December 29th, 2008 9:13 AM by Lehel Szucs
Housing starts have nosedived from 2.3 million, seasonally adjusted at annual rates, in January 2006 to 791,000 in October, a post-World War II low. Meanwhile, homebuilder sentiment is now at record lows. Leaping foreclosures, among other forces, have pushed up the homeowner vacancy rate. Some of the victims of declining homeowner rates are moving into rental apartments as the bubble years' lure of homeownership fades or they lose their houses. But others are doubling up with friends and family, thereby adding to empty house inventories.
As lenders spilled foreclosed houses on the market, they were sold for only 70% of the unpaid loan balance in the third quarter compared with 78% in 2007, and losses averaged 44% of the loan balance compared with 29% a year earlier. With about 40% of existing home sales coming from foreclosures, or "short sales" in which the mortgage amount exceeds the house's value, the prices for selling homeowners and builders are forced to decline to compete.
Existing home prices are down in October 20% from their peak in October 2005 as measured by the National Association of Realtors, and 21% from their second quarter 2006 peak according to the less-upward biased Case-Shiller index (Chart 2). Curiously, a survey found that in the second quarter, 62% of homeowners believed their houses had appreciated in the last year even though 77% had fallen over that time and only 19% had risen, according to Zillow. Another survey found that 91% believe that a house is the best long-term investment. A third poll revealed that 32% think this is a good time to buy stocks, but 51% believe it's a good time to invest in a home. We wonder if that optimism will persist if our long-held forecast of a 37% peak-totrough decline holds.
At present around 12 million homeowners, a quarter of those with mortgages, are underwater with their houses worth less than their mortgages. Among those who bought their homes in the past five years, 29% are underwater. If our forecast of a 37% house price fall is reached, about 25 million, or almost half the 51 million with mortgages, will be underwater. Adding in the 24 million who own their houses free and clear, and one-third of the total will be in trouble. The destruction of the American Dream of homeownership for so many people will force a political response, even though the cost of subsidizing their mortgages down to their house values would be about $1 trillion.