Reuters reported housing in the US is in the midst of a double dip in prices, a threat to the economic health of banks, households and the country itself.
According to data released by S&P Case Shiller, house prices have hit a new post bubble low, down almost a third from their 2006 peak.
Pending home sales, released by the National Association of Realtors, fell by 27% YoY in April 2011 as compared to the year before, an 11.6% MoM fall.
Given that we are supposed to be in the Spring home selling season, the outlook for the rest of the year is not good. There are, in the current market, very few normal buyers; many are swamped by negative equity in their current house and those who are not are reluctant to commit their own capital to a falling market.
Given tighter underwriting standards someone who now owes more than their house is worth faces a double burden if they choose to buy a new one; cut one fat check to their existing lender to cover the shortfall and an additional one for a chunky down payment for the new house.
And while mortgage rates remain low, and may well fall from here, underwriting criteria, outside of some government backed programs, are tight. The pressure from sales of foreclosed homes is one of the prime forces driving prices lower. Banks are far more willing to cut prices to get a sale done than homeowners and many foreclosures are in poor condition, requiring further discounts to entice buyers.
According to Lender Processing Services, the foreclosure system is overwhelmed, even despite a drop in new foreclosure starts and delinquencies. A scandal and lawsuits over improper foreclosure procedures has slowed the process, and it may be that banks are deliberately holding properties back so as not to further erode prices. At the current rate of sales it will take more than four years for banks to sell off their existing inventory of foreclosed or seriously delinquent houses. More than 40% of delinquent mortgages have been delinquent for more than a year.
That makes arguments that housing has reached fair value irrelevant. Four more years of foreclosure sales makes the market unattractive to all except for cash buyers looking for cash flow from renting the property and willing to wait patiently for capital values to rise.
The long fall of housing has three main impacts; on the banking system, on the economy and on the psychology of US consumers. Even after the crisis, real estate remains a huge exposure for the banking system, both in terms of toxic assets from before the crash and prime and near prime loans.
The economic impact of housing is broad, with home building usually driving the business cycle. The lack of a broad recovery in housing, despite government life support, is one of the reasons that the recovery has been so weak. Sustained double dip in house prices will further depress home building and other allied activity.
The biggest impact may prove to be psychological. Americans have had a 60 year romance with real estate and have come to conflate housing consumption with real estate investment. This has driven them to take on more leverage, to own multiple homes and to take on ever more risk. That mind set has been slow to erode, even in the face of four years of evidence.
If Americans begin to scale back their expectations, both of how much house they need and how much housing will appreciate, the double dip may turn into a decade long grind lower.
(Sourced from www.reuters.com)
