Home owners, investors, and others hopeful of a US housing market turnaround in the near future, got plenty of negative news Thursday (March 6) to dash their hopes.  Various records of the negative variety continue to fall on many home fronts.  Foreclosures finished the worst year on record with a record number of foreclosed properties during the fourth quarter of 2007, according to the Mortgage Bankers Association.

Another troubling sign for home owners was that for the first time since the Federal Reserve began recording comparisons of home owner debt to home owner equity; home owner equity fell below 50%.  During last year’s fourth quarter, home owner equity fell to 48%.  This means Americans, on average, have more debt tied up in their homes than ever before.

Amazingly, some estimates project that about one in ten home owners will have zero or negative equity in their homes by the end of March.  Zero equity means that home values are equivalent to debt in the home, while negative equity means the borrower has more debt from the home than value in the home. 

One of the contributors to the current housing slump and credit crunch has been years of relying on home equity for financing needs.  Many home owners have turned to cash out refinances or home equity loans to finance other projects, large purchases, or other big expenses.  This has put homes more at risk and turned into the current overwhelming situation.

The news gets even worse for housing.  Pending US home sales, which are home sales in process following the point where a buyer signs a purchase contract, were below expectations for January.  Pending sales have been running near all time lows over the last several months.  This is a strong indication of just how slow the real estate market has been operating.

Investors have been amazingly resilient as of late.  Day after day, it seems, the news continues to get worse for housing and loans, inflation, and the economy as a whole.  Surveys and investor behavior continue to suggest hope is in the market for an economic turnaround by the end of 2008. 

With the fresh round of negative housing news, some economists are saying it is foolish to believe that housing has bottomed.  Last year was the first year in forty years that median US home prices fell.  Leading economists think this development could carry forward for another year, or two, or three.  This definitely supports the potential for more downward mobility for housing.

UK and other world markets are beginning to see the potential for US housing and mortgage troubles to resonate.  Brits have enjoyed about ten years of strong housing and loan markets.  There have been very strong signs of caution lately.  The final eight lenders that had offered over 100% loan-to-value (LTV) mortgage products pulled them off the market a couple weeks ago.  Many UK lenders are reducing their liberal attitude toward loans by restricting credit offers and more closely monitor poor credit borrowers.  Housing is expected to slow significantly in 2008.

As much as housing and mortgage problems burden Americans, the psychological impact that ‘never-ending’ bad news has can be as detrimental.  Many Americans connect the US economic situation directly with housing and mortgage news.  As bad news seems like a daily occurrence, consumer confidence, spending, and other indicators paint a picture of potential recession. 

At some point, housing will see a bottom and buyers will return, but as common sense suggests, a bottom does not come while negative records continue to fall.  With tax rebates in hand in a few months, and better interest rates to work with, consumers can help inspire the economy with strong spending.

Market Recap

Equities saw a bit of green on Wednesday as the Dow, NASDAQ and S&P were up 41, 12, and 6 points, respectively.  The Dow finished at 12,254.  In earnings news, H&R Block said its third quarter loss shrunk, and TiVo beat analyst estimates.  The Fed’s Beige Book report disappointed investors by feeding concerns about a sluggish economy and rising prices.  News of an Ambac bailout also impacted the markets.  The Dow struggled on Thursday closing down 214 points.  Bad news for the housing sector was the biggest market mover.  Retailers had mixed February results, with Wal-Mart having strong gains.  The NASDAQ and S&P also were weak, down 52 points and 29 points Thursday.

Neil Kokemuller
Thursday, March 6, 2008
10:28 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

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