02/02/10 Stockholm, Sweden – The financial crisis has been largely born out of the housing market, so it’s been no surprise that the bulk of bailouts have worked to protect home values from falling further. For better or worse, American homeowners have been looking for that protection because a substantial portion of their net worth is tied up in their homes. The up and down fluctuations in home prices tend to correspond with either increased consumerism or old-fashioned belt-tightening and, in the US, the strength of the economy is largely dependent on the consumer’s willingness to spend.
Unfortunately, while propping up home prices is essential to maintaining the appearance of a recovery, there are at least five reasons why a further downturn is more likely. Zero Hedge offers a quick summary of a CIBC report on five causes of instability in US housing:
“1. Short-lived remedies; used by the administration to prevent further price deterioration (tax-credits);
“2. Shadow Inventory; in reality when accounting for the surging shadow inventory which very few dare talk about, the total number of available units double to over 8 million, representing a record high 16 months of supply.
“3. Strategic defaults; the amount of households with negative equity is roughly 10 million or about 20%, in 2009 25% of all foreclosures were strategic; as populist anger against banks accelerates look for strategic defaults to keep rising
“4. Quantitative Easing expiring; This needs no introduction: the sole reason why mortgage rates have been as los as they have, has been due to the Fed’s constant manipulation of the MBS market via the $1.4 trillion MBS/Agency QE purchase program. With this program set to expire in 2 months, rates are set to explode.
“5. House Prices are already entering a double dip; Previously we discussed the Case Shiller NSA home price index number which indicated that a double dip in prices has already commenced. A positive feedback loop will only lead to further deterioration here”
There’s no simple way of predicting how long the current pause in the housing market’s decline will last, but the above reasons help highlight why the very temporary government-sponsored relief can’t go on forever.
More detailed analysis, including 5 simple charts that visualize the problem, are available at Zero Hedge in its coverage of the next leg of the housing crisis.
Rocky Vega
Rocky Vega is publisher of The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.
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Why not just declare bankruptcy now, restructure and move on. It will be bad…no doubt. But this continue death by a 10000 cuts is killing you anyway.