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Slow market looks even weaker

Foreclosures hit record; debt now exceeds equity

March 7, 2008

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— Nervous homeowners and economic analysts have been wondering how much worse the national housing market could get, and on Thursday they got an answer: plenty.

Nationwide, foreclosures are at a record high. Home equity is at a record low. The housing market is spiraling 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 Thursday that homeowner equity actually slipped below 50 percent in the second quarter of last year, and fell to just below 48 percent 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 U.S. 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 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 Mark Zandi, chief economist at Moody's Economy .com.

Home equity, the percentage of a home's market value minus mortgage-related debt, has decreased steadily 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 percent 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 percent from their peak. The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007 compared with a year earlier.

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," 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.

Comments

Sodomite 6 years, 1 month ago

Dollypawpaw (Anonymous) says:

toefungus you are way beyond the curve.

I've been off grid for some time now.

Yeah- what are you hot wifi? Off the grid....my a$$.

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Dollypawpaw 6 years, 1 month ago

toefungus you are way beyond the curve.

I've been off grid for some time now.

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spywell 6 years, 1 month ago

Raise interest rates across the board on all loans.

You can lower rates to the point where as, their is no or little effect on the economy. Raising interest rates is also not good for the stock market or the bond market as far as profit is concerned. Sometimes solvency is better for the macro markets than profit is for the micro investors.

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spywell 6 years, 1 month ago

The only solution is unorthodox and distasteful at best.

Raise interest rates to around 10% on all existing home loans in default. This would lower the yield the investment bank would have to pay to bond holders. A note is a note, however, the fed can determines the insurance rate of the note. Changing the rate and terms on the bonds and adjusting the rates on the notes , even extending the pay out of the notes ten years longer would lower payments.

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spywell 6 years, 1 month ago

Since the era of big government ended in the late 1990's. Local, city and county governments are at fault because they pushed properties values upwards to gain a greater tax base so they could offer more social programs locally since the federal government reduced many grant and welfare programs.

This started a upward push to the real estate market nationally. Real estate appraisal companies and county tax appraisers work together along with greedy realtors and developers to increase profits by over building and over evaluating older homes or stater homes. Easy fiance with lowered rates forced prices even higher.

Home loans being reinsured and sold on the secondary market were backed by bonds which are general debentures, strips, stripes, ect. which when interest rates are low pay higher yields to investors. Investment banks are on the verge of nervousness; paying out high yields when interest payments are not being made on time. This eats away at their cash reserves and their float is short. FSLIC and FDIC insures lending institutions are forced to meet federal reserve requirements. A sell off in the bond market would be dangerously fatal. Recalling bonds by any investment bank would start a domino effect in the bond market which would cause the same effect as the depression of 1929. This sell off could cause money markets to dry up over night which would have a direct impact on companies ability to borrow money for short notes to pay operating expenses. This would force massive lay offs of employees. Profit and production would fall weakening the companies stock values by weakening the companies earnings. The result, massive stock sell offs in the stock market and bond market. Moving money into CD's will be even more so less profitable. The metal markets would hit a ceiling because of weakened demand and there will be no where to invest where to earn any profit.

The stop the problem, is impossible, because the root of the problem is at the county and city level with real estate values to begin with. The loan are already been made and there's nothing that can fix it now accept massive forclosures.

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Godot 6 years, 1 month ago

The Fed had a negative balance beginning in January, the first time in history of Fed. From where is this $100billion of liquidity coming?

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Godot 6 years, 1 month ago

Fed Reserve just announced they will auction $100,000,000,000 in the TAF to prop up the banking system. They are desperate.

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toefungus 6 years, 1 month ago

Much of this disaster was brought on by the Harvard MBA's that dreamed up collateralize mortgage derivatives that ignored a basic principal. The borrower had to make their payments. In the rush to cash in, the borrower was treated to loans like crack. The results will be a long and painful rehab of American thinking on debt and savings. Banks have long ago stopped encouraging savings and government policies have placed consumption above all else. Our values are sick and thus so is our wallet. Debt is modern slavery and sometimes the only choice you have is to throw off the chains and run.

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