U.S. Home Owners Drowning in the American Dream
Housing-Market / US Housing May 21, 2014 - 12:58 PM GMTBy: Raul_I_Meijer
According to a new Zillow report, 40% of all US mortgage holders can’t afford to sell their homes. That is 20 million Americans homeowners, 10 million who are downright underwater and another 10 million who are so close to being there that they don’t have the money to cover the cost of selling. And those are still numbers across the spectrum; things are far towards the bottom. ’30% of homes in the bottom price tier are in negative equity, while 18.1% of homes in the middle tier and 10.7% in the top tier are underwater’. If we assume that at the bottom, like across the spectrum, as many people are close to being submerged as those who already are, that would mean 60% of bottom tier borrowers are too poor to sell their homes (i.e. have less than 20% equity).
Pretty stunning numbers when you realize that this comes after 7-9 million homes were already foreclosed on (RealtyTrac lists 16.5 million foreclosure filings from 2006 through 2013), and millions more are still stalled in one or another step of the foreclosure process because banks don’t want to be forced to put the losses on their books. It also comes after 6 years in which many trillions of dollars were pumped into the top of the financial system to prevent it from crumbling. The problem is, of course, that those trillions were absorbed by the top. and never reached the bottom. It’s like watering a severely parched parcel of land.
A perhaps unexpected consequence of all this is that – potential – starters, a group already severely hindered by skyrocketing student loans and high levels of unemployment, find the starter home they might be able to afford remains occupied by people the market until recently would have penciled in for a move higher up the ladder. The US housing market is seriously congested. It could be opened with much lower prices, but that would significantly raise the number of underwater owners. As David Stockman writes: “Monetary central banking is an economy wrecker.” Just to make sure the market is eligible for awards in the absurd theater category, median prices have gone up by 11% since 2012. It should be obvious that such a market place in inherently self-defeating. Or should we really say American Dream-defeating?
Here’s what the Wall Street Journal takes away from the report:
Mortgage, Home-Equity Woes Linger
• At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage – 9.7 million households – were “underwater” on their mortgage, according to a report scheduled for release Tuesday by real-estate information site Zillow Inc. Z -3.19% While that is an improvement from 19.4% at the end of last year and a peak of 31.4% 2012, those figures understate the problem.
• In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings. Most move-up homeowners typically use their home equity to cover broker fees, closing costs and a down payment for their next home. Without those funds, many homeowners can’t sell.
• “It’s a sobering appreciation that negative equity is going to be with us for a while to come,” said Stan Humphries, Zillow’s chief economist. “Negative equity is central to understanding a lot of the distortions in the marketplace right now.”
• … prices have risen about 11% over the past two years, and several times that in rebounding markets like Las Vegas, Phoenix and much of California. Rising prices, combined with higher mortgage rates, have given sticker shock to buyers looking for a deal. This has been particularly hard on first-time home buyers who are usually in the market for a lower-priced home.
• Many underwater homeowners have gone into foreclosure or executed a short sale, where they sell the home for a loss. But many aren’t budging. “There are people who still have their jobs and they’re not late on their payment, but they can’t move,” said Vita Deveaux, a real-estate agent at Keller Williams Realty First Atlanta.
That’s essentially still just a bunch of numbers. But it’s not as if they’re some freak result of immaculate conception or spontaneous combustion. Therefore, David Stockman provides a wider perspective:
One of the most deplorable aspects of Greenspan’s monetary central planning was the lame proposition that financial bubbles can’t be detected, and that the job of central banks is to wait until they crash and then flood the market with liquidity to contain the damage. In fact, after the giant housing bubble crashed and left millions of Main Street victims holding the bag, Greenspan evacuated the Eccles Building, and then spent nearly a whole chapter in his memoirs explaining how this devastation wasn’t his fault.
Instead, he blamed Chinese peasant girls who came by the millions to the east China export factories where they lived a dozen at a time cramped in tiny dormitory rooms working 14 hour days. According to the Maestro, they “saved” too much, thereby enabling American’s to overdo it on the mortgage borrowing front. Yes, in so many words he said exactly that! Lets see. The Maestro was allegedly a data hound. Did he not notice that housing prices in the US rose for 111 straight months from late 1994 to 2006, and during that period increased by nearly 200% on average across US neighborhoods. How in the world could this giant aberration have escaped the notice of the money printers around Greenspan in the Eccles Building?
How in the world could any adult thinker blame this on factory girls in China – that is, a policy regime that caused excessive savings? In fact, it is plainly evident that the People’s Printing Press of China attempted to protect its exchange rate from appreciating against the flood of dollars emitted from the Eccles Building. It did this in mercantilist fashion by pegging the RMB exchange rate and thereby accumulating a massive hoard of US treasury notes and Fannie/Freddie paper. In short, China didn’t “save ” America into a housing crisis; the Greenspan Fed printed America into a cheap debt binge that ended up impairing the residential housing market for years to come. So the problem with central bank inflation of financial bubbles is that when they burst the damage is extensive, capricious and long-lasting.
It is no great mystery that historically trade-up borrowers have been the motor force that drove the US housing market. Selling their existing home for a better castle, trade-up buyers vacated the bottom-end of the market so that first time buyers could find a foothold. Now thanks to Washington’s eternal conviction that debt it the magic elixir of economic growth, first time buyers are few and far between because they are buried in student debt – about $1.1 trillion to be exact. Each graduating class has more students with loans to carry forward, and in higher and more onerous amounts. Fully 70% of the class of 2014 has student loans, and they average of about $30,000 each. Both figures are triple what they were just a decade ago.
As prices rise, and millions of homeowners and their families are drowning in the American dream, housing is a perfect reflection of what America has become: a nation in which the less affluent working men and women, those who were once known as the middle class, are sinking deeper, albeit slowly for the time being, along with the millions who abandoned the dream of homeownership as time went by.
That makes America already a radically different nation from what it once was, with only one way to go, but how many people fully acknowledge that change? I’m pretty sure most still think their dreams will return, and be fulfilled, at some point in the future. But that’s not going to happen, because all the credit that props up the top tier of society today was largely borrowed from the bottom tier, so things can only get worse when payback time comes. And it will, when interest rates rise. They can’t go any lower, unlike the fast growing contingent of less affluent Americans. Interest rates can only go up from here, and at some point it won’t matter anymore how skilled a swimmer you are.
By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)
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