Feedback loop

Judy Jones, who used to police foreclosed homes in Corona, Calif., for code violations until the city laid her off, could now be facing foreclosure herself. Her plight illustrates this CBS news piece on the worsening feedback loop between the housing downturn and the economy.

As the economy continues to slow and layoffs mount, that puts more homeowners in a position where they can't make their mortgage payments. That creates more foreclosures, adding to strains on the financial system that threaten to cripple the economy.

The Mortgage Bankers Association said Friday that at the current rate, 2.2 million homes will enter the foreclosure process this year, and that next year is likely to be worse. We also learned on Friday that employers laid off 533,000 workers in November alone, sending unemployment to a 15-year high of 6.7 percent.

While real estate comebacks have gotten us out of past recessions, it's hard to imagine that happening this time. Housing markets are already weak as this recession starts to pick up steam. An estimated 12 million homeowners are already "upside down" -- they owe more than their home is worth -- making it harder for them to avoid foreclosure when faced with a job loss or resetting ARM loan.

Mortgage rates are falling, thanks in part to the Fed's plan to buy $600 billion in debt and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. There's even talk of a Treasury Department program to get rates on conforming loans all the way down to 4.5 percent.

But can the Mortgage Fairy save us? Underwriting standards remain tough for many would-be home buyers, and many who can qualify are fearful of buying in such uncertain times. Home prices may have fallen in their market to the point where they are seeing bargains they'd like to take advantage of. But it's hard to make what for many will be the biggest purchase of their lives when their job may be the next one to evaporate.

The bottom line? Home prices in many markets may continue to fall, overshooting historic price-to-income trend lines on their way past levels where they would normally find support from economic fundamentals.

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