Bye-bye equity
Commentary: Underwater homes snag economy
By Lou Barnes, Friday, February 26, 2010.
Flickr image by Latente!.The bond market rallied this week and long-term rates fell, unfortunately in response to lousy economic news. Lowest-fee mortgages fell to 5 percent, and the 10-year Treasury note has approached its next key level: 3.6 percent.
Every item in this grim litany was forecast to improve, and none did. The Conference Board's measure of consumer confidence in February collapsed to present-conditions 19.4, the worst since 1983.
New claims for unemployment insurance jumped again, now almost back to 500,000 weekly. New mortgage applications fell 8.5 percent, now to 1997 activity. January orders for durable goods fell 2.9 percent, excluding volatile transportation and military sectors.
January sales of new homes suffered an 11.2 percent cave-in (the lowest rate of sales since 1963), and sales of resale homes dropped 7.2 percent.
Thursday morning's business channels broadcast striking visuals: Federal Reserve Chairman Ben Bernanke on split-screen left, asserting "nascent recovery"; President Obama on split-right, nouveau Roman emperor Nero, obsessed with health care fiddling; and from the screen-top data stream the sad data listed above drifted down in little red embers.
As births go, this recovery is in the intensive care unit, but the Fed dares not say so. Just keep its rate at zero and visit the chaplain.
The health care summit collected a most unfortunate cast of clashing politicians in modern recollection: House Minority Leader John Boehner, R-Ohio; Republican Whip Rep. Eric Cantor, R-Va.; House Speaker Nancy Pelosi, D-Calif.; and Senate Majority Leader Harry Reid, D-Nev., among them. Obama appears to have law-school moot court competition confused with governing.
Good grief, people: the economy. The economy.
Now 18 months past Lehman, trillions in spending and tax-cut stimuli, support for financial markets and mortgage-backed securities purchases, the Fed easiest-ever ... why no real recovery?
In a recession different from all prior, find explanation by hunting for the most uniquely different element in the overall pattern. One stands out. Never before have households taken such a hit to net worth, and never at such a sensitive spot: home.
We have had awful housing markets before, notably '79-'82, when mortgage rates reached 18 percent and unemployment 11 percent. However, that was a time of very high inflation: a house worth $100,000 at the outset often still was at the end, the loss to the owner inflicted by inflation. ...CONTINUED
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Submitted by Alexis Eldorrado on February 26, 2010 - 3:44pm.
Eldorrado Chicago Real Estate LLC
www.Eldorrado.com
Lou Barnes has done a great job here painting the “big picture”.
So big, it is almost unfathomable in terms of sheer numbers, but the reality hits home.
Restore credit is correct.
When credit is limited to only a very select few and the buyer pool dries up even more, and the absorption rate of homes for sale steadily increases, still more value and the little bit of equity that is still out there shrivels up even more.
There should be a moratorium on foreclosures for anyone who still has the ability to prove income.
All the bail-out money that helped banks survive, let the banks help those in there homes keep them.
Absolutely a great article…one of the best I have seen. Articles like this is why Inman News is so exciting to read.
Alexis Eldorrado
Managing Broker
150 N. Michigan Avenue, Suite 2800
Chicago, IL 60601
773-588-7777
Alexis@Eldorrado.com
www.Eldorrado.com
Submitted by Gabriel Gross on February 26, 2010 - 3:53pm.
Lou Barnes is one of my favorite writers and thinkers. Clear, precise, realistic. You should be on the Fed board.
I don't see a way out of this hole. AIG needs again more money, Greece will declare bankruptcy and that could kick in the next leg down.
Submitted by berge charles on February 26, 2010 - 4:05pm.
cb
Great article. As a country, we are truly entering uncharted waters. The very definition of wealth & net worth is unravelling before us. Real property is no longer the storehouse of value it once was. People who lack STEM skills (science, technology, engineering, math) may face a bleak economic future. Pretend low interest rates only create the illusion of higher property values. Higher incomes are the only sustainable basis for higher property values - and vice versa. And on & on..
Charles Berge, J.D.
Real Estate Broker
www.auctionrefer.com
Submitted by Duncan Logan on February 26, 2010 - 4:47pm.
It is really hard to read this and not try and come up with solutions. I think the truth is that there is no "good" solution, even if you remove all the political angles there is still no good solution.
Let's look at the problem, firstly, the numbers are just too big for the government(s) to handle. When the consumers could not handle their debt the banks absorbed it, when the banks could not handle their debt, the governments absorbed it but now perhaps the biggest bubble is about to burst, Greece, Italy, Spain, Eastern Europe, The UK and Ireland are all hanging on by a thread. Personal bankruptcy, corporate bankruptcy and now government bankruptcy.
Propping up real estate can only be a short term measure. To work it must be quickly backed up by rising house prices. The only legitimate way for house prices to rise is for demand to rise beyond supply and with unemployment at 10.5% (real unemployment we all know is much higher if you include the long term unemployed or those forced to take part time jobs) it is simply not going to happen.
I fear the truth is that the government is running out of viable options. America is looking OK as long as Europe looks worse. Money flows into the US dollar and stocks but not because there is a healthy economy, simply because it is the best of a bad lot. (true fear heads to gold which is at an all time high against most European currencies)
Releasing credit must not be forced. Banks must not be forced. There is a very good reason banks are not releasing credit, there is a very good reason consumer are slashing credit card debt, in a word I think it is fear. The banks are not on solid ground by a long shot and they know it. A second dip to the recession is still a very real possibility. Consumers are not confident because employment is not guaranteed. We all have a friend somewhere in financial difficulty.
Alexis, I agree the numbers are unfathomable, how did we get here? Interfering in natural market forces, how do we get out? I have no idea but I suspect we need to let natural market forces prevail. Less interference, not more.
Submitted by Jon Astaris on February 26, 2010 - 7:00pm.
Here's your solution: The 800 some billion stuffed with the mallet into the banksters already gorged on points and fees grabbed during the high rolling days should have been used to pay delinquent mortgages - the part the homeowner could not make.
The 800 billion could have made several years' worth of mortgage payments on all 10 trillion of mortgages in the land. No deflation, no crash. But as Alan Greenspan said, the "recovery" is extremely uneven, meaning simply that the billions went to a very select few while the rest of us lost all we had.
Submitted by Sean OToole on February 26, 2010 - 8:14pm.
I enjoy Lou's column more than any other here at Inman, however, I find the conclusion that we need more credit dead wrong.
Homeowners did not really lose any net worth in the recent housing crash. The reason - the increase in value was fictitious, completely unsupported by incomes, and driven solely by loose lending practices. This reality simply caught up with us, and left us with trillions more in housing debt then the population can afford as Lou so clearly points out.
And it wasn't just housing. We've been on a credit binge for years with not only individuals now seriously underwater, but municipalities, states, countries, and frankly the world.
More credit can not possibly solve the core problem - too much debt.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by John Rakoci on February 26, 2010 - 9:31pm.
We have a huge problem and solutions are going to be hard to swallow. The biggest problems of the US are related to the economy. It is a many pronged problem. Our government has concentrated on a doomed health care system instead of finding some solutions to the jobs and housing prongs. Those two items get nothing more than lip service. Without them having recovered the health care problem will fail sooner.
As an off topic- how many seniors are expected to vote for any congressperson thatvotes to remove $500 Billion from the fiscally broke medicare system?