As Treasury copes with mounting foreclosures and the ineffectiveness of its modifications programs, many attempt to ignore how declining home prices impact all of us. Some assume or hope the problem will “self cure” over time. It won’t.
The current foreclosure crisis demands our attention; to ignore it is to deny the potential impact that millions of foreclosures would have upon both the housing market and the overall economy. While it’s impossible to know the precise number, some experts have predicted that we’ll suffer more than 15 million foreclosures over the next five years; and only half that number would pose a serious problem.
While some are busy placing blame upon irresponsible home owners, others point to Realtors® or bankers as the villains; but what most seem to overlook is that regardless of who may be at fault—in reality there is shared responsibility—pointing fingers only distracts from the problem at hand. And that problem is the undeniable fact that continued foreclosures pull down home prices for everyone, shrink the values of lenders’ portfolios, and keep an economic recovery out of reach.
It has been estimated that homeowners have lost as much as $5 trillion in equity in just the past two years; and when values decline below their mortgage amount, responsible homeowners lose a critical economic tool. Unable to borrow against their home, they have no equity “cushion” that might have pulled them through problems with medical expenses, job loss, or other unforeseen financial disasters. And, with their home worth less than they owe, they are unable to sell and rid themselves of a burdensome mortgage.
With about 4 million either in default or foreclosure at the end of 2009, and with unemployment expected to remain high for several years, the number of foreclosures seems likely to rise as both borrowers and lenders exhaust their options. Experts now predict a record 3 million foreclosures for 2010 alone; and as they occur, more will become aware of how declining home prices impact all of us. Unless the administration can develop a realistic and workable plan to help struggling homeowners—a Band-Aid will do little against this gushing wound—the housing crisis and accompanying economic doldrums is likely to persist well into this decade.
The Housing Guru: The one source for all your housing questions
One fact that is completely overlooked by the economic "experts" and prognostigators is the number of home owners with negative equity that, not only cannot sell their home and move up, removing about 20-25% of our market.
Sadly, those same home owners are also severely "out of the economic" dynamic of the overall economy. When families are faced with paying for a home that has lost half it's value, they are not buying a lot of auto, toys, cloths, or much of anything else.
I have not heard a single congressperson, executive or economic expert address that fact. Their predictive models have completely overlooked this fact.
Sad.
Lenn - Great point. And a factor that adds hundreds of thousands, if not millions of homes, to the negative equity equation is the number that have only 10% equity. Because of real estate commissions and closing costs they are also unable to relocate or move up or down. Most had counted on their equity as a down payment on the next home.
Hi, John. You always hit the nail on the head and have a GREAT graphic to illustrate your point!
It has been uncommonly cold and snowy-y here and I am having alot of "sweatpant" days, spent in front of the computer. I'm using this time to review my 54 listings and make sure that they're priced strategically among their competitors as spring approaches. Sellers cling to the idea that they paid X or they need to walk away with X but the market won't bear it, in many cases, for all the reasons you cite. It makes my job so much harder when a property isn't priced right but it's hard for them to understand that what was right a year ago may not be right now.
My own house in Florida was originally priced at $627,000 and was reduced to $595,000, $525,000, $499,900, $429,900, $399,900, $349,900 and we are now THRILLED to have it under contract as a short sale at $269,900!!! What is the house worth or what's it worth to get out from under and be done with it?!
I feel my sellers' pain because I've been there, done that, bought the teeshirt!
John,
It's sad how the blame game got started right away, instead of everybody gearing up to work on the mortgage and housing problems. The current mess will take years to work through the economy and emerge as something we can call normal again.
Leslie - Glad you now have a contract on your home, but sorry for the circumstances.
Esko - I hope we'll one day return to "normal."
It's too bad B.O. doesn't assemble a task force of real estate, and lending experts, to find solutions. I guess it would be much easier to just blame Bush. Hope and change?
Sorry, but I don't believe the answer is more regulations and government becoming "more" involved. I think the opposite, the government should worry about what it can do and/or change that will allow for an expansion of private sector jobs. THAT will fix many, many things in our economy, and not with a Band-Aid which only prolongs the problem and suffering.
"unable to borrow against their home," that may very well be a good thing. homeowners recklessly borrowed against paper equity to live lifestyles that their income could not support. they made no attempt whatsoever to live within their means.
well that's changed now hasn't it.
the market will cure itself, there's just no quick, painless fix.
if you're waiting or expect the "administration" to solve the problem, hell will most likely freeze over first.
I personally believe that we, as real estate professionals hold the answer in our hands: If each and everyone of us take a position that we will be doing everything in our power to suggest prices that fit within the new paradigm, then sellers will get the idea that so many can't get right now. We have experienced such a shift in real estate that until the agents take a stand AGAINST over pricing the houses that are coming on the market (I am not talking about short sales here) then we stand a chance of improving the sales in the healthier market places....this will lessen the negative impact on housing in general and may even help to avoid another, deeper debacle. There are people with money and who want to buy sooner than later...but they need to feel thay are getting great value.
And to the comment about the government stepping in---we have the power to get all of us through this--it may mean more losses for a lot of people but that must happen--no more "help" (which doesn't help anyway!!!) from this government. WE NEED to experience it--face it down---get it out of the system in other words; other wise, see you next year--and the next and the next and ....Great post; thanks!
John:
I think the jobless numbers tell a large part of the story. With 10% (now, a little less) unemployment, people are unable remedy their situations and are not able to buy new homes. There has not been enough done to fix the economy.
Jon - It would be refreshing to see someone consulted other than politicians.
Scott - There are many things government can do to stimulate the creation of private sector jobs and to help restore the economy without adding government programs. However, the housing crisis will not be solved until we deal with mounting foreclosures. This is unlike any housing crisis we've experienced in our lifetimes and will not heal itself.
Jay - I don't expect the administration to "fix" the problem, but there are measures they could take that would help--they're just too dangerous politically for them to consider them. Unlike you, however, I don't think the problem will self cure.
Paula - I don't want another government program, but government could pressure banks to move more rapidly with short sales and modifications.
The housing bubble is really just a small part of the world wide government debt that hangs over developed nations that have for 40-50 years used monetary policy, military might, etc. as the means to allow corporations and their bought and paid for friends in government to rule the world. I know this sounds like I am short a few bricks, but take the time to analyze the facts. Wealth has been siphoned away from the average citizen using "bubbles enrich a few, with governments getting larger and less responsive to its constituents. Could continue here, but it would sound like ranting.
When the pool of able buyers shrinks and the available inventory grows, it causes havoc. When you add in hundreds of thousands of bank owned REOs further decimating pricing, one has to ask when a true recovery will be.
Claudette - The only economy that has been fixed is that of the big banks and Wall Street firms. They're doing just fine.
Dale - I'm well aware of the problem and agree that government has used bubbles to artificially prop up an economy that is little more than a Ponzi scheme.
J. Phillip - When you add in hundreds of thousands of bank owned REOs further decimating pricing, one has to ask when a true recovery will be. My answer would be: A very long time.
I saw a scary stat the other day. By June 10% of all American homeowners will have at least 1 25% negative equity. That hasn't happened in Oklahoma but the last time I checked we were the United States not the United Confederation, so we all lose.
Joe - What concerns me is the difficulty of remedying the situation. As foreclosures continue the entire market is pulled down; and there's a huge number of potential foreclosures hanging over the market.
Hi John. It certainly is a mess that is probably going to get messier...
That being said, I don't see government intervention helping...
Thanks for writing,
Ken
I said this earlier but I've done a 360 on mortgage loan reduction for upside down homeowners ! It's starting to look like the most viable option(keeping people in their homes !)
It's hard to believe that the government is unable to make any effective in-roads in the housing market. I think the appropriate term would be UNWILLING. One has to think there is something larger at work between the banks & the government. A common sense approach could have put a serious slowdown on foreclosures & short sales a long time ago.
When someone says, "We are from the government, we are here to help" YOU SHOULD RUN!
John....If the banks write down the loans to the actual value of the house at least homeowners would feel as if they have "something" that takes some of the pressure off them. This is done in commerical real estate all the time. You are right... the banks and wall street have been taken care of but main street has been left to deal with the fall out.
I think there is a difference between "the government" and "The administration"....Policy is set by the administration and the policy since 1980 has been the gradual shift of money to the top 1% of this country. Policy affects people's lives...
This is going to be a slow recovery because it has taken us years to get here...thankfully the Internet has the capacity to show transparency ..and this includes private and public sectors!
Ken - The only thing that I think government has to offer is to "encourage" banks to deal with short sales and modifications.
Michael - In many cases, I think you're right.
Jenna - I think you're right, they aren't committed to solving the problem.
Kathleen - The Internet has provided more transparency, but it also serves to enhance the division between opposing factions.
Thanka for the post today!
Patricia
I'm surprised that this hasn't been an issue LONG before now. More needs to be done, and I've been saying this for 6 months now . . . we need to have a 'moritorium' on the ARMS . . . which may be too little, too late for millions of Americans. If I hear anyone saying "the American Dream" I think I'll barf!
I don't see this as the President's problem...or the Administration's problem...(well it is since everyone wants them to fix this mess...and all the other messes...and make life wonderful again) but rather the lack of regulation over the banking industry and the crap loans they created knowing full well alot of folks wouldn't/couldn't/shouldn't qualify for, but nevertheless, these "loans" were created and passed for the banking industry could make more money.
These ARE tough times. But some of us still have homes. And jobs. And some lose jobs. And lose homes.
Some of us have health insurance. Others don't. Some people have pensions. Others don't. Some have lost pensions to Enron and others. It's all a sign of the times. It's a big mess and it's about time we stop the Government Blame Game.
Patricia - Thanks for stopping by!
Carla - I think many will be surprised by the continuing drag on housing and the economy that foreclosures will present.
Gary - Lack of equity and loss of investments has created an incredible hardship for many.
Evelyn - I'm over the blame game and am looking for solutions that will help people remain in their homes. If we are unable to solve this problem we'll all suffer the consequences for years to come.
well not only until the banks are forced to the table they will keep coming so far everything is optional
You are so right - these problems are so far-reaching with consequences that are not being considered. So much has been said about those that have negative equity and the resulting short sales and foreclosures without considering the marginal equity that so many have and the fact that it can't be used either to prevent a financial crisis or that is forcing households to tighten their belts and pulling money out of the economy (I'm not talking about the people who frivolously abused this) I'm afraid the road back is going to be a long one.
Gene - And so far most banks have been in no hurry to offer help.
Susan - The road is both long and treacherous.
I have an idea... It would be a one-time bump in the value of homes... and it wouldn't really cost. Stay tuned.
We were living in a fantasy economy for years where growth wasn't sprurred by real work and production but by a false increase in home prices. It was all fantasy and now it's time to pay for it. There's really no easy way out.
Those are some BIG numbers -- 5 trillion dollars?? I can't even imagine how much collective wealth that is! You're right, though. There's no point playing the blame game. Each stakeholder owning their share of the responsibility is the only way to ensure it doesn't happen again.
Several things have to happen...
LENDING MUST, MUST, MUST LOOSEN. That will allow businesses to expand.
JOBS, JOBS, JOBS!!! - but we need lending for that....
The erosion of wages for average employees have to go up. We need to swing the doors wide open to new opportunities for those who have been outsourced, insourced, downsized and obliterated.
Lane - I'll stay tuned.
Tim - I agree that any exit will involve pain, I'd just like to find the most logical solution rather than having the government fumble through the next few years.
Deena - We'll see if we'll remember the lessons of this recession.
Ruthmarie - Unfortunately I don't see any significant effort to add permanent, private sector jobs.
Nice article, John. I reblogged so hopefully my readers will see this on my outside blog. Well written.
Inflation will follow, this will put the values up, but reduce what the dollar really buys. Happend in the 80's and will happen again.
Hi Erica - Thanks for the support!
Gwen - Inflation is the only hope for restoring values to 2005-2006 levels, but, as you point out, it reduces the value of those dollars and negates the benefit.
John,
It's going to be interesting this year when all the commercial properties that are under water hit the fan.
Another fantastic article and Lenn's comment is great. The impact to our real estate markets with this debacle just removing the 'move up' buyers and sellers is dramatic.
John, I agree with you that the measures taken are just a band-aid on a gushing wound.
Terry - Lots of bank failures!
Christianne - And many of the move up buyers may be out of the market forever.
John,
Everybody wants to blame the consumer for spending too much. The people who loaned the money must take some responsibility as well. They said it was worth the purchase price or no loan would have been made. This economy needs Jobs, Jobs, and more Jobs as soon as possible.
Having my property on the market (back on in Jan) for more than 8 months now, I can tell you I NEVER WANT TO OWN a home again. What benefits used to be in place for folks buying property seems no more, and most consumers have a bad taste in their mouth as they watch the economy and the market squander like a bunch of dead fish fighting to breathe.
I have no desire to be a homeowner any longer and look forward to selling my property and renting.
John,
The Federal Reserve has well documented the increased sucess rates associated with loan mods that include principal reductions. If the Treasury "infact" wants to streamline the short-sale foreclosure process I trust they have a market willing to lend and borrowers capable or...
Steve
Ed - I agree that we need jobs, and don't see any meaningful progress in creating significant numbers.
Mindy - There are lots of folks who have been turned off to home ownership.
Steve - I agree that principal reductions would certainly be a positive action in many cases. I just don't see it happening in significant numbers to alter our course.