US housing slump - searching for a bottom

A minimum requirement for the ending of the credit crunch is an end to the US housing price slump which is shredding the banks balance sheets. But this is some way off.

Home construction peaked in 2005 as the demand for mortgages fell away with the rise in interest rates.1  It was the June 2006 when prices started to fall in response this oversupply.
US house prices had increased by 225% between 2000 and June 2006. Since then prices have fallen by 20% over the 25 successive months up to August 2008, although the rate of decline has slowed from  7%, at the start of this year, to  2.4% in the third quarter of 2008.

The human cost is immense. Between July and September 2008 802,018 2 homes were foreclosed. A further 4.4 million homes are expected to become  delinquent  in the next two years,3 while 1.6 million homeowners have mortgages more than 60 days overdue and 500,000 homes have entered into the foreclosure process.

And it is not only home owners. The US Department of Labor estimates that 622,000 construction workers have lost their jobs between 2006 and October 2008.4 The only sign of any improvement is that new housing inventory   the amount of unsold new houses   fell by 31% in September from its 2006 peak. At current rates of decline builders will have reduced inventory to their 1997-2003 average of around 300,000 by January.

The problem confronting house builders is that as fast as they stop building houses, new supply becomes available through repossessions (about 40% of home sales are repossessions). Bush vetoed a proposal from the FDIC which would have reduced future repossessions by an estimated 1.6 million at a cost of just $25bn.

The number of foreclosures has been exacerbated by two distinctive features of the US housing market. In the US, unlike in the UK for example, when a mortgage holder gives up the ownership of their property returning it to the bank or finance house, they also relinquish the debt. Hence whenever a householder falls into negative equity, they have a positive incentive to give up their home, posting the keys back to the bank   so called  jingle mail .

The second problem is that in spite of sharp cuts in interest rates, from 5.25% in September 2007 to 1% in October 2008, these reductions have not been passed onto mortgage holders. Hence the mortgage rate for a conventional 30 year mortgage has increased to 6.04% in September 2008 from 2005 when it was 5.75%. So payment on a median-priced single family home fell from 24% of disposable income, at the beginning of 2007 to 19% at the beginning of 2008, but has actually increased through the course of 2008 to 20.3% in August.5

This is a classic example of where the interest of the individual capitalist banker undermines that of the whole. The collective capitalist banker requires an end to falling house prices and a reduction in delinquencies and foreclosures so as to limit the scale of write-downs on their mortgage backed securities. But each individual capitalist banker needs to raise mortgage rates as high as possible in order to repair their core capital to guard against losses arising from mortgage write-downs and house price falls.

That is why the state has to step in to prevent foreclosures, both to keep a roof over the heads of millions of workers and to put a floor under house prices. The only way to do this would be for the federal government to nationalise all homes threatened with foreclosure to create a nationwide social housing stock which could be leased to existing home dwellers at affordable rents. If this worsens the plight of banks who count these homes as assets then they in turn should be nationalised.

Endnotes

1. The construction of single family homes has collapsed, falling from 2.15  million homes completed in September 2005 to just 817,000 in September 2008, a decline of 62%.
2. http://www.bloomberg.com/apps/cbuilder?ticker1=HOMFCLOS%3AIND
3. http://www.fdic.gov/consumers/loans/loanmod/index.html
4. ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb1.txt
5. Freddie Mac, National Association of Realtors and Wachovia October 2008

Sat 28, February 2009 @ 12:22