Mortgage rates are near 50-year lows. Affordability has improved dramatically. The ratio of home prices to income is 21% lower than its 15-year average. An excess of 3 million vacant units makes this a buyer’s market. Household formation averaging 1.2 million a year in the next decade should clean out the excess.
“Whatever the excess supply of housing is, it is shrinking pretty fast,” says Thomas Lawler, a regular source at Calculated Risk, the leading arbiter of housing data. He is quoted in Why It’s Time To Buy. (Please see the chart below showing positive inventory trends. Click chart for large image.)
The obvious long-term goal of ownership is free-and-clear title with no mortgage. If your mortgage is paid off at retirement your monthly nut is significantly reduced. You don’t have to pay rent. You can sell the house and collect the equity on the way out.
The journal reporters suggest an “ultraconservative” approach. Only purchase when the cost to own is cheaper than the cost to rent. That means you should wait for the monthly cost of ownership including principal, interest, property taxes, fire insurance and upkeep to equal the rent bill you would pay for a similar home. (Please see the chart below showing price and inventory trends. Click chart for large image.)
“While we might not see rapid growth in the next couple of years, there are a tremendous number of positive signs that could lead to a rebound,” says Anthony Sanders, a real-estate finance professor at George Mason University.
A report from Fannie Mae found 27% of homeowners would consider walking away. The previous year only 15% would think of defaulting on a mortgage they could still afford.
Morgan Stanley estimated 200,000 strategic defaults in 2009 or 12% of the total. (Please see the full story at “Walk away from your mortgage? Time to get ‘ruthless’ – CNN Money.)
Most walk-away borrowers are good credit risks with high FICO scores. One Florida couple paid $1.4 million for a house which is now worth $400,000. They are still paying, but not all borrowers would stick with that mortgage.
Consumers are adapting the rationality of professional investors. An investor who purchases an office building will often use a company to make the purchase and borrow the money. If the value fell by half while the mortgage is 70% of the original price, and if the loan is not personally guaranteed, the investor might send in the keys and wish the lender good luck.
“There’s a sense that the banks don’t follow the ‘rules,’ but somehow the little guy is supposed to — more and more people are saying ‘enough is enough’ and walking away,” said Brent White, a law professor at the University of Arizona, and author of “Underwater Home: What Should You Do If You Owe More on Your Home than It’s Worth?”
PRINT homeowners who will consider strategic default doubles
Thanks for carrying post or quoting to Business Insider, Global Economic Intersection.
CoreLogic reported today that 27.7 percent of all homeowners with a mortgage are near or in negative equity.
Negative equity borrowers are “underwater” and “upside down” with mortgage debt greater than the value of their home.
The housing crash has created crippled zombie states which have incomprehensible negative-equity stats. In Nevada 63 percent of all mortgaged properties are underwater. In Arizona = 50 percent. Florida = 46 percent. Michigan = 36 percent. California = 31 percent. (Please see the chart above from Calculated Risk showing negative-equity by state. Click for expanded view.)
Macro-economy watchers should be focusing carefully on price behavior in these monster-crash states. They may preview the price falls in housing we have yet to see in more stable states. (Please see the chart above showing the tie between negative-equity severity and the default rate. Homeowners at 150% LTV are about six time more likely to default compared to borrowers at 100%-104% LTV.)
The new CoreLogic report drew front-page attention from the Wall Street Journal (Second-Mortgage Misery) which examined a hard link between second mortgages and negative equity. They quoted a Federal Reserve Board study saying homeowners withdrew $2.69 trillion of cash out from their homes between 2004 and 2006. That’s a serious debt binge.
Only 18 percent of borrowers without home-equity loans were underwater while 38 percent of borrowers with home-equity loans were in a negative equity position. The stats say the average positive-equity homeowner has 1.2 mortgages per property while the average negative-equity homeowner has 1.6 loans.
“Many borrowers in negative equity are still able and willing to make their mortgage payments. Those in negative equity and impacted by an income shock of some kind, such as a job loss, divorce, or death, are much more likely to be at risk of foreclosure or a short sale,” said Mark Fleming, chief economist with CoreLogic.
Financial crisis watchers are aware that major commercial banks including Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase& Co., and Citigroup Inc. are huge holders of second mortgages.
“America is starting to look comatose,” said the Economist.
We have 13 million unemployed. Four people are looking for work for every job opening. Of high school dropouts 30 percent are jobless. The average duration of unemployment is 40 weeks. We added 54,000 jobs in May, but McDonald’s created about half of them.
“The post-crisis imperative for banks and households to reduce their debt meant a V-shaped rebound was never on the cards. Even so, this is a terrible performance.” (The Economist: Excuses, excuses Please see our post-crisis consumer-debt chart below.)
Robert Reich calls unemployment harder on women, blacks, the less educated, the elderly. He cites their lack of political clout as the cause of their heightened financial problems.
“They lack the political connections and organizations that would demand policies to spur job growth. There’s no National Association of Unemployed People with a platoon of Washington lobbyists and a war chest of potential campaign contributions to get the attention of politicians.” (Robert Reich, LA Times: The Silent Jobless)
Is there really an economist who believes that you need a lobbyist to get a job? I wonder what lobbyist did he use to get the job at UC Berkeley?
HSH Associates says high food, energy, and commodity prices have slowed momentum. Manufacturing has been driving expansion. The consumer hasn’t been able to “pick the ball and run with it.” They cite falling home prices as a major buzz kill.
“That the value of perhaps your largest asset is under renewed pressure contributes to the feeling of economic claustrophobia, as the walls of debt you hold seem to be closing in around you.” (HSH Associates, Market Trends)
Anybody arguing that the 2409-page Patient Protection and Affordable Care Act is driving new job growth or that we pursued this gargantuan task at the right time? If you do, then I suggest you call Mr. Reich. Maybe he will lobby his Washington friends. And get you a job at McDonald’s.
