Housing Prices Still the Bane of Economic Recovery

Whoa…this looks bad too.

In the housing sector, the fed’s ultra-low interest rates are supposed to make it easier to refinance…which is supposed to help firm up prices. But prices haven’t firmed. They’re still giving way.

The latest numbers show prices falling, hitting post-bubble lows in 11 cities. Of the 20 major cities in the survey, only two of them had positive price movements last year. No surprise, only one – Zombietown itself, Washington, DC, home of the feds – showed an increase of more than 2%.

Worst hit were the sunshine states – California, Florida, Nevada, Arizona and Georgia. Along with Michigan, more than a third of homeowners in these states have negative equity in their houses…with 70% of them underwater in Nevada.

Wealth effect? Not in housing. According to the Case/Shiller numbers, homeowners saw their net housing wealth decline by $650 billion in the last quarter of 2010. And since many more households own houses than stocks – 66% are homeowners – falling housing prices has a much bigger effect on the economy than rising stock prices.

And it gets worse. The big wave of resetting (and recasting) ARM loans begins to crash into the housing market next month. There are about $700 billion worth of loans in this group. Many will not be successfully rewritten. Falling housing prices will make it impossible. Homeowners will prefer to walk away, rather than be shackled to a long-term mortgage 30% to 50% higher than the value of the house.

Says housing expert Robert M. Campbell:

“I continue to believe that the second downward leg in house prices that began in 2010 will likely take US housing prices to a point that is 15% to 20% below current levels.”

Bill Bonner
for The Daily Reckoning

The Daily Reckoning