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Housing Economics Determined By a Couple Key Facts

I’ve been tracking the deeply embedded narrative of housing recovery among real estate analysts. Brady Dennis’ writeup of the respected Harvard report on the state of the housing market is a good example of this genre, though to his credit, Dennis keeps it in check a bit.

“While still in the early innings of a housing recovery, rental markets have turned the corner, home sales are strengthening, and a floor is beginning to form under home prices,” Eric S. Belsky, the center’s managing director, said in a statement accompanying the report […]

Of course, the slivers of heartening news about the nation’s housing situation are still outweighed by troubles, and those who talk of a future recovery also acknowledge the uncertainty of the present.

The Harvard report notes that more than 2 million homes were in some stage of foreclosure during the early part of 2012, with more facing a similar fate. The number of borrowers delinquent on their mortgages has fallen, but it’s still far higher than historical averages.

In addition, more than 11 million homeowners owe more than their houses are worth, and the total amount of that “negative equity” has stayed at about $700 billion. As banks have become more cautious, lending to only the most creditworthy borrowers, many would-be buyers are having trouble getting home loans. The lackluster job market adds to those difficulties and also makes it harder for many existing homeowners to simply make ends meet.

You can hold both ideas in your head, that we’re seeing a bottoming in some aspects of the housing market, and that the historical averages remain well below trend. But it actually may be worse than that. Barry Ritholtz talked with Laurie Goodman of Amherst Securities for an upcoming column, and got some pretty fascinating results. By way of background, Ritholtz lays out that foreclosure starts went up last month after 27 months of falling, though distressed home sales are generally down, as are repossessions, for a variety of reasons (short sales, banks holding properties in foreclosure rather than moving to evict).

Here’s where the rubber meets the road, however:

1) 2.8 million Americans are 12 months or more behind on their mortgages.

This truly amazing data point represents a very sad fact of the housing market. Once a homeowner falls that far behind in their mortgage, the odds are that they will never catch up. (Mortgage mods are likely to fail at an exceedingly high rate as well). Nearly all of these 2.8 million homes are likely to be some sort of distressed sale — short sale, auction, walkaway or foreclosure […]

2) “Since 2007, 19% of all borrowers (~9 million borrowers) have gone >90 days delinquent on their mortgages, or have had their mortgage liquidated.

In other words, one in five people who held or qualified for a mortgage not too long ago would not today. The 90 days delinquency on their credit reports prevents them from qualifying for a new mortgage.

That’s 19% of the market that would be ineligible for a bank loan today. It’s hard to see how that will get made up. Because the third data point that’s needed here regards new household formation. Rising student debt makes it impossible for young people to start their lives by becoming first-time homebuyers. And gifts from parents is unsustainable, especially given the current economy and the inadequacy of modern retirement plans.

So just apply supply and demand here. Household formation is at historically low levels, and over 9 million Americans are locked out of the mortgage market. Demand cannot possibly bounce back under those circumstances. Maybe you get a kind of stability, with zero growth in sales or prices for a few years. That’s what Ritholtz predicts.

Maybe an expansion of refinancing, which the Senate Banking Committee is taking a crack at, will help. But it’s more of an economic stimulus program. It doesn’t touch this central problem – there aren’t enough people able to buy homes. Given how the mortgage industry chews people up and spits them out, that’s probably a good thing. But on economic terms, it’s not helping us climb out of our hole.

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David Dayen

David Dayen