HOUSING WEIGHS DOWN THE RECOVERY / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

Housing weighs down the recovery

By Mort Zuckerman

Published: January 12 2011 22:12

 

Welcome to 2011, which in one respect at least has started well. Barack Obama’s appointment of Bill Daley as his chief of staff was well received across the worlds of business and politics and the reaction will have brought some relief to the president.

On the economy, however, the news remains troubling for America. A fall in the unemployment rate from 9.8 to 9.4 per cent was largely due to the sharp decline in the labour force participation rate as discouraged workers soared to a new record.

The household employment survey did rebound by 297,000, and this was led by full-time positions. But we face another threat to the recovery: the growing likelihood of a double-dip downturn in the housing market. According to the S&P/Case-Shiller index, home prices fell by 1.3 per cent in October across 20 major markets.

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Millions of homes stand empty. Home-buying intentions have slid back and mortgage applications are down dramatically from the already-depressed levels of a year ago. This comes in spite of the fact that the affordability index compiled by the National Association of Realtors, which reflects the percentage of income to payments on a median-priced home, is the most favourable on record since 1970 at 13.6 per cent, well below the conventional affordability level of 25 per cent of income.

Yet we have had a dramatic decline in prices and home equity values. The latter have fallen by some $9,000bn since 2006 according to Zillow.com, the property information service company. “For sale” and foreclosure signs proliferate across the land, reflecting demand that is weak in the short term and grimmer in the long term as fewer and fewer buyers accept housing to be a safe investment.

Household formations have slowed by some 1.5m a year and an overhang of unsold properties threatens to smother any incipient recovery.

Estimates of homes either with loans in delinquency or at some stage of foreclosure are as high as 8m. Equally worrisome is negative equity, where the mortgage exceeds the value of the home.

An estimated 5.5m US households are tied to mortgages that are at least 20 per cent 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.

The raw material for foreclosures – delinquencies – remains on the rise, foretelling a significant increase in the roughly 25 per cent of home mortgages already under water. The Mortgage Bankers Association estimates 8m homes are 30 days or more behind on payments or in foreclosure.

Few of these delinquent loans are being cured. In 2005, homeowners retrieved 66 per cent of the loans delinquent for 60 days or longer; by the middle of 2009, this had shrivelled to just 5 per cent, according to Barron’s magazine. More than 3m homes have been repossessed by the banks since January 2007. The result is a dead weight dragging down homeowners, the financial world and the wider economy, with little prospect for improvement.

All of this contributes to the expectation that home prices will continue to decline for at least a year and perhaps for two. The estimates are that prices will fall a further 10 to 20 per cent, which would bring the total decline from the peak valuations of the first quarter of 2006 to about 40 per cent. The stabilisation of housing prices is simply impossible given the amount of real and shadow inventory.

In fact, median resale prices have been declining at an accelerating pace, according to the National Association of Realtors, as lenders continue to tighten already-restrictive standards. As David Rosenberg of Gluskin Sheff put it: “If home prices don’t decline at least another 10 per cent, then the laws of supply and demand will end up being repealed as far as it pertains to residential real estate.”

The result is that millions more American families remain at risk of losing their biggest asset, their home equity. Since mortgages average approximately 50 per cent of total home values, the 30 plus per cent decline in home prices to date has already reduced homeowners’ equity by over 60 per cent.

What is to be done? The options are all bad. A moratorium on foreclosure would be opposed by people struggling to keep paying their mortgages who ask: “Why not us?” A repeat of the tax credit given to first-time borrowers is unlikely to be supported in the new Congress. The expansion of the role of Fannie Mae and Freddie Mac in mediating housing markets must overcome the perception that they distorted mortgage markets and have left taxpayers holding the bag to the tune of $150bn and rising, compared with the $25bn asserted in Congress when they were taken over by the government.

As for reducing the principal of mortgages to the value of the underlying properties – as some suggest, to reduce the threat from negative home equity – the cost to the lenders, be they the banks or the taxpayer through Fannie and Freddie, would run in the range of a trillion dollars. Standard & Poor’s believes 70 per cent of loans already modified will re-default, putting another huge bill on to the backs of the taxpayers.

All previous postwar recoveries have been able to depend on a growing US housing market. That is not the case this time.

Indeed, the continuing decline in the housing market is a dagger pointed at the heart of an incipient economic recovery.

The writer is editor in chief of US News & World Report and chairman and co-founder of Boston Properties

Copyright The Financial Times Limited 2011.