The downward spiral of consumer, business and banking confidence, fueled by the foreclosure crisis, has sent home values to new lows. Rick Sharga, VP of Marketing at RealtyTrac, said in July; “Foreclosure activity is the highest since the Great Depression of the 1930s.”
Headlines fill the pages of newspapers daily. “10,000 homes foreclosed on each day,” glared The Economist in August 2008. “Home foreclosures up 430%” screamed the Tucson Citizen on May 8th. Economist.com wrote on February 28th, “…brick-fronted townhouses…of northern Virginia…are now worth some 40% less….Foreclosures are rising.”
The reasons for the increasing number of foreclosures have been uniformly agreed too. Reporter Les Christie of CNN wrote on October 10th, “…couples back out of deals [because they think] they can get a better deal, so they decide to wait….forcing prices down further." On October 14th he wrote a follow-up article “Home prices plummet.”
The Vicious Cycle
An over-supply of homes combined with the myth of home ownership was all that was needed to initiate foreclosures on many sub-prime mortgage holders, over-stretched owners and speculators. Their failures in turn became the spark that commenced the negative equity cycle. Dropping home values placed other owners and institutions in crises situations which in turn produced additional foreclosures. The circle was complete!
Homes and Households
According to the U.S. Census Bureau’s Housing and Homeownership Data (CPS/HVS) for the second quarter of 2008, there are 129,871,000 total housing units in the USA. Of this 85.6% are occupied but only 58.3% of the total units are owner occupied.
Also, the latest U.S. Census Bureau’s Household Data (released in May 1996) has projections that extend through 2010. For the year 2008 the census models have three projections (112,362,848; 111,833,083 and 111,161,226) as the total number of USA households.
This Census data definitively shows that there are between 1.75 and 1.87 million more homes in the USA than households to fill them. The housing surplus part of the equation, now in place, initiated the halt to home equity increases.
Home Equity Myth
According to a June 23, 2008, New York Times article written by Princeton University Economics professor and 2008’s Economics Nobel Laureate, Dr. Paul Krugman; “There are…disadvantages to homeownership….there’s the financial risk…borrowing to buy a home is like buying stocks on margin….”
Agreeing with Krugman’s thesis Dr. Jack Guttentag, Professor of Finance at the University of Pennsylvania’s Wharton School, wrote in The Curse of Negative Equity, July 2007; “Most home buyers…expect price appreciation….Price appreciation is like a tooth fairy, you need do nothing except put your house…under the pillow, and as if by magic, you have equity.”
The home equity fairy led marginalized owners toward the path of foreclosure with unsustainable expectations; foreclosures that reversed the economic trend and began the negative equity part of the circular equation.
Negative Equity
When the equity myth failed, a housing value reversal was to blame. Mark Zandi, Chief Economist and co-founder of Moody’s Economy.com calculates in his 2008 book Financial Shock that; “…17.5% of the 53,765,000 home mortgage-holders [9.41 million] have home loans that are greater than the value of the house.” Professor Krugman agrees; “Now that the bubble has burst….around 10 million households [have] negative home equity — that is, with mortgages that exceed the value of their houses.”
With negative equity, owners that fall upon hard times (loss of job, medical emergency, lack of additional credit, college costs, balloon payments, etc.) find foreclosure at their door. Zandi concludes that; “If house prices fall by another 10%... [which he expects] almost 14 million mortgages will be underwater by [2009.]”
Negative equity, because of expectations, creates foreclosures that create even lower equity values for formerly unaffected owners.
Foreclosures
The final arm in the circle, foreclosures, connects to housing supply, the first arm in the circle. Harvard professor and reporter Dr. Jerome R. Corsi, of Seacoast Newspaper, a division of Ottaway Newspapers Corporation, reported on July 29, 2008 that; “RealtyTrac reports banks now own 1 million foreclosed properties….” Sharga reported; “….25 percent of all 2008 sales will be foreclosed home sales.”
Dr. Corsi summed it best; "The foreclosure problem is getting worse and will stay with us well into the next decade.”
Frank W. Hardy - Frank has 36 years of airline experience navigating every ocean & continent. Flying 25,000 hours in 42 years presents a rare historical ...
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