Limp US Housing Market Looks Even Weaker

Source : The Straits Times, Mar 7, 2008

NEW YORK - NERVOUS homeowners and economic analysts have been wondering how much worse the US housing market could get. On Thursday they got an answer: Plenty.

Foreclosures are at a record high. Home equity is at a record low. The housing market is spiralling down with no end in sight - and taking people's sense of economic security with it.

For the first time since the Federal Reserve started tracking the data in 1945, the amount of debt tied up in American homes now exceeds the equity homeowners have built.

The Fed reported on Thursday that homeowner equity actually slipped below 50 per cent in the second quarter of last year, and fell to just below 48 per cent in the fourth quarter.

And that was just one example in a day of dismal housing reports.

The Mortgage Bankers Association said foreclosures hit an all-time high in the final quarter of last year. And pending US home sales - those in the gap between when a buyer signs a contract and when the deal closes - came in below analyst expectations for January and remained at the second-lowest reading on record.

'There is no sign that we're near the bottom in the housing market,' said Mr Douglas Elmendorf, a senior fellow at the Brookings Institution and former Fed economist. 'Housing prices will probably fall for a year, two or three to come.'

The trifecta of reports illustrates a housing market caught up in a 'very negative, reinforcing downward spiral,' said Mr Mark Zandi, chief economist at Moody's Economy.com.

Home equity, the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices and homeownership rates jumped earlier this decade. That was due to a surge in cash-out refinancings, home equity loans and lines of credit and an increase in no-down-payment mortgages.

Now declining home prices are eating into equity, and economists expect the figure to drop even more.

Economy.com estimates 8.8 million homeowners, or about 10 per cent of homes, will have zero or negative equity by the end of the month.

Even more disturbing, about 13.8 million households will be 'upside down' if prices fall 20 per cent from their peak. The latest Standard & Poor's/Case-Shiller index showed US home prices plunging 8.9 per cent in the final quarter of 2007 compared with a year earlier.

More homeowners struggling with monthly payments
Experts believe foreclosures will rise as more homeowners struggle with monthly payments as the interest rates on their mortgages adjust higher. Problems in the credit markets and eroding home values are making it harder for people to refinance their way out of unmanageable loans.

The threat of so-called 'mortgage walkers,' or homeowners who can afford their payments but decide not to pay, also increases as home values depreciate and equity diminishes. Banks and credit-rating agencies already are seeing early evidence of it.

'If you're struggling with payments and you have negative equity in your home, your struggling isn't getting you very far,' Mr Elmendorf said. 'It's very likely you want to stop and walk away.' Even for those who retain some equity, the effect on consumer sentiment and spending will be profound.

Homeowners, who once happily tapped home equity for expenditures and home improvements, may instead save money as they watch their total net worth wither. Those who are willing to spend their home equity will find lenders reluctant to give out home equity loans or lines of credit.

'People were relying on home equity to maintain consumption. They can't keep doing that once the equity's gone,' said Mr Dean Baker, co-director at the Center of Economic Policy Research.

'Undoubtedly, this is one reason for the falloff in consumption in last couple of months.' Economists worry that the prolonged housing downturn has put the economy on the brink of recession. The economy grew an anaemic 0.6 per cent in the fourth quarter.

A massive loss in home equity could even mean some Americans won't have enough money to retire. On average, housing is Americans' single largest asset, representing 39 per cent of a household's total net worth.

Ms Melba Dumay, 44, worries that higher costs for insurance and other expenses will outpace any growth in value of the home she's owned in Tampa, Florida, for about 10 years. She was depending on her home equity for retirement and as something she could pass on to her high-school-aged daughter.

'It's your legacy to your children and everything else, and if that's not worth anything then you got to start all over again,' Ms Dumay said.

Economic stimulus package
So far, the government has stepped in with a number of measures to contain the housing fallout. Last month, Congress passed a US$168 billion (S$233 billion) economic stimulus package with provisions aimed at helping homeowners refinance into more affordable loans.

The Federal Reserve has also slashed interest rates to in hopes of spurring growth.

On Tuesday, Fed Chairman Ben Bernanke suggested lenders reduce loan amounts to provide relief to beleaguered homeowners. But some experts think more help is needed.

'At the end of the day, these efforts will be insufficient,' Mr Zandi said. 'Policymakers will need to be more aggressive and put taxpayer money on the line to stem this. Ultimately, we will find a bottom, but it would be a mistake to let the market run its course.' -- AP