The classic 1895 science fiction novel The Time Machine by H.G. Wells allowed travel to the past and future. According to the most recent Case-Shiller study, home prices have now 'traveled' back to 2003 levels. This represents a 3.7% drop in overall prices since November 2011. Even worse perhaps is that home prices dropped in 19 of the 20 market areas covered in the Case-Shiller index, with a 15% decline in the past four months alone!
Most people would welcome a return to 2003 pricing of most goods; gasoline, food, even precious metals. But the drop in home prices is another issue altogether. Unlike prices of consumer goods, which benefit almost everyone, the drop in home prices has hurt almost everyone. An April 2011 editorial in the New York Times reported a cumulative loss of 5.6 TRILLION dollars of homeowner equity since 2008. The same article predicted that in addition to the 6.7 million homes lost already, 3.3 million more homes will be lost through 2012. You don't need a PhD in mathematics to perform that calculation ... a total of ten million homes!
Worse than those horrific numbers is the impact those figures are likely to have on U.S. housing in general, which is already suffering from a 'double-dip' recession. Mortgage Servicing News readers are probably already growing weary of my dismal reports. I wish I had better news. The fact remains, however, that these massive losses may only be a precursor to even worse news to come. Every drop in home prices plunges more homeowners 'underwater,' and increases the risk of more foreclosures and 'strategic defaults' as people lose all hope that any recovery in home prices is on the horizon.
The 'robo-signing' scandal caused an artificial delay in new foreclosure filings in 2011, as mortgage lenders pondered their positions. With that problem close to resolution, banks are ramping up foreclosure activity and clogging the pipeline once again. This will inevitably lead to increases in already swollen REO inventories nationwide.
The two major issues affecting the U.S. economy, persistent high unemployment and home foreclosures, feed upon each other. Job losses generate more mortgage delinquencies, and foreclosures generate higher unemployment rates. In a pernicious cycle, people who lose their homes also lose their spending ability. Consumer spending drives the GDP, and declines in consumer spending affect all industries and companies, not just homebuilders, contractors and home-improvement retailers. Add to this rising fuel prices, and Americans are further crippled economically. President Obama cited a reduction in foreign oil dependence, but economists point out that any such decline may be the result of decreased demand due to the recession.
Where does all this end? No one knows for certain. While the general economy languishes, the Dow Jones Industrial Average posted a 4.4% gain in January, the best percentage gain since 1997. But is stock market performance a true barometer of the U.S. economy? Many would argue no. Recent stock market activity appears contrary to the depth of the underlying issues that affect Americans.
Gains in the Dow make pretty headlines, but average investors tend to pick more losers than winners. Just ask people who bought stocks like Fannie Mae, Eastman-Kodak, Washington Mutual, American Airlines or General Motors, thinking they were investing in 'blue-chip' companies. If those stocks returned to their 2003 values, however, they'd be worth a lot more than they are today. Alas, there is no real 'time machine.' And perhaps it's just as well. What if you traveled back to 1929? Massive unemployment, rampant home foreclosures, major U.S. companies going bankrupt. Maybe we don't need a time machine after all.
Philip Wegener is a Los Angeles based mortgage-industry executive and President/CEO of Central Mortgage Asset Management.
