Mort Zuckerman Joins Volcker In Bashing The Chaos That Is US Homeownership: "The American Dream Has Become A Nightmare"
It is always fun to read Mort Zuckerman's post-"dark side" conversion rants. Especially since they tend to be very much spot on. His latest focuses on the nightmare of US homeownership, which incidentally is the last thing that prevents the all out collapse of the US economy. Should the dwindling mass of homeowners (sometimes referred to in endangered species textbooks as the "middilus classius") realize that just like stocks, owning a home is very much an overrated premise, that could well be reset push this country so desperately needs.
From US News.
The American Dream of Home Ownership Has Become a Nightmare
The disappearance of home equity value is a lead weight on the recovery
Why has housing been such a core element in the story of American civilization?
Culturally a decent house has been a symbol of middle-class family
life. Practically, it has been a secure shelter for the children, along
with access to a good free education. Financially it has been regarded
as a safe store of value, a shield against the vagaries of the economy,
and a long-term retirement asset. Indeed, for decades, a house has been
the largest asset on the balance sheet of the average American family.
In recent years, it provided boatloads of money to homeowners through
recourse to cash-out refinancing, in effect an equity withdrawal from
their once rapidly appreciating home values.
These days the American dream of home ownership has turned into a
nightmare for millions of families. They wake every day to the reality
of a horrible decline in the value of the home that has meant so much to
them. The pressure to meet mortgage payments on homes that have lost
value has been especially shocking—and unjust—for the millions of
unemployed through no fault of their own. For the baby boomer
generation, a home is now seen not as the cornerstone of advancement but
a ball and chain, restricting their ability and their mobility to move
and seek out a job at another location. They just cannot afford to
abandon the equity they have in their homes—and they can't sell in this
American homeowners have experienced an unprecedented decline in
their equity net of mortgage debt. The seemingly never-ending fall in
prices has brought an average decline of at least 30 percent.
Furthermore, the country is now going through an unprecedented
nationwide slide in sales, despite the fact that long-term mortgage
interest rates nationwide plummeted recently to a record low of 4.3
percent before rising slightly. The result is that home occupancy costs
for home purchases are now down to roughly 15 percent of family income,
dramatically lower than the conventional, affordable figure of 25
percent of family income devoted to home occupancy costs. Yet new home
sales, pending home sales, and mortgage applications are down to a
The economics of home ownership could hardly be more disastrously
opposite to the expectations of generation after generation. Millions of
homes have been foreclosed upon. About 11 million residential
properties, or about 23 percent of such properties with mortgages,
have mortgage balances that exceed the home's value. Given the total
inventory, and the shadow inventory of empty homes, many experts expect
prices to fall another 5 to 10 percent. That would bring the decline to
40 percent from peak-to-trough and expose an estimated 40 percent of
homeowners to mortgages in excess of the value of their homes.
The growing risk of disappearing equity invites more strategic
defaults on mortgages. Homeowners with negative equity are tempted
simply to mail in their keys to their friendly lender even if they can
afford the mortgage payment. Banks don't want to take the deflated
properties onto their books because they will then have to declare a
financial loss and still have to worry about maintaining the properties.
Little wonder foreclosure has not been enforced on a quarter of the
people who haven't made a single mortgage payment in the last two years.
A staggering 8 million home loans are in some state of delinquency,
default, or foreclosure. Another 8 million homeowners are estimated to
have mortgages representing 95 percent or more of the value of their
homes, leaving them with 5 percent or less equity in their homes and
thus vulnerable to further price declines. A huge percentage will never
be able to catch up on their payment deficits.
The pace of foreclosures was briefly slowed by loan modifications
brought on by government programs. Alas, the programs have not been
working as hoped. Half of the borrowers have been redefaulting within 12
months, even after monthly payments were cut by as much as 50 percent.
The foreclosure pipeline remains completely clogged. As it unclogs, a
new wave of homes will come on the market and precipitate additional
downward pressure on prices. The number of foreclosed homes put on the
market by banks will be a more powerful influence on the further decline
of home prices than either consumer demand or interest rates.
A well-balanced housing market has a supply of about five to six
months. These days the supply is more than double that, as inventory
backlog has surged to about a 12½ months' supply this summer, up from
8.3 months in May. This explains why average sale prices have been
declining for so many, many months. The high end of the market, in
particular, is under great pressure.
The mortgage market doesn't help. It is virtually on life support
from the government, which now guarantees about 95 percent of the
mortgage market. The rare conventional lenders are now actually
insisting on a substantial down payment and making other more stringent
financial requirements. Household formation is also shrinking now, down
to an annual rate of about 600,000, compared to net household formation
during the bubble years, when it was in excess of a million annually.
The most critical factor subduing the demand for housing is that home
ownership is no longer seen as the great, long-term buildup in equity
value it once was. So it is not too difficult to understand why demand
for housing has declined and will not revive anytime soon.
This is a disturbing development for those who believe that housing
is going to lead America to an economic recovery, as it did during the
Great Depression and then through every recession since. Each time,
residential construction preceded the recovery in the larger economy.
This time, in the Great Recession, a lead weight on recovery has been
the disappearance of some $6 trillion of home equity value, a loss that
has had a devastating effect on consumer confidence, retirement savings,
and current spending. Every further 1 percent decline in home prices
today lowers household wealth by approximately $170 billion. For each
dollar lost in housing wealth, the estimate is that consumption is
lowered by 5 cents or 5 percent. Add to this the fact that we are
building a million-plus fewer homes on an annual basis from the peak
years of the housing boom. With five people or more working on each
home, we have permanently lost over 5 million jobs in residential construction.
That is why housing was such an important generator of normal
economic recoveries. To give this context, residential construction was
6.3 percent of GDP at its recent peak in 2005 and 2006. It has fallen to
the level of 2.4 percent this year. This is significant if you
recognize that a 3 percent top-to-bottom decline in real GDP constitutes
a serious recession.
Government programs to stimulate housing sales have not helped. There
have been eight of them. One, which expired most recently (in the
spring), was an $8,000 tax credit for housing contracts. All of these
have done little more than distort the pattern of housing demand and
actually pulled forward hundreds of thousands of units at the expense of
There is no painless, quick fix for this catastrophe. The more the
government tries to paper over the housing crisis, and prevent housing
from seeking its own equilibrium value in real terms, the longer it will
take to find out what is true market pricing and then be able to grow
The sad fact is that housing problems never left the recession of the
last several years and it doesn't look as if they are going to leave
anytime soon. The ultimate solution remains the same as the solution to
the country's broader economic crisis. That is, getting millions of
people back to productive work.