What Is the Future of the Housing Market of 2011 Into 2012?

Future of the Housing Market

The housing crash that began in 2007 resulted in the worst economic catastrophe in the United States since the Great Depression of the 1930s, although few observers who realized that the bubble was about to burst truly understood the severity of the depression that would follow. In reality, it led not only to a collapse of the housing market but also to the failure of large banks, mortgage and insurance companies and very quickly to mass unemployment. The much touted service sector that was supposed to be the engine of the economy in the postindustrial age came to a grinding halt and had to be bailed out by the largest government expenditures since the Second World War. For a public that was accustomed to decades of rhetoric about the virtues of laissez faire and free markets, all this came as quite as shock, perhaps even more so than it did for the generation of the 1920s. By 2006, almost 40% of mortgages were for other the primary residences: was far above the norm and an indication that the speculation had reached a fever pitch, no longer grounded in any form of reality. Only the 1930s Depression offers any real guide to a complete crash of the housing sector like this one, and at that time the market did not really recover until after the Second World War. In short, a depression like this one can last ten years of longer if history is any guide, and even then more federal programs to assist middle and lower income borrowers will have to be implemented, as they were in the 1930s and 1940s. Those that have been attempted thus far have not been particularly successful, especially since the high unemployment rate seems to be very persistent.

The bubble peaked in mid-2006 and slowly began to wind down, while foreclosures rose 75% in 2007. By the end of that year, foreclosures on fixed rate mortgages were up 55% for prime borrowers and 80% for subprime ones, while prime adjustable rate foreclosures were up 400% and subprime ones 200% (Holt, 2009, p. 106). No one in the government took any action to aid these individual home buyers or indeed even seemed aware of the problem until it affected the big Wall Street banks and American international Group. By then, it was too late for anything except drastic government action to prop up the entire system through the Troubled Assets Relief program (TARP), which proved extremely unpopular politically. As a result of the crash, 30% of all mortgage lenders either merged or went bankrupt, as did all five of the major investment banks and AIG. Foreign investors and governments took huge losses while real investment in the U.S. economy fell 32% in 2007-09, a decrease not seen since the Great Depression (Holt, pp. 127-28). Since that time, the housing market has remained greatly depressed with no real sign of any lasting recovery.

Vitner and York, two analysts at Wachovia Bank, attempted to predict just how far the housing market would decline and at what point it would reach bottom. They were well aware that the declines being experienced in many parts of the country were "unprecedented" since the 1930s, so that prediction would be inexact at best. Their data was also badly "skewed" by the more severe declines in areas of the country where the bubble had been greatest, although they thought that overall declines would be 22-29% with the bottom in mid-2009 to mid-2010. An even larger decline would be needed to bring prices to the level of equivalent rents than "what is needed to bring prices back in line with per capita income" (Vitner and York, 2010, p. 56).

Laurie S. Goodman (2010) believes the future of the housing market is extremely bleak, perhaps even catastrophic, unless government takes some actions to reduce the principal balances on underwater houses, make short sales more appealing to owners in default, and provide more aid to low-income and unemployed homeowners. If this does not occur, at least 25% of the U.S. housing market will go into foreclosure and perhaps even enter a 1930s-style 'death spiral'. Of the nearly 56 million homes with mortgages in the U.S. 14.1% are already in foreclosure or soon will be, compared to 4.3% in 2008 (Goodman, 2010, p. 27). The Treasury Department's Home Affordability Modification Program (HAMP) did not address the program of principal reductions for houses that are underwater, but rather lowered monthly payments by about 30% by extending mortgages to 35 or 40 years. After twelve months, 65% of these modified mortgages became delinquent again. In the subprime market, 51% of loans are already nonperforming as are 28% in the private mortgage market, that is not secured by Fannie Mae and Freddie Mac (Goodman, p. 28). Since it is "not in the borrowers' best economic interests to cure mortgages with significant negative equity," many more of these loans will soon become nonperforming as well (Goodman, p. 31). At least four or five million of these can be expected to default, and "if nothing is done, more than one borrower in five will face eviction" (Goodman, p. 35). This will be politically impossible for any government to tolerate, which will necessarily mean an even larger mortgage modification program that will write down principal balances based on the borrowers income, assets and overall economic situation (Goodman, p. 36).

Only 1% of people over age 75 purchase new residences, and as the American population ages there will be more sellers than buyers on the market. Up to age 65-70, the sell rate for houses is only about 2% while sales and purchases are generally in balance for people in their 50s, while buying is far more common for those under age 50. Only in retirement meccas like Florida, Arizona and Nevada are there large numbers of elderly buyers (Myers and Ryo, 2008, p. 22). Today, the Northeast and Midwest have the highest numbers of elderly sellers and this trend is going to accelerate as more Baby Boomers retire and move to the Sunbelt (Myers and Ryo, p. 22). Even without the current recession, Baby Boomers were going to experience lower levels of income, savings and investment, and be forced to sell on already depressed markets. Naturally, the great recession has made this situation far worse (Myers and Ryo, p. 28). By 2030, seniors over age 65 are going to be 40-50% of the population in most places, sometimes even higher than that, which is an increase of 60-70% from current levels. This will be good news for younger buyers but very bad news indeed for those who spent many years building up equity in their homes (Myers and Ryo, p. 33).