Since World War II, the United States has never recovered from a recession without a surge in new house construction. This doesn't mean a recovery is impossible without a housing comeback. In this case we would be committing a fallacy of induction if we jumped to that conclusion. But if historical experience is a reliable guide, there will be no strong economic recovery in the United States this time around because the housing market is in deep trouble again.
I gave my forecast for the housing market in The End of Suburbia, Really! Today's update corroborates my conclusions. A friend asked me whether I have ever considered whether I might be mistaken about my pessimistic view of our future. I have. This post is a partial answer. My pessimism realism is rooted in the data and their reasonable interpretation. I would have to disregard huge chunks of reality to reach more optimistic conclusions. Housing is a case in point.
Zillow.com has just issued their housing report for the 1st quarter of 2010. It's not a pretty picture—
Home values in most U.S. markets continued to decline in the first quarter of 2010, as the Zillow Home Value Index fell 3.8 percent year-over-year, and 1 percent quarter-over-quarter, to $183,700. However, home values in several large California markets show signs of having reached a bottom, according to the first quarter Zillow Real Estate Market Reports(2).
Housing market conditions varied across the country, and home values in most markets (106 of the 135 tracked by Zillow) continued to decline on a year-over-year basis...
Additionally, negative equity across the country remained high, with 23.3 percent of single-family homes with mortgages underwater, up from 21.4 percent in the fourth quarter of 2009. Foreclosures(3) reached a new peak in March, with more than one out of every 1,000 (0.11 percent) U.S. homes going into foreclosure during the month...
Prices are falling, more homeowners are underwater, and foreclosures are up. But here's the worst part—
"It's a very positive sign that several large markets have hit what appears to be a tentative bottom in home values," said Zillow Chief Economist Dr. Stan Humphries. "While this is no guarantee that home values there will not fall again, it is more likely than not that they will remain above their lowest point last year.
"However, we continue to have concerns about other factors playing out in markets across the country. We suspect that the homebuyer tax credits are, for the most part, stealing demand from later this summer, rather than creating new demand. Even with the tax credits in place during the first quarter, inventory levels were rising, and home values continued to decline at a steady clip, rather than steadying.
Government giveaway programs, if they have "worked" at all, have only pushed demand forward. This makes perfect sense from a political point of view, where the idea is to put a rosy sheen on things in the short-term even if these "solutions" only make things worse in the longer term. Meredith Whitney speaks to this point (hat tip, Mish)—
What has kept home prices stable - and make note that politicians and banks are eating their own cooking because they really believe home prices are stable - they're stable because there's been a ton of inventory kept from the market. So if you control the supply, you can control the price without controlling the demand.
Here's a statistic that I find fascinating. This is just for the top four banks. If you look at nonperforming assets - that's loans that haven't paid over 120 days - the size of that is 1.5 times all of the charge-offs that banks have incurred since 2005. So you think credit has stabilized, mortgages have stabilized? Non-performs have ballooned so they've more than doubled since the beginning of 2009, and that's just stuff that has to start going on to the market, and interestingly, this quarter you're starting to see housing supply reach the market. That to me triggers another down leg in housing, so to me, I'm steadfast in my belief that there's going to be another double-dip in housing
Inventory has been kept from the market by various government rescue programs and fraudulent bank accounting that hides "non-performing" loans. These "kick the can down the road" measures have prevented house prices from falling to a "natural" level. Artificial incentives, combined with dishonest accounting, stabilize prices in the short-term, but can not prevent the house prices from going where they want to go. And of course politicians believe their own bullshit. It is their fondest hope that you will believe it too.
From here, things only get worse. As usual, Calculated Risk is all over the story. There has been a surge in REO inventory (foreclosed homes) at Fannie & Freddie. More foreclosures are in the pipeline.
The second graph [below] shows the distribution of homeowners with a mortgage with near or negative equity.
The share of borrowers whose mortgage debt exceeds the property value by 25% or more fell slightly to 10.4% or 4.9 million borrowers, down from 10.6% or 5 million borrowers. The aggregate dollar value of negative equity for these deeply underwater borrowers was $656 billion dollars.Research has shown that once negative equity exceeds 25 percent "owners begin to default with the same propensity as investors", and it is these 4.9 million borrowers - with $656 billion in debt - that are most at risk for foreclosure.
We are looking at a double-dip in the housing market. This new housing bust will not be nearly as bad as the collapse of the Housing Bubble, but the new swoon guarantees that a lot more time must pass before we reach the actual "bottom" in housing.
I contend that an economic recovery is very unlikely without a resurgent housing market. Americans generally don't grasp how long it takes to recover from a disaster like the Housing Bubble. It doesn't help that Americans are awash in a Sea Of Propaganda telling them the housing market is recovering due to the ineffective damn near miraculous steps taken by their elected representatives to avert disaster.
I'll conclude with Richard Suttmeier, who says in effect I hope you enjoyed the housing recovery ... because it's history.
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