January 6, 2010--Underwater

To get a feel for the extent of the on-going crisis in housing, all you need to do is drive around down here in South Florida.

This is Bernie Madoff territory where personal fortunes were wiped out, but it is also the epicenter of the housing bubble. Along AIA, the road running parallel to the beach—the high-price district—you will see about a third of the beachfront properties are on the market. Most for well over a year.

Then venturing further into the developments and gated communities, you will discover the same thing. This drive-around brings the depth of this sad reality to full life. It is not hard to imagine what the people who are desperate to sell must be feeling.

And if you think about it for a few minutes, you are quickly reminded that the terrible economic collapse of the larger economy was centered in the housing sector—from the speculation in condos in places such as downtown Miami where 60-storey towers containing thousands of apartments which were bought and sold like commodities now stand black and empty; to the folks down the road from here who bought homes they couldn’t afford, borrowing against what seemed to them like endless growth in their equity, spending that cash-out mortgage money on soaring life styles; to where you can witness the work of the worst of the perpetrators—those in companies such as AIG who devised and sold “financial products” such as derivatives for houses almost literally made of air.

You can see all of this within just a few miles of here and realize, as the editorial writers in the New York Times yesterday wrote about so succinctly, how we are far from out of these woods, that things are likely to get worse, and there can be no real recovery unless and until things stabilize in the housing market.

The economy is like a giant jigsaw puzzle made up of interlocking and interrelated pieces—without full-time jobs people do not have the money needed to buy houses or sustain the ones they own; without the appreciating asset of a house they do not have money to spend on things that are more discretionary: from consumer goods to medical and dental treatment; without this ability to consume more jobs are lost and this 60 percent portion of our economy continues to suffer; with the loss of these jobs, or minimally because employers are loath to hire, people do not have the money to buy or pay for the houses they own; without . . .

The Times editorial writers point out that the small blips up in the housing market we have seen for the past few months are more the result of government tax credits than because of any freshening of the economy. And these are set to end in April. As a result, home prices have been flat, and things are likely to get worse. (Editorial linked below.)

Because of worries about the lack of real rebound in the housing sector and realizing that these home-buyer tax breaks are about to expire, interest rates are creeping up and more and more people are thus slipping underwater—discovering that they value of their homes have declined so much that they now owe more than their home is worth. About one-third of homeowners are now underwater. That’s about 16 million people!

And it is estimated that another 2.4 million will slip into foreclosure, causing a further 10 percent decline in the average value of a home, which would then bring that value down 40 percent since the peak in the market back in 2006. It’s been that long.

Government action has not helped very much. Yes, the tax advantages implemented less than a year ago did lead to more buying, but again this assistance is about to end. More critically, this tax break (implemented as much by Democrats in a failed attempt to get Republican support by agreeing to the GOP’s favorite solution to everything—reduce or cut taxes—as by their own complicity in standing by while the real estate bubble inflated) distracted the administration and Congress from doing what they should have done—pushed lending banks to bite the bullet and reduce, with government help of course, people’s mortgage principal balances so they would owe less (reflecting the declined value of their property), stay above water, and thus be required to pay less monthly and not be tempted to walk away from their homes, which as a consequence would reduce the glut and value of homes languishing on the market. Another jigsaw puzzle.

We will see.

No one is optimistic that the administration or the Congress, in an election year with people still obsessed about health care and now terrorism, will have the gumption or political will to take on anything this complicated and confrontational. For more than a year financial institutions have had their own obsession—their balance sheets. To ask them to grant principal reductions to homeowners is likely more than they can bear now that they are working their way out from under the federal thumb so they can return to business-as-usual.