Why Housing Prices Won’t Go Up Soon

I know, I usually talk about housing over on my real estate site.

Today there’s a bunch of conflicting information about whether nationwide, house values are going up or not. Prices fell 2.5% in Q4 of 2009 (not in Vegas, but nationwide), but rose in December, but only if you looked at it on a “seasonally adjusted” basis. That’s a nice way of saying you ignore the fact that prices “always” go down in December. You could get dizzy trying to make sense of this data.

But here’s the thing. 1 in 4 homes is “underwater” right now — the mortgage is more than the house is worth — and it’s more like 7 in 10 here in Nevada. That means among other things, that the owners of those homes have limited ability to pick up and move to a new job, and that unless a very specific set of circumstances apply to them, they can’t realistically reduce their housing costs. Add to that the fact that a record number of mortgages are seriously delinquent or in foreclosure. Add to that the expert opinion that over 6 million delinquent homeowners will not be able to negotiate with lenders and will lose their properties. The mortgage system is overwhelmed and in need of reconstruction, and the latest program announced by the President is little more than a bandage on a chest wound.

So we’re not out of the woods yet, even though there are some signs of a trail ahead.

Here’s the next set of hazards as I see them. First, none of the plans out there do a thing to help legitimate investors. Investors are necessary, because not everybody will own their primary dwelling when all is said and done. If there is to be affordable rental housing, somebody must invest in it. Right now, it’s hard for investors to buy unless they have cash. And right now it’s almost impossible for investors to refinance or get any sort of assistance; somebody decided that only owner-occupants deserve help, so screw the family that rents from the investor. To a lesser extent, a sub-problem of this is the difficulty that non-citizens have getting mortgages for property in the United States. I currently have no, zero, zip, nada sources for mortgages for Asian or European clients (I speak Japanese and French), and can only help Canadians if they plan to live in the property.

Second hazard strikes close to home. Most of my neighbors are underwater on their mortgages. Banks are dumping properties for less than half what they sold for 3 years ago. None of the current refinance or loan modification programs has anything to offer people like me and my neighbors, people who can continue paying the bills each month but are underwater and have interest rates 1-3% above current levels. Now, every book about stock market investing advises that you must have an exit strategy — a plan for when to sell if things go right or even if they go horribly wrong. It’s far better to take a loss, even a loss of 50%, than wait for your losses to get even greater in the vain hope that things will turn around. If you buy on margin, sometimes this decision will be made for you by the brokerage and it is a very painful mercy. This being the case, the rational thing for many of my neighbors is to stop paying the mortgage, buy something nearby for half what they currently owe, and let the bank have their overpriced asset back.

Until banks are forced to face the reality that something must be done to fix every seriously underwater mortgage, and not just the delinquent ones, we will be at risk of more foreclosures coming onto the market. And since they will continue to dump these properties at unrealistically low prices, property values will continue to decline and housing construction will continue to be a money-losing proposition. That will in turn continue to put pressure on the budget of any state or local government that depends on property taxes for revenue, and that will put pressure on the Federal government to make up the inevitable shortfall.

In closing: Mr. Volker has some good ideas, some very smart people agree with him, and don’t cry for the banks (oh, I know you want to do just that!) because they won’t go bankrupt; The Senate is highly dysfunctional right now, with record numbers of cloture votes and 290 bills passed by the House sitting in the docket collecting dust (Hey Reid and Ensign! Get to work, you bums!); unemployed people don’t buy fast food breakfasts; and Rich People Sure Are Different (yeah, they pay almost nothing in taxes).