Nobel laureate Professor Vernon L. Smith, who delivered the keynote address at the Cato Institute’s 30th Annual Monetary Conference on Nov. 15, noted how housing leads both recession and recoveries.
“In 11 of the past 14 recessions, you’re having a decline in housing leading that recession. And all recoveries with the exception of — if you want to call this a recovery we’re in — with the exception of this recovery, housing has always come back after a recession,” said Smith.
He’s right. New home sales are still about 66 percent below what they were in 2003, when prices were roughly the same as they are today.
That accounts for 368,000 new home sales annualized in Oct., compared with more than 1.1 million in Sept. 2003. The prior month’s sales were revised down by 20,000, too.
In addition, some 10.4 million homeowners still owe $680 billion more on their mortgages than their homes are worth as home values are still 31 percent below their April 2006 highs. That is 22.3 percent of residential homes with mortgages upside down, reports CoreLogic.
Locally, in Nevada 59 percent of homes with mortgages are underwater, 43 percent in Florida, 36 percent in Georgia, and 33 percent in Michigan. Those four states alone account for 34.1 percent of all negative equity mortgages nationwide.
Overall, negative equity keeps about one-fifth of homes nationwide — and nearly half in troubled regions — effectively off the market for those homeowners who simply cannot afford to sell. This drives sales downward, as the amount of willing sellers collapses.
But demand is also a problem, too.
With low savings and relatively higher unemployment, the amount of buyers who can take advantage of relatively low prices and historically low interest rates is not accelerating. The unemployment rates in the aforementioned states are 11.5 percent in Nevada, 8.5 percent in Florida, 8.7 percent in Georgia, and 9.1 percent in Michigan.
In short, it appears likely the housing market will not improve substantially until the jobs market gets better first, particularly in the areas where the housing downturn hit the hardest. New buyers would then be able to get into the surplus housing stock of foreclosed homes. Once that happens, prices would eventually begin to improve, too.
The high unemployment rate alone explains why all of the “stimulus” and bailouts in the financial sector have been to so little effect in improving the market so far.
The Federal Reserve purchased some $1.25 trillion of mortgage-backed securities (MBS) in its rounds of quantitative easing, and now is committing to buy an additional $480 billion a year for as long as it takes to reverse the nation’s fortunes. This helps banks to repair their balance sheets, but really does nothing to boost equity or reduce unemployment.
Obama’s temporary 2009 homebuyer’s tax credit did produce a slight spurt in new home sales and prices, only to crash down afterward, leaving many of those who took advantage with little net benefit.
After that, Obama’s mortgage modification program was a colossal failure, with hardly any principal modifications occurring. Obama blames this on Federal Housing Finance Agency Chairman Edward DeMarco, who blocked such measures.
But even under the Agency’s best case scenario, DeMarco estimated just 248,000 borrowers would have even been eligible for the Home Affordable Modification Program Principal Reduction Alternative — or just 2.3 percent of the 10.4 million borrowers nationwide who are underwater. Meanwhile, the program likely would have been a net loss to taxpayers.
Ironically, the push for principal forgiveness may imply that prices are still too high, effectively telling homeowners not to expect their deflated home values to come back anytime soon. The worst case scenario is that prices still have more to tumble before a true market bottom is felt.
If so, perhaps it is time to just let it happen. Foreclosures actually are the most efficient way to bring down prices and clear the market, anyway. As far as boosting demand goes — only a real jobs recovery will produce that outcome.
Obama for his part has been trying to slow down the very foreclosure process that might be the solution. In the meantime, millions of Americans still cannot find full-time work in this economy, and in Nov., another half million Americans stopped looking.
On the bright side for Obama, while maybe not for the rest of the country, at least his mortgage is paid for the next four years. Of course, the check is drawn in red ink.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.