Housing: What Is Happening To The American Dream?
When we moved to New England in the early 1990’s, for the first time in my life I met families who were living in a home that was worth less than the amount they had paid for it. This regional phenomenon was new to me and I was stunned to hear of it. Last night mpthompson linked to this article from July 3, in the Wall Street Journal,
What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house — that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.
mpthompson and others have also linked to this column from August 5th from Reuters,
About half of U.S. mortgages seen underwater by 2011:
The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.
The Kaiser Family Foundation, statehealthfacts.org. Data Source: Measures of State Economic Distress: Housing Foreclosures and Changes in Unemployment and Food Stamp Participation.
So what is the government doing? JustMary mentioned mortgage-interest deductions. Earlier this year in Mortgage Deduction Looks Less Sacred, the Wall Street Journal covered the Obama administration budget proposal to decrease the mortgage-interest tax deduction for those who fall in higher earning categories.
On July 23rd, in The deficit and health care Falls the shadow, in the last paragraph the Economist raised the specter of eliminating the mortgage-interest tax deduction.
Other problems are mentioned in news from Texas: New mortgage rules stifle housing market.
As mpthompson noted, we need to be aware of what’s happening, not to seek out negativity, but to gain realistic awareness of the potential impact of housing on the economic situation.
UPDATE: From Tyler Durden at Zero Hedge: Fannie Needs $10.7 Billion In New Treasury Capital. Durden links to a Bloomberg report on Fannie Mae’s $14.8 billion loss in the second quarter. Thanks to theghostofreason for pointing this fact out
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H/T: mpthompson, Wall Street Journal, Yahoo! News/Reuters, The Kaiser Family Foundation, statehealthfacts.org, JustMary, Economist, WFAA.com
[1]
My husband does construction and is also a long time realtor (majored in business administration in college). He doesn’t go along with the glum outlook that Deutsche Bank and others have recently projected.
In fact this morning he talked with an active broker friend who felt that the housing market was holding (in our area), buyers were showing more interest, and that the lending situation, although not really improving, wasn’t getting any worse. This woman realtor has always been active in state affairs and has lots of state and national Realtor contacts, so I think her POV has credibility.
[2]
Thanks for the info, Jan. This is not an area of expertise for me. JustMary had mentioned doing a thread on it last night and I wanted to put something together for discussion.
[3]
Iread basically the same thing (that 50% of mortgages will be “under water” by 2011). Scary.
[4]
In the early ’90s my wife and I purchased our first home and we quickly lost all equity as the recession of ‘91 & ‘92 took its toll on California real-estate. Being a recent college grad and underwater in our house by $50,000 wasn’t a pleasant place to be — this includes losing the 20% equity we came in with. I have distinct memories of friends and family members recommending us to simply mail the keys to the mortgage holder. Fortunately, we decided to whether the storm and ultimately recovered the value that we lost during the dip. That experience taught me valuable lesson to never assume the value of property is cast in concrete.
My primary worry is that a LOT of mortgage holders will either be unwilling or unable to carry their mortgage should the Deutsche Bank prediction hold true. It takes a bit of intestinal fortitude to see such a situation through. Particularly if the government makes it easier to walk away from loans with fewer consequences.
Right now, my interest in this is simply a “concern”. In the coming months it is something to keep track of and see if the percentage of mortgages with negative equity does indeed grow.
[5]
Another thing to keep in mind. I was discussing the Deutsche Bank prediction today with a friend of mine who has extensive experience with the financial industry. His point was to take any prediction such as that made by Deutsche Bank with a grain of salt. Any financial company never releases reports purely for the benefit of the public. His point being that Deutsche Bank has almost certainly made financial bets based upon their prediction and that releasing the prediction is a function of self interest to maximize whatever bets they have made.
This would provide a counter point to the very negative prediction and reinforce the optimism that Jan expressed above through the opinions of her husband who has feet on the ground.
[6]
mpt, I think that same recession had impacted the people we knew in NE.
Any financial company never releases reports purely for the benefit of the public.
Thanks for adding that and bringing some balance to the mix!
[7]
Here is a report from NAR. Its a pdf toward the bottom of the first page of the report.
Now the reportage trys to paint in ‘nice’. But go look at the charts in the pdf. There is still an 8-9month overhang, the same one had when we entered this recession. Now I will grant it has gone down, but 9 months is not normal, it is usually 3-4 months in normal times.
One also has to take PHSI number with a grain of salt. That number reflects all contracts signed but not brought to closure. So the actual number will be less than that. (Kinda like BLS numbers that always get revised.
So the industry is still sitting right where they were in 2007. This all like the egg heads saying — “unemployment is still rising but the rate is slowing down.” Not much consolation.
[8]
The American Dream was being bashed with a shovel by the Bush administration, but it expired officially on Jan 19, 2009….
[9]
Thanks to mpt for the video on Democrats & Fannie and Freddie !
[10]
I’ve used that video to against the arguments that if Republicans had not stood in the way of regulation we wouldn’t have had the financial crisis.
What libs don’t understand is that regulations can be manipulated by politicians to turn a good organization bad just as much as the can turn a bad organization good. Regulators doing their best job can be shut down if their reports are politically inconvenient — just as we see in that video a regulator essentially being chased out of the halls of congress. If the people in charge of the regulators are corrupt, the best regulations and regulators in the world won’t amount to a hill of beans.
If there is a single video I could show the people of the United States, that video would be very near the top. It would open up a LOT of eyes.