Friday, August 24, 2007
Housing Slump? We've Yet To Hit Bottom
While trying to sell me thousands of dollars in home improvements, the contractor took a moment to say the media is being overly-negative in reporting the residential real estate crash. The press, he said, should be covering the home-selling success stories, not fixating on the depth of the problem.
This fellow is not alone. Many people would prefer to wish away the current housing crisis. So would I. But that's not going to happen.
In fact, I'll wager the housing plunge won't bottom out until mid-to-late 2009. And that's if we're lucky.
There are plenty of reasons why we're in this fix, which is slowing the economy's growth and could tip us into recession. Here's a couple of culprits: Historically low interest rates (courtesy of the Federal Reserve and former chief Alan Greenspan)which beget cheap credit; overly-aggressive mortgage lenders and brokers; naive, uninformed or delusional buyers (who bought more than they could afford with little or no money down); and a regulatory system that turned a blind eye to the obvious excesses of the mortgage-generation industry.
All those causes have produced one troubling result: The supply of houses far exceeds the demand. Until that inventory is radically thinned, this housing crunch goes on.
I've heard free market types say there's a simple answer to this crisis: Just slash prices and the buyers will come roaring back.
Well, maybe that works in Adam Smith's neighborhood but in the real world that's not going to be nearly enough, especially over the next few years. That's because no matter how low you go, there's going to be an acute shortage of qualified buyers.
Right off the bat, you can disqualify the so-called "sub-prime" buyers, who kept the housing wave going long before it should have crested and are now being swamped by mortgage foreclosures.
Basically, sub-prime borrowers are cash-strapped consumers who could not qualify for a "traditional" loan with a 15 or 20 percent down payment. They agreed to adjustable rate mortgages, or other creative loan instruments cooked up by mortgage brokers, and now are faced with escalating monthly payments (even as the value of their home drops). In some cases, they took interest-only loans (which should be outlawed), meaning they've only paid for the debt-financing and haven't accrued any equity in their residences.
Foreclosures are rising in this area and throughout the country. There's a tendency to lump all foreclosures into the "sub-prime" category. Rubbish.
In many cases, foreclosure victims are middle and upper-middle-class residents, who have lost white-collar and management jobs at places like Motorola Inc. or Sears Roebuck & Co. Some used home equity loans to supplement their incomes or pay for health care insurance. When interest rates went up, or other costs escalated, they fell on hard times.
The hollowing out of the middle-class workforce--through lay-offs, out-sourcing or other management efficiencies--is literally hitting home.
But it doesn't end there. Even the gainfully employed who want a new house, but have to sell their current residence in order to buy another place, are stuck in neutral. In this damaged market, to whom do they sell their house? And if they have a mortgage coupled with a home equity loan, how much can they cut their asking price before taking a significant loss?
And even if you can sell your place, what are the odds of getting an affordable mortgage for your new home? Lenders have a way of making us pay for their excesses. Chances are if it's a small amount, you're OK. But if you want to stretch and get a jumbo loan for that McMansion you've always dreamed about, get ready to pay through the nose.
Then, there's over-building.
For nearly a decade, rural real estate developers have uprooted innocent corn fields to make way for single-family home complexes. In cities, old buildings have been gutted and rehabbed into condos, while spanking new condominium towers have blossomed on postage stamp-sized lots in Chicago's downtown and the suburbs (and throughout other markets, too.)
That's what you call a glut.
In the early days of this housing crisis, some experts who frequent the airwaves on CNBC would say this was a "self-contained" housing crisis, limited to the poor souls in the sub-prime market.
This is a serious housing downturn,one that threatens to damage nearly every business segment that's associated with the industry. That means real people stand to get walloped. Already, there's much less demand for construction trade workers, real estate agents, lenders and the suppliers who support those businesses. Consumers? Don't look for them to bail out the economy this go-around.
They're worried about losing their homes and will have less to spend on going out to restaurants, shopping and paying for other frills (maybe with the exception of Starbucks!).
Even those crafty Wall Street traders are feeling the burn.
The Fed is trying to find a center to this financial storm by pumping money into the banking and lending system, which is one way to keep credit coming and the economy moving. If that isn't enough, look for an interest rate cut this year and maybe more next year.
Meanwhile, my contractor acquaintance better brace himself for more bad news about the housing market. Those success stories are going to be far and few.