“Wherever you look, things look bleak.” We could begin and end this month’s update with economist Robert Shiller’s grim but accurate description of the housing landscape. Current statistics certainly don’t provide any reason to dispute his assessment or to predict that conditions will improve any time soon.
After ending 2007 with the first nationwide year-over-year decline in home values this country has ever recorded, the housing market continued its downward journey in January. New home sales fell by nearly 34 percent compared with the same month last year, reaching their slowest pace in more than a decade and pushing the inventory of unsold homes to 9.9 months – the highest level since 1981.
Existing homes didn’t fare much better, as January sales fell by more than 23 percent and inventory levels rose to 10.3 months. These statistics may actually understate the extent of the market’s malaise, because many would-be sellers have been discouraged from even attempting to attract buyers, knowing they have been sidelined either by the possibility that prices could decline further, or by tightening credit standards, which are making it difficult for willing buyers to obtain financing.
Further constipating the market, many sellers apparently have yet come to terms with what is for many a significant reversal of housing fortune. In a recent survey of 1,619 homeowners, 36 percent said they think their homes have increased in value, 41 percent said their values have remained stable, while only 23 percent said their homes are worth less now than they were two years ago. Those assumptions are dramatically at odds with the widely-watched Standard & Poor’s/Case-Shiller index of home prices, which fell by almost 9 percent in the fourth quarter – the largest decline in its 20-year history. Prices declined year-over year in 17 of the 20 metropolitan areas the index tracks and fell by double-digit declines in 8 of them.
Not Low Enough
But even those declines haven’t let enough air out of the housing market bubble, according to some analysts, who say prices will have to fall by another 15 percent to 20 percent nationally before housing becomes affordable for buyers, who can no longer count on the easy credit and lax underwriting standards that fueled the market’s explosive growth and triggered the subprime implosion that is at least partly responsible for its continuing decline.
The headlines continue to track the linked distress of borrowers and lenders. Foreclosures, which hit an all-time high in the fourth quarter, now exceed the number of home sales in some hard-hit communities. An increasing number of those foreclosed properties are going back to the lenders, because they lack sufficient equity to pay off the underlying mortgages. Goldman Sachs estimates that some $3 trillion in mortgages could be under water by year-end, and Zillow.com estimates that 30 percent of outstanding mortgages now exceed the value of the homes securing them. Separately, the Federal Reserve reported last week that housing debt now equals 52 percent of aggregate home values, exceeding homeowner equity for the first time since 1945, when the government began tracking that data.
Those reports help explain another disturbing trend highlighted recently in articles appearing in several national newspapers – more delinquent borrowers are walking away from their homes. Traditionally, lenders have assumed correctly that owners would do almost anything to avoid losing their homes. No longer. Borrowers, who in the past would have paid their mortgage first, are paying their credit card bills instead, concluding that they are better off losing their homes than losing access to the credit on which many are relying to remain afloat as their finances deteriorate.
Even borrowers who could afford to make their mortgage payments are calculating that it isn’t in their financial interests to do so. A recent Wall Street Journal article noted, “Mortgage industry executives and consumer counselors say they are starting to see people who aren’t in dire straits defaulting on their mortgages, because they don’t want to pay for properties that have negative equity.” The big change, analysts say, is the large number of owners who were able to purchase properties with no money down. With no “skin” in the game, these buyers are concluding that they have little to lose by letting lenders foreclose, and businesses like “You Walk Away.com” are encouraging that strategy. The company, which helps owners navigate the foreclosure process, assures them, “Before you know it, you will have this behind you and a fresh start.”
Still, for most homeowners, foreclosure reflects not a financial calculation but an economic necessity. Analysts have focused on the impact of subprime mortgages re-setting at higher rates, but a large number of subprime borrowers are defaulting before their loans adjust, indicating that they couldn’t afford the loans they obtained from the outset.
Another measure of economic distress, bankruptcy rates, are also rising again. Filings increased 18 percent between January and February and are now running nearly 30 percent ahead of the 2007 pace, even though the bankruptcy reform legislation enacted in 2005 makes filing more difficult and more expensive. Some homeowners facing foreclosure may be using bankruptcy as a defensive measure. Although bankruptcy won’t prevent foreclosure, it will stay the action temporarily, giving owners more time to sell the home, work out an agreement with their lender, or simply a means of delaying the inevitable for a while.
A Perfect Storm
Step back a little from the continuing cascade of negative statistics and you see what amounts to a perfect – or perfectly appalling – storm for consumers. With economic growth stalling, a recession looming, energy costs rising, home values declining and debt loads at record levels, “everything is going wrong for households,” Mark Zandi, chief economist for Economy.com, observed recently.
Continued deterioration of the economic outlook and an awareness of the extent to which the subprime/housing market crisis that triggered the current problems is now also exacerbating them, is increasing the pressure on Congress and the Bush Administration to “do something” to help borrowers at risk of losing their homes. The looming November elections are intensifying that pressure, as Democrats and Republicans consider the unsettling prospect of facing voters when the economy is stumbling toward, or has fallen into, a severe recession, and foreclosures are forcing hundreds of thousands of families from their homes.
Bush Administration officials have held fast to their argument that assistance for struggling borrowers should come primarily and voluntarily from financial institutions, and should not entail much, if any, direct intervention by the federal government – a view Federal Reserve Chairman Ben Bernanke had also echoed, until recently. But as the economic outlook has worsened, Bernanke’s position has changed.
Speaking recently at a meeting of the Independent Community Bankers Association, Bernanke said that “more can and should be done” to help struggling borrowers. Requiring lenders to write down part of the principal balance of underwater loans, as several legislators and some industry executives have suggested, “may be a relatively more effective means of avoiding delinquency and foreclosure” than modifying loans by reducing their interest rates or extending their repayment term, Bernanke told the banking group.
Less Isn’t More
Bernanke’s statement reflected a view shared by an increasing number of legislators and economists that more aggressive actions by lenders and by the federal government may be essential to prevent a potential foreclosure crisis from creating a full-scale economic disaster. And despite its philosophical opposition to government intervention the Administration has demonstrated a willingness to move the financial policy lines it has drawn in the sand.
Edging steadily, if grudgingly toward a more activist role, the Administration abandoned its initial position (that the subprime problems were overstated) in favor of “jawboning” lenders to work out problem loans, and then jawboned them again to work more rapidly and to help more borrowers. More recently, the Administration decided to support legislation allowing Fannie Mae and Freddie Mac temporarily to purchase “jumbo” loans in order to boost liquidity in the credit-restricted secondary mortgage market. President Bush recently repeated his opposition to a government “bail-out” in any form, and Treasury Secretary Paulson rejected as a “non-starter” the use of federal funds to purchase under-water loans. But analysts say those positions, too, will almost certainly change.
Writing in early February after another spate of dismal economic statistics, Wall Street Journal columnist David Wessell predicted, “Another three or four months like the past one, and [administration officials] will be thinking seriously about aggressive proposals that for now are deemed too radical.”
FDIC Chairman Sheila Bair, who has been well ahead of the Administration in recognizing the seriousness of the subprime problems and advocating more aggressive responses to them, told the Senate Banking Committee recently that the need for direct government intervention “is something we should all be thinking about. But I don’t think we’re there yet,” she added. Not yet.
