The Latest (Bad) News on U.S. Housing
A front page article in today’s Wall Street Journal, by Nick Timiraos gives the latest bad news about the U.S. Housing Market. A survey by MacroMarkets LLC, is predicting virtually zero growth in U.S. housing prices through 2015.
The U.S. is still nowhere near recovering from the bursting of the housing bubble which was at its height from 2000-2006. Some of the bad news:
• 20% of mortgages are underwater (homeowners owe more than the value of their home).
• Banks own 500,000 houses and are in the process of foreclosing on 4 million more.
• Homeowner’s equity as a share of home values is now 38.6%, down from 59.7% in 2005.
This causes pain in several ways. First, through the “inverse wealth effect”, those who see the value of their home eroding will tend to be more conservative and spend less. This reduces consumer spending, which at 70% of GDP is the main driver of the U.S. economy.
Second, the glut of foreclosed homes reduces the demand for new construction. This depresses the construction industry, which is an important source of employment, especially for those without college degrees.
Third, banks are saddled with huge amounts of depreciating real estate, which makes them shy away from issuing more mortgages.
Of course, every cloud has a silver lining. No one who owns real estate or works in the business likes to see a moribund market and falling prices. But if you are just starting out and looking to buy, you might have the opportunity of picking up a house at a bargain price—especially if you have lots of cash.
If you need to finance your house with a mortgage, interest rates are now at a record low, just above 4% for a 30-year fixed-rate mortgage. This means, for example, if you are borrowing $200,000, your payment would be around $950 per month, as opposed to $1450 at a historical average rate of around 8%. But good luck getting the loan!
Common sense says that when you spend your hard-earned money on an asset—real estate, stocks, bonds or gold—you are at risk of a loss. And when you buy an asset using borrowed money, you are at risk of a catastrophic loss. It seems that this basic truth was ignored for many years, and we are now suffering the consequences.
Eventually, with the passage of time we will see a recovery in the housing market and an improvement in the employment situation. But given the size of the last nationwide borrowing binge, it looks like it will take quite a while.