com, the property information service company. Simultaneously, mortgage rates have tumbled so far that the affordability index compiled by the National Association of Realtors is the most favorable on record for buying a home since the association started measuring it in 1970. As of October, families earning a median income of $62,141 needed to devote only about 13.6 percent of their income to payments on a median priced home, compared to the conventional affordability level of 25 percent of income.
Yet still the signs proliferate across the land: For Sale! Foreclosed!
Other indices are glum. Home-buying intentions have slid back, and as of last fall, mortgage applications were down 36 percent from the already depressed levels of a year earlier. Experts once believed that home prices never declined for more than a calendar year. How wrong they were. True, that was the experience posted in the period after World War II, but according to the Home Value Index compiled by Zillow, values nationwide now have kept falling for more than 50 months.
Not only is short-term demand weak, but the long-term picture grows grimmer. People no longer count on receiving the rewards of ownership once taken for granted in the second half of the 20th century. According to Fannie Mae, only 67 percent of buyers expect housing to be a safe investment, compared with 83 percent in 2003. What is more, demand is slowing because household formations have slowed down. The recession has resulted in perhaps 1.5 million fewer new households. Nor is it likely that any price recovery will gain enough momentum to change all this. According to a survey by Zillow, about 30 percent of respondents are at least somewhat likely to put their home on the market once prices turn up, threatening to smother any incipient recovery.
Homeowners wishing to sell are faced with unique pressures. Not only is the backlog in unsold homes roughly double the normal level, but there is a burgeoning cloud of potential foreclosures. Estimates of homes either with loans in delinquency or in some stage of foreclosure are as high as 8 million, a so-called shadow inventory. Many of them will be dumped on the market sooner or later.
Even more worrisome today is the unprecedented threat to the housing market described as negative equity, where the mortgage exceeds the value of the home. An estimated 5.5 million U.S. households are tied to mortgages that are at least 20 percent higher than the current home value. These are the borrowers most likely to default. For these families, the American dream of home ownership has turned into a nightmare—as it has for lenders. Deutsche Bank, an authority on housing, is the most pessimistic; its analysts predicted in 2009 that as many as 48 percent of the mortgages in America could have negative equity by this year. In any case, the raw material for foreclosures—delinquencies—are on the rise, so we can certainly expect a significant increase in the roughly 25 percent of home mortgages already underwater and with that, more delinquencies and foreclosures.
Here too the statistics are depressing. The Mortgage Bankers Association estimates that 8 million homes are 30 days or more behind on mortgage payments or in foreclosure. Very few of these delinquent loans are being cured and the bucket of non-performing mortgage loans is being filled every month with new defaults and delinquencies. In 2005, homeowners retrieved 66 percent of the loans delinquent for 60 days or longer. By the middle of 2009, this percentage had shriveled to a paltry 5 percent, according to Alan Abelson of Barron's magazine.