Glut: This house in College Point, Queens, is one of many now on the market — with millions more coming soon. (Wayne Carrington )
The number of contracts to buy previously owned homes plunged 12.5 per cent in April, far more than economists predicted. The Case-Shiller Home Price Index hit a new low in March, with 12 of 20 cities each hitting new lows. This spells danger for the broader economy.
Some 2.25 million homes are now in foreclosure, with another 1.8 million mortgages more than 90 days past due. The banks, Fannie Mae, Freddie Mac and the Federal Housing Administration now own more than 1 million repossessed homes. That means there are more than 5 million homes on, or soon coming on, the chopping block — and that’s on top of the 3.8 million homes officially listed.
The vast number of underwater homeowners will soon swell inventories even further. A full 12 million homes are mortgaged for more than they’re worth, and that figure will only rise as prices drop further. Not all those borrowers will default — but many surely will.
With millions more mortgage defaults inevitably coming their way, banks must sell homes faster than they repossess them — and to get them sold, they’re having to slash prices. Last summer, sales of repo’ed units accounted for 23 percent of all home sales; now they’re 34 percent. And over those same nine months, the average home price dropped 11 percent.
Yet even with prices plummeting, sales are slowing. This shouldn’t be happening, not when prices first started dropping nearly five years ago and are now down by nearly a third from their high, not with interest rates at all-time lows. Floods and bad weather bear some blame, but there must be a fundamental economic explanation. Most likely, cause and effect have reversed themselves: While the subprime crisis and bursting of the housing bubble triggered the financial crisis that led to a broader recession, now it’s the broader recession — and its persistent joblessness — that’s dragging down housing.
The economy still isn’t producing enough jobs to keep up with the growing workforce. So people are reluctant to become first-time homebuyers because they’ve lost (or fear losing) their jobs, and because they fear further price drops. That means
“trade-up” buyers can’t buy — even if their jobs are secure — because there’s no one to buy their current (starter) homes at a price that will pay off their mortgages.
Finally, younger Americans’ basic attitude toward housing is changing. Once the American Dream, owning a home has become the American Nightmare for millions.
A significant further drop in home prices will swell the ranks of underwater borrowers, and drive those already there deeper underwater. With nearly one in five workers un- or underemployed, that could trigger a new wave of defaults as some simply lose hope.
So far (thankfully), that hasn’t happened; but with 50 million mortgage loans totaling more than $10 trillion — one in four of which is already underwater — a tsunami of fresh defaults would again ripple through global capital markets, possibly triggering another global financial panic. That could result in a double dip in the broader economy.
And with Uncle Sam now backing 95 percent of all new mortgage loans, a new wave of defaults would dramatically increase our at-the-limit national debt.
No housing policy will stop housing’s double dip. To do that, we need the millions of jobs only a reversal of President Obama’s ruinous overall economic policies will bring.