Something for the housing bears to roar about

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans — those extended to home buyers with troubled credit — to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers’ introductory interest rates expired and were reset higher.

“We’re right in the middle of this third wave, and it’s intensifying,” said Mark Zandi, chief economist at Moody’s Economy.com. “That loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults. They’re coast to coast.”

Those sliding into foreclosure today are more likely to be modest borrowers whose loans fit their income than the consumers of exotically lenient mortgages that formerly typified the crisis.

Economy.com expects that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.

From the article...

“The state will lose 6.5 percent of its jobs before the recession ends, compared with 5.7 percent nationally, according to the forecast.

Massachusetts lost 6.1 percent of its jobs from the 2001 recession and 11.3 percent during the downturn of the early 1990s, considered the state’s worst since the end of World War II.”

These projections are very optimistic. Essentially they predict the current recession will be more severe than the tech crash but less severe than the early 1990s. I would be shocked if this turned out to be true. The current crash may not be The Great Depression Part II (we hope), but it will certainly be worse than the 1990s. No question. We are currently witnessing the fallout from the largest speculative credit boom/bust in history. The global housing bubble has popped. House prices are falling at the fastest rate ever--even faster than during the Great Depression. And there is still a long way to go before we hit bottom.

Long term, home prices will stabilize when they are supported by fundamentals such as population, household incomes, and rents. Boston prices need to drop another 30% from current levels to get there. Short term, prices will likely dip even lower as the market “over corrects”. I personally wouldn't be surprised to see Boston home prices at 50% of current levels within the next 2-3 years.

The crash was late to hit Boston. Best case scenario, we are half way to the bottom. We have a lot further to go. Anybody who buys a house now expecting to sell at a profit in the next 10 years is in for a very rude awakening...