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Case Shiller Composite, Year over Year (Calculated Risk)
The deep investment in the notion of a housing recovery took another hit today, as home prices fell to a 10-year low.
The housing market started the new year with a thud. Home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.
The average home sold in that month lost 0.8% of its value, compared with a month earlier, and prices were down 3.8% from 12 months earlier, according to the S&P/Case-Shiller home price index of 20 major markets.
Home prices have fallen a whopping 34.4% from the peak set in July 2006.
It’s actually a bit worse than this, real home prices and price-to-rent ratios are down to late 1990s levels.
The reaction from those with that deep investment is to say that prices aren’t coming back to the bubble years, nor should they. And that’s true. But the notable part of all this is the trend. You have new and existing home sales falling month-over-month, and now prices falling as well. And what we know is that the coming months will probably lead to a spike in foreclosures and a new set of inventory dumped onto the market. In fact, we’re already seeing this. It’s a result of the foreclosure fraud settlement, and the very reasonable belief from the banks that they will never face sanction for their misdeeds. The principal reduction piece attached to the settlement is so trivial that JPMorgan Chase reps in Florida don’t even know about it.
The other point is that, when you have 20% of all mortgages in negative equity, continuing price collapse restarts that vicious cycle. It draws people more underwater and more vulnerable to sudden economic shocks in their personal financial picture. The principal reduction from the settlement is too minor to help, HARP 2.0 is setting up as a disaster, Fannie and Freddie haven’t moved on write-downs, and basically all the efforts to stabilize the foreclosure crisis have fallen short. So that, coupled with the expected surge, increases foreclosures. Foreclosure sales start to make up a larger portion of the market, and sellers must set their price accordingly. This lowers prices overall, and the negative equity increases. Eventually people either cash out or they succumb to being underwater, leading to more foreclosures. Leading to lower prices. Leading to more negative equity.
If there were a finite set of homes that needed to “clear” to reset the market, that would be one thing. But [we don't know what that number is, yet.]. Each drop in home value has a significant impact on those at or near negative equity. And you’re talking about millions of families.
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“The principal reduction piece attached to the settlement is so trivial that JPMorgan Chase reps in Florida don’t even know about it.”
Why should they care? They know there will never be sanctions imposed UPWARDS against the moneyed or government elites, only downward against those proles foolish enough to approach the walls of the Enclaves and raise a voice. Those people will suffer the full might of the State brought down on their backs.
Law in this country has changed permanently into two legal systems, one to punish the proles and one to enable and indemnify the looters.
HARP has so many limitations on who qualifies – with no merger of equity loans/2nd mortgages with primary mortgage specifically in the rules – that it is no better than what we had under the stimulus – and in many ways worse.
Principal reduction is picking up – the settlement is working. But the size of the monies available should have been double with mandatory offer in the settlement to any that were good credit for the payment after the principal reduction and loan rate modification.
Fannie Freddie non-participation in principal reduction is nonsense – but the minute they get close the hedge funds/investment banks complain that “banks” are being gifted money. The hedges really want to blow this thing up so as to screw the other banks.
Clearly, the great American nation is going to have to reset it’s ideas of prosperity for some time to come, excepting the fortunate few who continue to be the principal beneficiares of the economic functioning.
“Law in this country has changed permanently into two legal systems, one to punish the proles and one to enable and indemnify the looters.” Excellent analysis.
I do not understand how a home with a second mortgage that is underwater on the first would benefit from cutting that first, unless the second is completely forgiven.
I was in Las Vegas over the weekend. On the news they reported that there are 5000 housing starts this year compared to 1000 last year, I assume that is to date, so they are seeing an uptick, but they also said that during the boom years they had 30,000 houses being built in a year.
Our cab driver said that the unemployment there is low, women make more money than men doing anything, including cocktailing in the bars, at all ages. I did not spend any time around the casinos, so I have no idea, but he said the dealers make $125K per year.
I have not done much research on LV, but I thought the rate of foreclosure was very high. The cab driver said the houses are now being bought by outside investors, but I really don’t see how it can keep growing.
I have a diary in mind of other stuff I saw there, related to the economy and what is new there. No time yet to write it.
Housing will continue to fall until housing is affordable. Affordable is a factor of household income (including households with unemployed people, since they have to live somewhere). The details are intricate and interesting in and of themselves, but the bottom line is that houses don’t sell until people can afford to buy them. They don’t sell to investors until they are cheap enough to generate positive cash flow at rents people can afford. We aren’t there yet, we aren’t even close. You can’t re-inflate a bubble, not for a generation or so. Real estate corrections take much longer to play out than paper market corrections because the transactions take a long time, may involve legal action, and people are reluctant or unable to take their losses and sell, and they have the issue of needing a place to live.
Loan against home equity has to be very low as banks have tightened lending. So how does the economy get tightened up? Job creation has to be lower quality. Housing is the traditional engine out of recovery. If it does not recover Bernanke double talk on behalf of the administration is smoke and mirrors. We are in hot water but have plenty to waste on Wars to nowhere.
Dave, like a well slung stone skipping across only the tallest of waves on an otherwise placid lake your summary reads.
The only data point I’d add is that with 75% or more of the 99% earning a wage or salary that’s tunneling it’s own downward course across economists’ x/y limited landscape, housing as a market is as captive to this and the trends you identified as is a banking regulator to the Khans of lower Manhattan.
My thoughts exactly. With wages depressed over the last 20 years, and house prices going up wildly at the same time, the cost of a home was pure illusion. If all the people that are underwater right now, but continue to pay the bank, suddenly walked away, there would be a collapse that all the kings horses and all the kings men could never put back together again.
I don’t think housing will be back at 2006 levels for another 10 years.
RE: “The other point is that, when you have 20% of all mortgages in negative equity, continuing price collapse restarts that vicious cycle.”
Is this fact-based? I ask because I’ve heard that from 1970s – 2002 people were moving every 7+ years. That would seem yo indicate that some 14+% of mtg. holders were ALWAYS under water. Further, it would be reasonabe, as business & R.E. cycles crested & ebbed, this % would easily pass through 20% (1990-1996 in CA for example). I ask because I don’t recall reading of wide housing panic, nor a fear that another “vicious cycle” of price drops was starting.