The news has been filled with conflicting headlines the last few weeks. On the one hand, the National Association of Realtors® reported that sales in April are “up strongly from a year ago,” but down from March. And, the California Association of Realtors® reported that “home sales and median price both jumped in April.” That is great news, because it points to a recovery from the mortgage foreclosure crisis.
Then the headlines told us that the Case-Shiller Index, one of the nation’s leading indicators, showed that home prices have reached their lowest point since the peak in 2006. And, the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, reported that mortgage interest rates are still below 4. That is a lower interest rate than at any other time since 1980, and less than one-half of what it was during the savings and loan crisis at the end of the 1980s, the last time the U.S. experienced a banking and real estate collapse. Low interest rates make housing more affordable, so buyers are willing to pay more, which usually supports higher prices. If prices are still dropping while interest rates are at historic lows, then the market must still be in trouble, and not recovering at all.
So where are we really? Has the housing market bottomed out and started to recover, or are things still headed down to an even deeper bottom?
On a national scale, the National Association of Home Builders/Wells Fargo Housing Opportunity Index, which takes into consideration actual income levels, sales prices, and interest rates for homes purchased each quarter, shows that housing is more affordable now than at any time in since 2000. In fact, for the first time this century, over half of the houses sold in were affordable to families earning the median income in every metropolitan area of the state, except San Francisco and Los Angeles.
If housing is so affordable, interest rates are so low, and sales are rising, why is there still a housing problem?
A big part of the answer can be found it two parts of the affordability equation. Home prices in many markets are still falling, and incomes have been stagnant or have declined in many markets. Of the 27 California market areas tracked by the Housing Opportunity Index, median sales prices dropped in 17 regions. Along with the Case-Shiller Index, this indicates that home prices may have stopped falling in most of the state, and that homes are more affordable that at any time in the past 40 years, but other data from the Census shows that incomes, adjusted for inflation, have also fallen. And when income distributions are reviewed, it is clear that income and wealth are becoming more concentrated at the top, while middle-income households, historically the bulk of the home buyers, have been losing ground steadily.
So, the still sluggish home sales market may be reflecting prospective home buyers’ concerns that if they purchase a home today, its value may fall, while at the same time their own incomes stagnate or decline. That might result in their home being worth less than their mortgage.
And those fears may be reinforced by what they are hearing from their friends, relatives and coworkers. Last week, Zillow, a national real estate research group, reported that nearly one-third of all mortgage holders owe more than their homes are worth, and the rate is much higher in California. Altogether, homeowners owe $1.2 trillion more than their homes are worth.
It only makes sense that families thinking about buying a home in this market would think twice before committing to that downpayment and mortgage on what could turn out to be a depreciating home. Add to that the fact that almost all Californians are better off renting instead of buying, as shown by the Trulia Rent vs. Buy Index, and it is no wonder that home sales remain sluggish.
What will it take to change this picture? First, prospective borrowers have to believe that the homes they buy will not lose their value. Second, those same homeowners have to believe that they will not lose their income, either through unemployment, or due to gradual erosion due to inflation and the continued redistribution of wealth to those at the very top. Third, since most home purchases are made by existing homeowners who are moving due to changes in family circumstances or work location, the negative equity of current homeowners has to be turned around. If you cannot pay off your mortgage when you sell your home, you are not going to be able to buy a new home. Finally, the private mortgage lenders have to play. That includes Fannie Mae, Freddie Mac and the major banks.
What can we do in the meantime? Lenders need to help wash some of the negative equity out of the marketplace. A recent article in the Bay Citizen described how the “Keep Your Home California” program, that was expected to help over 100,000 homeowners has actually helped fewer than 8,000 borrowers. This was part of the Hardest Hit Fund program created as part of the Troubled Asset Relief Program (TARP) to help unemployed and underwater homeowners lower their mortgage balances and reduce their payments in order to allow them to avoid default and foreclosure.
With the need so great, how could this happen? The program offered to match public subsidy funds with private bank right-downs of mortgage principal, with each contributing $50,000. Only one bank has been willing to participate, while the other major mortgage lenders have refused. So now the state is going to drop the matching requirement, and provide the full $100,000 gift of taxpayer funds to reduce mortgage balances. And, the banks who were interviewed were still saying they were not sure they would participate.
The mortgage default and foreclosure crisis must be addressed before the nation can get out of our continuing economic doldrums. This is going to require action at the federal, state and local levels, but primarily, it is going to require private financial institutions to step up to the plate.