That Great "Investment": Housing

Ah, a blast from the past. The cover from the National Association of Realtors chief economist David Lereah's book.

Readers know that I am on a bit of a rant here. Too many people were sucked into the "housing is always a great investment" shtick at the worst of all times. We've already shown what the 100+ year returns from housing have been. The low natural returns didn't prevent one of the biggest bubbles EVER from being blown or its natural aftermath. (You do know that all bubbles collapse, don't you?)

Well, here's the latest data point. The number of "underwater" mortgages continues to climb. "Underwater" is another way of saying that you owe more on the property than it is worth in the marketplace. From the Wall Street Journal:

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default.

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. "The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," the study said.

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.

Many borrowers are so deeply under water that they can't take advantage of lower rates and refinance their mortgage. "We're declining hundreds of loans each month," said Steve Walsh, a mortgage broker in Scottsdale, Ariz. "The only way we will make headway is if we allow for a streamlined refinance where the appraisal is irrelevant."

Did everyone catch that? Eleven percent of owners who bought IN 2009 are already underwater. The housing bust is not over. On a national level more declines are coming, a view shared by Ivy Zelman, one of the more prescient experts on the housing crisis. If you are lucky enough to live in selected areas, house prices may be stable to slightly increasing. But for the rest of the country great care must be taken in purchasing a home.

The government is throwing ALL KINDS of stimulus at this. From artificially lowering the cost of mortgages to goosing demand through tax credits for first time (and now long time) buyers. It has had the effect of TEMPORARILY stabilizing the rate of descent. That is all. We are likely to see very poor data come out in this area from now until the spring 2010 selling season.

"Invest" at your own risk.