Opinion

John Wasik

Don’t hold your breath on home appreciation

October 11, 2010

FINANCIAL/MORTGAGESYou may see two full moons in a month before home prices start rising again across the U.S. The rip tide of a huge home inventory, increasing foreclosures, unemployment and more bank woes continue to roil the housing market in most regions.

If you think you’ll see a profit from selling your home or hope to get a home-equity loan based on recent appreciation, you may have to wait a while — maybe a few years.

A host of demons continue to bedevil the U.S. home market. The worst of these gremlins is unemployment. Home sales and prices are directly linked to the number of people working. A jobless rate around 10 percent doesn’t spur home sales.

Nobody is in a hurry to buy homes. According to a recent report by Ned Davis Research, housing prices may not begin to appreciate until the jobless rate goes to 7 percent or lower.

Once the jobless rate gets to about 6 percent, the firm estimates that home prices may begin to rise roughly 2 percent annually or track the historical level of inflation.

“Yes, there is a light at the end of the dark housing tunnel,” writes Joseph Kalish, the report’s author, “but it will take at least two years and possibly more to get there.”

Complicating any housing rebound scenario is the fact that there are millions of unsold homes on the market and more are being acquired and resold by banks through foreclosures.

Kalish estimates that this “excess supply” is between 1.4 million to 2.5 million units. Even with record-low mortgage rates, in a slack economy, those homes don’t sell, so new homebuilding makes no economic sense.

The huge home inventory also puts pressure on banks to sell the homes they own at below-market prices just to get them off their books. Remember, banks are not in the real estate business; they don’t want to own and rent homes.

This tsunami of foreclosures and vacant homes is likely much worse than what most big bankers are willing to admit. Christopher Whalen, a financial analyst with Institutional Risk Analytics in Torrance, California, told the conservative think tank American Enterprise Institute on October 6 that “non-payment by borrowers and mounting foreclosure backlogs are creating the conditions for the collapse of some of the largest U.S. banks in 2011.”

In Whalen’s view, the biggest banks should have been broken up in 2008-2009 instead of propped up with TARP and Federal Reserve funds. Ironically, megabanks like Bank of America got bigger during the crisis by absorbing troubled subprime mortgage-gorged firms like Merrill Lynch.

The recent halt to foreclosure processing by major banks, Whalen noted, was an indication that banks are up to their necks in bad debts that are only getting worse. “The use of loan modification to make bad credits appear ‘current’ is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria,” Whalen stated.

Banks are being swamped with defaults put on overdrive by massive unemployment. The so-called “underemployment” rate of those still looking for full-time jobs but working part-time or who have abandoned their search is 17 percent. These folks can’t afford mortgage payments.

There is one silver lining to all of this mayhem. It’s likely that mortgage rates will remain low for at least another year, possibly longer. Refinance if you can. If you need to repair or add onto your home, now’s a good time.

On the savings side, your only consolation is that you can find thousands of FDIC-insured institutions that are not having financial problems. Credit unions are another strong option. There’s plenty of no- or low-fee competition for your checking, credit card and savings accounts.

You won’t get rich from investing in insured certificates of deposit or other savings accounts, but you won’t lose any money, either. Now is the time to reduce your debts as the megabanks struggle to stay afloat.

Photo: REUTERS/Rick Wilking

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