Bankruptcy

Our House in the Middle of Our Street is no Longer Our House

By Christian E. Weller

Here?s a news flash: The housing market is bad. Actually, it is really bad, historically, woefully bad. And, the bad news won?t stop coming. Housing wealth is dropping precipitously, families own ever smaller shares of their own homes, and home owners are falling behind in their mortgages in record numbers.

According to data from the Federal Reserve, housing wealth has taken a nose dive for two years. In December 2006, housing values reached a peak of $18.9 trillion (in 2008 dollars). By December 2008, they had fallen by $3.9 trillion to $15.1 trillion.

This reflects a historically fast depreciation of housing wealth. Over the past two years, real housing wealth dropped by 20.5%, a record for any two-year period since 1952. In fact, before this crisis occurred, there had never been a two-year period when real housing value fell by more than six percent. 

The large losses are exacerbated by the enormous leverage of homeowners, i.e. they were drowning in debt. When the crisis started, declines in the value of homhomes thus quickly translated into much larger losses in home equity. From December 2006 to December 2008, real home equity for all families decreased by 37.9%. Prior to this crisis, home equity never fell more than 10% during any two-year period since 1952.

Wealth is a store of future income. It is thus relevant to compare current wealth with current income. By December 2008, home equity relative to after-tax income had decreased to 74.0%, the lowest level since September 1967. The housing crises of the early 1970s, the early 1980s and early 1990s look tame in comparison to the current turmoil.

And, the sharp decrease in home equity has fed into the larger financial and economic crisis. The share of home equity relative to house values had dropped to 43% by December 2008, meaning that the bank owned the other 57%. Every month the bank owns a slightly larger share of families? homes because home equity is falling faster than house values. No wonder many homeowners don?t feel it?s worth their financial sacrifices to continue paying their mortgage just so that the bank can increase its hold on their homes. According to the Mortgage Bankers Association, one in nine mortgages was either delinquent ? thirty days late with their payments ? or in foreclosure in the fourth quarter of 2008. These foreclosures, though, will translate into further home equity losses as more increasing numbers of homes are sold at fire sale auctions.

The housing market problem has already spread to almost every corner of the economy. If we want to stop the blood letting in the real estate market, we need to help homeowners to keep their homes. Otherwise, the vicious cycle in the housing market will continue.

Full post as published by Credit Slips on March 16, 2009 (boomark / email).