Readers suggested a topic on what might be desireable effects of a housing correction. “I’d like to know what people want/expect out of this housing downturn. For example, in addition to a house at 2.5x income, I’d like to own a few multi-family properties to hold long term as a cash flow investment. So, I’d like to see enough lopped off of prices such that most people think RE is a bad investment and multi-family properties stop being seen as potential condo conversions and become income producing again.”
“I also realize for that to happen, it seems that this country would most likely fall into a very ugly recession if not depression.”
“Is it possible to ask for 30%-50% off of peak without bringing about economic depression?” One replied, “I think housing and incomes ‘have’ to come back in line, and I don’t think that this necessarily results in a despression.”
“Credit is already tightening up, and the disengagement between incomes and housing prices can only exist as long as there are lenders out there willing to overlook such an obvious risk factor.”
“It is worrying how deeply Wall Street has tied itself to sketchy mortgage practices, but in many ways it’s no different than how deeply they got involved with dot coms that didn’t even have a clue how to earn a profit. And we survived that.”
“Also, remember that a large majority of homeowners bought pre-2000 and are not HELOC’ed, and so are not directly affected by such a price reduction.” Another had this,
“Add together new and existing home sales for the 7 1/2 years since 1/1/01 and you get over 50 million dwellings changing hands. Obviously there’s double (and triple etc.) counting in there, but add in HELOC’s and I reckon that majority might not be as large as you think.”
From MarketWatch. “Sales of North American-built vehicles sank to the second lowest level in 14 years in June. Light truck sales continued to fall, hitting the lowest level since October 2005.”
“General Motors Corp. posted a 21.3% plunge in June U.S. light vehicle sales. ‘As we look at the results coming in, the performance is capping off a second quarter for the industry that I think can best be described as a bit underperforming,’ Paul Ballew, GM’s top sales analyst, said in a conference call. ‘We’re dealing with the twofold impact of gas prices and the housing correction that is occurring in a couple of key states.’”
The Associated Press. “Late payments on home equity loans climbed to a 1 1/2-year high in the opening quarter of this year, while delinquencies on credit card bills fell, painting a mixed picture of how people are managing their debt.”
“‘There are still signs of consumer financial distress, which will continue throughout most of this year as the worst of the housing problem works its way through the economy,’ said James Chessen, the American Bankers Association’s chief economist.”
“On a brighter note, late payments on credit card bills dropped in the first quarter to 4.41 percent. That was down from 4.56 percent in the fourth quarter and was the best showing in nearly a year.”
“‘The improvement in credit card late payments is somewhat remarkable, given that the economy was not operating on all cylinders,’ Chessen said.”
The LA Times. “Credit counselors said consumers were paying the price for reckless attitudes about debt fostered by years of easy credit, particularly in the mortgage market.”
“‘It’s a monster we all created,’ said Todd Emerson, president of a nonprofit consumer credit management organization in Riverside.”
“During the housing boom, home equity loans gave many consumers a ready source of cash as the value of their property shot up. But with prices declining, quite sharply in San Diego and some other California regions, borrowers have less equity available to cash out by selling their houses or refinancing their home equity loans.”
“As a result, late payments on such loans rose to 2.15% in the first quarter, up from 1.94% a year earlier and the highest in nearly two years. On home equity lines of credit, the delinquency rate was 0.6%, the highest since mid-2003.”
“Emerson said the bankers’ report reflected a scary trend: Ten or 15 years ago, consumers made regular mortgage payments at all costs so as not to lose their homes.”
“‘People today, in order to keep themselves alive, they’re paying off their credit cards first rather than paying off their mortgages first in order to keep an open line of credit,’ said.”
“Many of those homeowners bought expensive properties with a ‘figure it out when they get there’ mentality, Emerson said. ‘Trouble is,’ he said, ‘they never figure it out.’”
The New York Times. “The wonderful world of leverage has lifted homeownership to near-record levels, and we thump our chests with pride at the prosperity and middle-class life that possessing a home implies. Hovering in the background, however, is a glaring statistic: Never before have homeowners actually had such a small ownership stake in the houses they occupy.”
“The reason is debt. Home prices have gone up a lot, but borrowing against homes has gone up even more in almost all of the last 20 years. ‘Owners’ equity,’ as the Federal Reserve calls the difference, is gradually eroding — a detail that millions of families ignore, focusing instead, perversely, on the rising dollar value of their homes.”
“When they sell, most still pocket a tidy sum after paying off their loans. But millions of middle-income families don’t sell; they take out another loan, which they often spend, surveys show. And then, as the margin of potential profit — a k a owners’ equity — shrinks.”
“At the end of the first quarter, the nation’s homeowners owned, free of debt, only 52.7 percent of their dwellings, down from 54.1 percent a year earlier and 57.5 percent at the start of the century. The decline occurred even though owners’ equity, measured in dollars, rose by an astonishing $4.3 trillion since 2000. Unfortunately, mortgage debt rose by $5 trillion.”
“‘Basically people are gradually consuming their capital,’ said Edward N. Wolff, an economist at New York University who studies household wealth. ‘It makes the middle class in particular more vulnerable. Their homes are still their biggest saving, and that is the bottom line.’”
“Even now, the illusion of rising equity obscures its erosion. For a family with a $50,000 mortgage and a house valued at $100,000, for example, the owner’s equity is 50 percent. Two years pass. The family borrows an additional $60,000, raising debt secured by the house to $110,000. The expected selling price, however, has risen to $200,000.”
“Home prices, however, must continue to climb for this merry process to continue. Indeed, millions of homeowners seem confident that they will do exactly that over the long run, despite the drop in recent months.”
“The tax code has played its own special role in all of this. Congress changed the law in 1986, allowing individuals to deduct on their tax returns only those interest payments on loans tied to housing. Interest on other loans no longer qualified. With that big change, borrowing against one’s home to buy a car or an appliance or clothing or a vacation became cheaper, after taxes, than standard consumer credit.”
“‘What surprises me,’ said Lee Price, chief economist for the House Appropriations Committee, ‘is that more people haven’t mortgaged higher percentages of their equity.’”
“The culture of ‘own your home free of debt as soon as possible’ had endured for decades. Through the 1960s and ’70s, owners’ equity ranged from 65 to 70 percent. As recently as 1983, some 52 percent of American homeowners who were 55 to 65 years old owned their homes without any mortgage debt. By 2004, however, that percentage had dropped to 36 percent, according to Federal Reserve data.”
“The first sharp decline in owners’ equity, nearly three percentage points, came in 1990 as home prices dropped while borrowing held strong. The decline then continued, despite the housing boom, although at a slower pace, a fraction of a percentage point annually during most years. And then last year, another steep drop in equity kicked in, as home prices weakened but owners kept up their borrowing.”
“‘You might end up without enough pension income to pay off your mortgage, or enough equity to draw on if health costs get out of hand,’ said Conrad Egan, president of the National Housing Conference. ‘But people seem to be saying, ‘O.K., I’m willing to live in that kind of environment.’”