Will Your House Do the NASDAQ Meltdown?
By Dean Baker
T r u t h o u t | Columnist
Wednesday 27 June 2007
The latest data on housing sales showed that the inventory of unsold homes climbed to 4.4 million in May, yet another record. The current inventory would be more than a full year of housing sales in the mid-nineties, before the housing bubble began to take off. There is also a record inventory of new homes for sale. Economists usually expect that excess supply leads to a drop in prices, and in this case, there is a considerable excess supply of houses.
In fact, house prices by many measures are already falling. The National Association of Realtors reports that the median price of an existing home is down by 2.1 percent from its year-ago level. Prices have fallen by much more in some local markets. For example, an index constructed by Yale economist Robert Shiller shows that house prices are down by 4.9 percent in the Boston area and by 6 percent in San Diego. Adjusting for inflation, Shiller's measure implies that the real price of an average house in San Diego is down by almost 10 percent from its year-ago level. That's real money in a city where middle-income families might have purchased a $700,000 house in 2006.
Even these numbers understate the true decline in house prices. At the peak of the boom, houses were sold without conditions. No successful buyer got a home inspection, and then forced sellers to make repairs before closing. It has also become a standard practice in at least some markets for sellers to make kickbacks to buyers at closing - effectively allowing the buyer to pull out cash by inflating the sale price. These kickbacks, which can be 2 to 3 percent of the sale price, are not picked up in any of housing price indices which rely on the contracted price.
Unfortunately for homeowners, several factors indicate that the situation is likely to get worse in the near future. The vacancy rate for ownership units is 50 percent higher than it had ever been prior to the last two years. A seller holding a vacant unit - one which collects no rent - is likely to be a very motivated seller.
Similarly, foreclosure rates are soaring. Foreclosure rates had been very low in 2004 and 2005. In a period of rapidly rising house prices, very few borrowers had no equity in their homes. If they found they could not meet their monthly mortgage payments, they could borrow against their newly accumulated equity or simply sell their home and cash out excess equity. Homeowners in a market with declining prices have no equity cushion. .....(more)
The complete piece is at:
http://www.truthout.org/docs_2006/062707L.shtml