Safe as Houses: Double-dip housing crisis looming

Posted Wednesday, June 1, 2011 in Analysis

Safe as Houses: Double-dip housing crisis looming

by Gina Hamilton

This morning's eagerly awaited S&P/Case Shiller composite index, which many hoped would show a slow recovery of the American housing market, or at least only a modest decrease of housing prices, instead caused many to hit the panic button.

U.S. single-family home prices dropped in March, dipping below their 2009 low, as the housing market remained bogged down by inventory - much of it foreclosure-related - and weak demand, as mortgages remain difficult to come by and the job market remains soft.  Consumer confidence is also extremely low, with a large number of people polled saying they have no intention of getting into the housing market at all, at any time.

The 20-city composite index was at 138.16, falling below the 2009 low of 139.26, or more than a five percent drop in actual housing prices.

In a statement to the New Maine Times today, David Blitzer, chair of Standard and Poor's index committee, said that the numbers reflect what many are coming to realize is a double-dip housing setback.

"There are some bright spots," he said. "In some of the farming states, and in parts of Texas, and surprisingly, even California is not doing too badly. But across most of the country, housing prices are falling with no relief in sight.  There is no reason why housing prices shouldn't drop 15, 20, even 25 percent before we hit the bottom."

Including Maine?

"Including Maine," he acknowledged.

As of April, homeowners have lost some $8.3 trillion - in paper - on their home investments. The biggest problem is foreclosures, Blitzer said. With so many properties moving through the foreclosure mill, there is a glut of properties on the market.  More than a million more foreclosures are expected through the remainder of this year, depressing local property values.

"This is where Maine has a slight advantage," he said.  "There aren't quite as many foreclosures per capita in New England as elsewhere in the country."

But that is small comfort for people who can't sell their homes because they are underwater on their mortgages - they owe more for their house than the property is worth.

Because the existing housing market is one of the key economic indicators for future growth, the double dip housing 'recession' is a very bad sign. Few homes are being constructed while there are millions of unsold properties on the market, and new housing construction is a leading economic indicator, an economic boon that extends into virtually every sector of the economy - construction products, banking and other financial services, taxation, durable consumer goods, and trades labor.

The housing market has struggled for many reasons. In addition to the usual suspects - too few dollars chasing too many goods, a textbook rationale for deflation in this particular market - it is also likely that much of the current losses stem from the fact that the market was wildly overheated in the first place.

The bubble

It is a fact well known in economic circles, that when a bubble is extreme, the recovery is equally prolonged and painful when that bubble bursts. 

At the peak in 2005, home prices were 65 - 70 percent higher than what they should have been, according to historic norms.  The current 31 - 35 percent decline from the high point has not yet been enough to return housing to the trend lines it has clung to since the Great Depression.

For people who bought during the bubble, assuming prices would continue to rise indefinitely, there is no joy in that unfortunate fact. Many of them will turn in the keys and walk away, unwilling to pay in some cases twice what the house is worth.  When they do so, however, the value of their properties instantly drop, and carry their neighbor's property values along with them. 

A house can only sell for what the neighborhood comparables sell for.

Those who will suffer most are people who have been planning to use their home's value in tangible ways - to retire, for instance, or those who have to sell in a hurry to follow the job market to the south and west. Also at risk are those who have lost a job in a depressed market and have to settle for a less well-paid position.

But anyone who has purchased a home in the last ten years, or refinanced in the heady market of easy capital, will take a hit.  When our home prices return to the historic norms ... and they will ... all of us will lose some of our personal worth. Our children will inherit a property that is not worth what we paid for it.

The days of 'home as investment vehicle', and all the business structures that went along with that model, are over.   

blog comments powered by Disqus