Housing bust goes from bad to worse

June 27, 2008

Petrino DiLeo reports on the most recent statistics that show the housing crisis getting bleaker.

IN THE past 12 months, the Federal Reserve Bank has lowered the target for the federal funds rate from 5.25 percent to 2 percent, engineered a bailout of Bear Stearns and altered the type of collateral it will accept to help ease pressures on Wall Street banks.

George Bush approved an economic stimulus plan worth more than $160 billion. Congress has discussed seemingly dozens of schemes ostensibly aimed at helping homeowners and stemming the tide of foreclosures, but is pushing legislation that amounts to a bailout for politically connected corrupt lenders like Countrywide.

Is any of it making a difference? According the latest economic data, the answer is a resounding "no."

The S&P Case-Shiller indices--which measure historical prices on homes sold in 20 of the largest markets in the U.S.--show that the rate of price declines on homes has actually been increasing in recent months. In other words, the problem is getting worse.

According to the newest data, through the end of April, prices in the 10 largest cities Case-Shiller monitors have dropped 16.3 percent. In the top 20 cities, the drop has been 15.3 percent. These are both the highest numbers on record for the indices, which measure data back to 1987. (Economist Robert Shiller, one of the designers of the index, has separately extrapolated the index back to 1900, and says that the current rates of price declines are comparable to the Great Depression of the 1930s.)

Overall, the Case-Shiller indices indicate year-over-year declines in all 20 cities. In 13 of the markets, the rates of annual decline are at record lows and 10 of them are in double-digits. Put another way, the 15.3 percent drop in the top 20 city index represents a $4 trillion loss in housing wealth in just the last 12 months.

What's even more alarming is that the rates of price declines are accelerating. During the past quarter of the year, the annualized rate of price declines in the top 20 cities is a whopping 22.1 percent. The drop is "not comparable to anything we've seen since the Depression, and perhaps not even then," economist Dean Baker said during a June 24 conference call with the media.

In the bottom third of the housing market--homes for the working class and the poor, the sector most targeted by sub-prime predatory lending--the annual rate of price decline is greater than 40 percent in some markets over the past three months, according to Baker.

BUT WHILE millions grapple with rising mortgage payments or see their wealth evaporate with falling house prices, members of Congress continue to benefit from favorable treatment by mortgage lenders--the very same lenders who will get a bailout if proposed legislation passes.

The housing bill's key backers in the Senate--Chris Dodd (D-Conn.), head of the Senate Banking Committee, and Kent Conrad (D-N.D.), who chairs the Senate Budget Committee--both got special deals from the nation's biggest mortgage lender, Countrywide, thanks to their connections with the company's CEO, Angelo Mozilo.

"Dodd, the lead sponsor of the bill, secured no-closing-cost mortgages at interest rates of 4 percent and 4.25 percent, and continues to insist he got no special favors," the Rocky Mountain News reported. Conrad admitted calling Mozilo for help with a discount on a $1 million mortgage for a beach house, but also claims that it was legitimate.

Now Dodd and Conrad are in position to return the favor to the mortgage industry. If the current bill passes the House, Countrywide and other lenders will see U.S. taxpayers assume responsibility for mortgage defaults. And further price declines mean that there's no end in sight for foreclosures.

As prices continue to drop, more borrowers end up "under water." That is, they end up owing more on their house than it's worth. As a result, increasing numbers of homeowners are likely to stop paying and fall into foreclosure. That only adds more houses to an already bloated supply and puts further downward pressure on prices.

"I don't see much reason to see where this is coming to an end anytime soon," said Baker, co-director of the Center for Economic and Policy Research. "The best we can hope for right now is a slower rate of price decline."

But that's highly unlikely in a broader economic climate where job cuts are accelerating and food prices are rising. "There is going to be a feedback effect as the economy weakens further--which in my mind is almost a sure thing," Baker said. "As people become fearful of job prospects, they are less likely to go out and get a home or get a bigger home."

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