By John Hines
Economist
Euphoria can be a dangerous emotion. Economic intricacies are tough enough for even the most practiced of economists to read in real estate markets. But the worst recession since the Great Depression is pointing to a longer downturn yet in housing.
A new economy is slowly emerging from the catastrophe of the financial crisis as unemployment climbs. Beware of false bottoms in housing, triggered by temporary programs. The excess inventories of homes and cars are tightening the grip on the new economy with too many debt holders on the brink of failure.
As home values decline, equity levels drop, eroding wealth. Lender moratoriums on foreclosures ended at the end of March. Bankers have only modified 180,000 troubled mortgages since President Barack Obama’s housing rescue plan went into effect, according to the Government Accountability Office (GAO).
The rate of foreclosures is increasing as a result, and now account for one foreclosure every 12 seconds. Economists seem, however, to be in agreement on at least one major theme and that is that the housing market needs to be stabilized before the economy can recover.
A recovery is impossible to sustain unless the government gets control of foreclosures. Less than half of all mortgage modifications so far granted by the banks include debt forgiveness, which is at the heart of the troubled housing market. Unless mortgage holders are granted debt forgiveness on a wider scale there is little hope the economy will get back on track any time soon.
Perhaps the clearest picture of falling home values can be seen in Las Vegas, where prices have tumbled more than 50% from their peak. The median home is now valued at $125,000 in the gambling center. Las Vegas has the highest foreclosure rate in the country and is projected to worsen overtime as more homeowners see the equity in their homes evaporate and walk away from mortgages.
Rising unemployment will contribute to the downfall since jobs are the most important single factor in the housing market.
The deal made this week between Treasury Secretary Timothy Geithner and 25 of the nation’s largest mortgage companies gives little comfort to troubled mortgage holders. Bankers agreed to set a goal of modifying 500,000 loans by November 1st.
The program still does not require lenders to provide modifications to homeowners, but is on a voluntary basis. House Rep. Barney Frank, (D-Mass.) said Congress will push legislation allowing bankruptcy judges to reduce mortgages if modifications remain low. Banking lobbyists have successfully fought against a similar previous proposal.
Until such time that bankers and mortgage companies, which provided the most liberal lending standards in banking history are forced to negotiate with troubled homeowners there is no end to the foreclosure epidemic in sight.
The process would be simplified in bankruptcy court and allow judges to permit homeowners to stay in their homes. Courts would be jammed with homeowners filing bankruptcy seeking a solution.
No one expects lenders to work with mortgage holders on a voluntary basis as foreclosures climb and the economy falls into a deeper recession. Bankers are leery of lending to home buyers and businesses fearing a deepening downturn in the economy.
The cost to the economy and real estate will continue to deflate housing values, at a higher cost to homeowners over the time it takes to resolve the crisis, and provide false bottoms to housing markets all over the nation.
John Hines is Housing Predictor’s real estate economist.