The Glut in the Mortgage Market: Self-Reinforced and Going Down

The law of supply and demand is trumping the homebuyer tax credit. The glut of housing we mentioned on Tuesday is making itself evident with this news: The number of mortgage applications fell 1.9% last week. Both new purchases and refinances are down.

At this rate, Congress could repeal the homebuyer tax credit today, instead of allowing it to lapse on April 30, and no one would notice.

Adding to the housing glut: An increase in the number of foreclosed homes that banks are looking to unload. That number was actually falling much of last year, as many homeowners were suspended in limbo, waiting to find out whether they qualified for permanent modifications under the HAMP program.

Now that HAMP has proven itself a miserable failure, some of those homes are coming to market. Thus, Barclays estimates the number of foreclosed homes held by banks and mortgage investors rose 4.6% between December and January.

Foreclosures now make up one out of every five homes listed for sale across the fruited plain.

And don’t forget the “strategic default” phenomenon. Professor Luigi Zingales at the University of Chicago estimates 35% of home mortgage defaults in December were by folks who could keep up their payments, but decided it just wasn’t worth their while on an underwater property. Nine months earlier, it was only 23%.

And as more people do it, the stigma once attached to it falls away. “The risk that the number of people doing this might explode is significant,” says the professor.

At this point, the housing glut appears to be self-reinforcing. The Census Bureau reports at least 6.6 million households had at least three generations under one roof in 2009. That was a 30% increase over 2000.

One in six Americans now lives in a home with at least two adult generations. Horror of horrors. What is becoming of the American Dream!?!

Addison Wiggin
for The Daily Reckoning