The Current State of Housing

New housing start numbers were released this morning, showing an uptick of more than 10 percent. But lest this lure Americans into an optimistic view of the housing market, Mortimer Zuckerman has a lengthy, data driven op-ed in the Journal noting the dismal state of housing. He starts with this:

The pressure to meet mortgage payments on properties that have lost value has been especially shocking for those who have lost their jobs in the Great Recession. Their houses have become a ball and chain, restricting their ability to seek employment elsewhere. They cannot afford to abandon the remaining equity they have in their houses—and they can’t sell in this miserable market.

New home sales, pending home sales, and mortgage applications are down to a 13-year low, despite long-term mortgage rates that plummeted recently to an average 4.3% before rising slightly. New home prices have fallen by an average of 30%. According to David Rosenberg, chief economist at Gluskin Sheff, this has reduced home occupancy cost to 15% of family incomes, down from the conventional 25%.

The fall in house prices has eaten away at the equity Americans have in their homes. About 11 million residential properties have mortgage balances that exceed the home’s value, notes Mr. Rosenberg. And given the total inventory of homes and the shadow inventory of 3.7 million empty (foreclosed) homes, he notes that prices might fall another 5% to 10%. That would leave an estimated 40% of American homeowners with mortgages in excess of the value of their homes.

This negative equity problem has led to serious delinquency problems. And while the upward trend we were seeing in the rate of new foreclosures has slowed, there is still a significant problem:

A staggering eight million home loans are in some state of delinquency, default or foreclosure, Alan Abelson reported in Barron’s in July. He noted that another eight million homeowners are estimated to have mortgages representing 95% or more of the value of their homes, leaving them with 5% or less equity in their homes and thus vulnerable to further price declines.

The pace of foreclosures slowed briefly thanks to loan modifications by the Home Affordable Modification Program and other government efforts. But the programs have not been working as hoped—it’s been reported that half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50%.

The failure of HAMP is just one of several government failures that have made housing worse. The First-time Homebuyers Tax Credit has been the most high profile failure, with any gains from housing starts or prices wiped out after the expiration of the credit as the one thought benefits of the program turned out to just be stolen future demand. For programs that have delayed foreclosures like HAMP, the consequences of failure haven’t just been artificially increased housing prices, but a delay in working through the real troubles in housing and the creation of a shadow inventory of homes that will sit crushingly on the market for a while:

While the foreclosure pipeline remains clogged, as it unclogs a new wave of homes will wash into the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.

A well-balanced housing market has a supply of about five to six months. These days the inventory backlog has surged to about a 12½ months’ supply. This explains why average sale prices have been declining for so many months. The high end of the market, in particular, is under great pressure.

Zuckerman doesn’t finish on a positive note, and unfortunately his sentiment here is spot on.

There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.

Read the whole piece here.