New home sales in the United States are on pace to set a brand new all-time record low in 2011. This will be the third year in a row that new home sales have set a new record low. Sadly, this is yet another sign that the U.S. economy continues to grow weaker. Back in 2005, more than four times as many new homes were being sold as are being sold today. The home building industry is one of the central pillars of the U.S. economy, and the fact that we are going to set another new record low for home sales in 2011 is a really bad sign for those hoping for an economic recovery. Unlike most of those that work in the financial industry, those that build new homes produce something of lasting value for American families. In addition, millions of Americans have traditionally made a solid living by building and selling new homes. But today the market for new homes has totally dried up and large numbers of those jobs are disappearing. Some of the reasons for this include high unemployment, a glut of foreclosures on the market and the tightening of lending standards on home loans. In order for the U.S. to have anything resembling a healthy economy again, we are going to need a revival in the sale of new homes.
But unfortunately, it looks like things are getting even worse. In August, the number of new home sales declined for the fourth month in a row. That is a very troubling sign because typically summer is the best time for new home sales.
Celia Chen, the director of housing economics at Moody’s Analytics, is saying the following about the dismal numbers….
“With job growth at a standstill, the stock market swinging wildly, Congress wrangling over the debt ceiling and the euro zone’s problems sending consumer confidence down, sales of new homes are slipping from an already weak pace.”
When you take a close look at the numbers, it really is shocking to see how far we have fallen.
Back in 1963, the U.S. Census Bureau began monitoring new home sales. Prior to the most recent economic downturn, the record low for new home sales happened in 1982.
In that year, only 412,000 new homes were sold.
Well, that record was broken in 2009.
Then it was broken again in 2010.
And it will be broken again in 2011.
This year, we are on pace to see only 303,000 new homes sold in America.
That is beyond pathetic.
To get an idea of just how bad that is, just check out the following chart which comes from the Calculated Risk blog. The first number is the year, the second number is the total number of new homes sold during that year, and the third number is the total number of new homes sold through the month of August during that year. The number of new homes sold during 2011 is a projected number….
Well, for one thing, if people do not have good jobs they cannot afford to buy new homes.
Back in 1969, 95 percent of all men between the ages of 25 and 54 had a job. In July, only 81.2 percent of men in that age group had a job.
That is a massive problem that needs to be solved.
Unfortunately, our leaders continue to allow millions of our jobs to be shipped overseas.
If you gathered together all of the people in the United States that are “officially unemployed” right now, they would constitute the 68th largest country in the world. It would be a nation larger than Greece.
Secondly, there is a gigantic glut of foreclosed homes on the market right now that is competing with new homes for the few qualified home buyers that are out there.
It is absolutely shocking how many vacant homes there are in some areas of the country.
According to the U.S. Census Bureau, 18 percent of all homes in the state of Florida are sitting vacant. That figure is 63 percent larger than it was just ten years ago.
Until the number of vacant homes goes down, there is just not going to be a need in the marketplace for a lot of new homes.
Sadly, it looks like another huge wave of foreclosures could be on the way.
According to the Mortgage Bankers Association, at least 8 million Americans are currently at least one month behind on their mortgage payments.
That is more than a bit frightening.
Thirdly, lending standards on home loans have dramatically changed.
Five or six years ago, if you were breathing you could get a home loan.
Even the family dog could get a home loan.
But now the pendulum has swung to the opposite end of the spectrum.
Applying for a mortgage today is like getting a series of proctology exams from a very rude and very uncaring doctor.
Many mortgage lenders today will deny you at the slightest hint of a problem.
Even if you have a very high income, near perfect credit, very little debt and a long history of financial responsibility there is still a very good chance that you will be turned down.
If you don’t believe this, just start talking to people that have applied for home loans lately.
A ton of pending home sales are being cancelled because potential home buyers simply cannot get approved.
Until some sort of “balance” is restored to the mortgage lending process, this is going to continue to be a major problem.
It would be nice if I could tell you that things are going to get better soon, but the truth is that there are all kinds of signs that the U.S. economy is getting even worse and there are all kinds of signs that the global financial system is on the verge of a massive nervous breakdown.
So if you make a living by building or selling new homes, you might want to find other ways to supplement your income for a while.
Things are not going to turn around significantly any time soon.
Right now, interest rates are near historic lows. The U.S. government is able to borrow gigantic mountains of money for next to nothing. U.S. consumers are still able to get home loans, car loans and student loans at ridiculously low interest rates. When this low interest rate environment changes (and it will), it is going to absolutely devastate the U.S. economy. Without low interest rates, the U.S. financial system dies. When it comes to borrowing money, it is the rate of interest that causes the pain. If you could borrow as much money as you wanted at a zero rate of interest for the rest of your life you would never, ever have a debt problem. But when there is a cost to borrowing money that changes things. The higher the rate of interest goes, the more painful debt becomes.
The only reason that U.S. government finances have not fallen apart completely already is because the federal government is still able to borrow huge amounts of money very cheaply. If interest rates on U.S. government debt even return just to “average” levels, it is going to be absolutely catastrophic.
So what happens if rates go above “average”?
The reality is that if there is a major crisis that causes interest rates on U.S. Treasuries to go well beyond “normal” levels it is going to cause a complete and total collapse.
In 2010, the U.S. government paid out just $413 billion in interest even though the national debt soared to 14 trillion dollars by the end of the year.
That means that the U.S. government paid somewhere in the neighborhood of 3 percent interest for the year.
Considering how rapidly the U.S. dollar has been declining and how much money printing the Federal Reserve has been doing, a rate of interest that low is absolutely ridiculous.
The shorter the term, the more ridiculous the rates of interest on U.S. Treasuries are.
For example, the rate of interest on 3 month U.S. Treasuries right now is just barely above zero.
The Federal Reserve has been playing all kinds of games in an attempt to keep interest rates on U.S. government debt low, and so far they have been pretty successful at it.
But they aren’t going to be able to do it forever.
Up until now, other nations and investors around the world have continued to participate in the system even though they know that the Federal Reserve is cheating.
However, there are signs that a lot of investors are finally getting fed up and are ready to walk away from U.S. government debt.
China has been dumping short-term U.S. government debt. Russia has been dumping U.S. government debt. Pimco has been dumping U.S. government debt.
Others are taking things even farther.
In fact, there are some investors that plan on cashing in on the loss of confidence in U.S. Treasuries. Renowned investor Jim Rogers says that he is now going to be shorting 30 year U.S. government bonds.
“I cannot imagine or conceive lending money to the United States government for 30-years at 3, 4, 5 or 6 percent —you pick a number — in U.S. dollars”
And he is right. Who in the world would be stupid enough to loan the U.S. government money at a 4 or 5 percent rate of interest for the next 30 years?
Actually, most U.S. government debt is financed in the short-term these days. In fact, the U.S. government issues a higher percentage of short-term debt than any other industrialized nation.
This trend really got started during the Clinton administration. Back then they figured out that the U.S. could reduce its borrowing costs substantially by relying much more heavily on short-term debt. The Bush and Obama administrations have continued this trend.
So these days the U.S. government constantly has huge amounts of debt that are maturing and that need to be rolled over.
This is great as long as interest rates stay very, very low.
But when interest rates rise the whole game will change.
In a recent article, Pat Buchanan explained that the Obama administration is being completely unrealistic when it assumes that interest rates on U.S. government debt will stay incredibly low over the next decade….
“The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.
A return to the normal Fed rate would, by 2020, add $4.9 trillion to the cumulative deficit”
Most Americans really cannot grasp how incredibly low interest rates are right now.
Sometimes a picture is worth a thousand words.
The following chart shows how interest rates on 10 year U.S. Treasury bonds have declined over the last several decades.
As confidence in the U.S. dollar and in U.S. government debt declines, interest rates will go up.
In fact, there are troubling signs that we are starting to see a move in that direction right now. Last week, the yield on 5 year U.S. Treasuries experienced the biggest one week percentage jump ever recorded.
The big danger is that the political wrangling in Washington D.C. will start to cause a panic. The managing director of Standard & Poor’s recently told Reuters that if the U.S. government starts defaulting on debt at the beginning of August, the credit rating on U.S. Treasury bonds that are supposed to mature on August 4th will go from AAA all the way down to D….
Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.
“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”
When a credit rating gets slashed, interest rates on that debt can go up dramatically.
You are delusional if you believe that something like that can never happen here.
Right now the U.S. national debt is completely and totally out of control. If the U.S. government had to start paying interest rates of 10, 15 or 20 percent to borrow money it would be a total nightmare.
This year the U.S. government will have income of about 2.2 trillion dollars.
If in future years the U.S. government is spending a trillion or a trillion and a half dollars just on interest on the national debt, then how in the world is it going to be possible to even run the government, much less balance the budget?
But rising interest rates would not just devastate the federal government.
It would become much more expensive for state and local governments to borrow money.
Student loans would become much more expensive.
Car loans would become much more expensive.
Home loans would become out of reach for everyone except the very wealthy.
As we saw during the housing crash of a few years ago, rising interest rates can absolutely wipe homeowners out.
On a standard home loan, if you change the rate of interest from 5 percent to 10 percent you increase the mortgage payment by approximately 50 percent.
If you change the rate of interest from 5 percent to 15 percent, you roughly double the mortgage payment.
As the 30 year fixed rate mortgage chart below shows, interest rates are near historic lows right now….
So what would a significant spike in interest rates do to it?
When all of these low interest rates go away the entire financial system is going to change dramatically.
A significant spike in interest rates would wipe out U.S. government finances, it would push state and local governments all over the country to the brink of bankruptcy, it would bring economic activity to a standstill and it would destroy any hopes for a housing recovery.
This country, and in particular the federal government, is enslaved to debt but right now we are not feeling the full pain of that debt because interest rates are so low.
If you want to know when things are really going to start coming apart, just keep an eye on interest rates. When they really start spiking you can start sounding the alarm.
The truth is that the state of the economy is going to continue to get worse. Our debt is growing every single day and our country is getting poorer every single day. When interest rates start surging it is going to start knocking over a lot of dominoes.
I hope you are getting prepared for when that happens.
Unless you have been asleep or hiding under a rock for the past five years, you already know that we are experiencing the worst real estate crisis that the U.S. has ever seen. Home prices in the United States have fallen 33 percent from the peak of the housing bubble, which is more than they fell during the Great Depression. Those that decided to buy a house in 2005 or 2006 are really hurting right now. Just think about it. Could you imagine paying off a $400,000 mortgage on a home that is now only worth $250,000? Millions of Americans are now living through that kind of financial hell. Sadly, most analysts expect U.S. home prices to go down even further. Despite the “best efforts” of those running our economy, unemployment is still rampant. The number of middle class jobs continues to decline year after year, but it takes at least a middle class income to buy a decent home. In addition, financial institutions have really tightened up lending standards and have made it much more difficult to get home loans. Back during the wild days of the housing bubble, the family cat could get a zero-down mortgage, but today the pendulum has swung very far in the other direction and now it is really, really tough to get a home loan. Meanwhile, the number of foreclosures and distressed properties continues to soar. So with a ton of homes on the market and not a lot of buyers the power is firmly in the hands of those looking to buy a house.
So will home prices continue to go down? Possibly. But they won’t go down forever. At some point the inflation that is already affecting many other segments of the economy will affect home prices as well. That doesn’t mean that it will be middle class American families that will be buying up all the homes. An increasing percentage of homes are being purchased by investors or by foreigners. There are a lot of really beautiful homes in the United States, and wealthy people from all over the globe love to buy a house in America.
But because of the factors mentioned above, it is quite possible that U.S. home prices could go down another 10 or 20 percent, especially if the economy gets worse.
So what is the right time to buy a house?
Nobody really knows for sure.
Mortgage rates are near record lows right now and there are some great deals to be had in many areas of the country. But that does not mean that you won’t be able to get the same home for even less 6 months or a year from now.
In any event, this truly has been a really trying time for the U.S. housing market. Hordes of builders, construction workers, contractors, real estate agents and mortgage professionals have been put out of work by this downturn. The housing industry is one of the core pillars of the economy, and so a recovery in home sales is desperately needed.
The following are 20 really wacky statistics about the U.S. real estate crisis….
#1According to Zillow, 28.4 percent of all single-family homes with a mortgage in the United States are now underwater.
#2 Zillow has also announced that the average price of a home in the U.S. is about 8 percent lower than it was a year ago and that it continues to fall about 1 percent a month.
#3 U.S. home prices have now fallen a whopping 33% from where they were at during the peak of the housing bubble.
#4 During the first quarter of 2011, home values declined at the fastest rate since late 2008.
#5According to Zillow, more than 55 percent of all single-family homes with a mortgage in Atlanta have negative equity and more than 68 percent of all single-family homes with a mortgage in Phoenix have negative equity.
#12 Two years ago, the average U.S. homeowner that was being foreclosed upon had not made a mortgage payment in 11 months. Today, the average U.S. homeowner that is being foreclosed upon has not made a mortgage payment in 17 months.
#13 Sales of foreclosed homes now represent an all-time record 23.7% of the market.
#19 In 1996, 89 percent of Americans believed that it was better to own a home than to rent one. Today that number has fallen to 63 percent.
#20 According to Zillow, the United States has been in a “housing recession” for 57 straight months without an end in sight.
So should we be confident that the folks in charge are doing everything that they can to turn all of this around?
Sadly, the truth is that our “authorities” really do not know what they are doing. The following is what Fed Chairman Ben Bernanke had to say about the housing market back in 2006….
“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
Since that time U.S. housing prices have experienced their biggest decline ever.
At some point widespread inflation is going to reverse the trend we are experiencing right now, but that doesn’t mean that most American families will be able to afford to buy homes when that happens.
As I have written about previously, the middle class in America is shrinking. The number of Americans on food stamps has increased by 18 million over the past four years and today 47 million Americans (a new all-time record) are living in poverty.
Millions of our jobs are being shipped overseas, the cost of living keeps going up and an increasing percentage of American families are losing faith in the economy.
More Americans than ever are talking about “the coming economic collapse” as if it is a foregone conclusion. Our federal government is swamped with debt, our state and local governments are swamped with debt and our economic infrastructure is being ripped to shreds by globalization.
So sadly, no, there are not a whole lot of reasons to be optimistic at this point about a major economic turnaround.
The U.S. economy is going down the toilet and the coming collapse is going to be incredibly painful for all of us.
Hopefully when that collapse comes you will have somewhere warm and safe to call home. If not, hopefully someone will have compassion on you. In any event, we all need to buckle up because it is going to be a wild ride.
If you make your living by building or selling new homes in the United States, you might want to consider taking up a different career for a while. New homes sales in the United States hit yet another new all-time record low in the month of February, and there are a whole lot of reasons why new home sales are going to stay extremely low for an extended period of time. The massive wave of foreclosures that we have seen has produced a giant glut of unsold homes in the marketplace, mortgage lenders are making it really hard to get approved for home loans, unemployment is still rampant and the global economy looks like it may soon plunge into another major recession. None of those things is good news for the new home construction industry. The truth is that we were supposed to have seen new home sales already bounce back by now. If you look at the historical numbers, new home sales in the U.S. always increased significantly after the end of every recession since World War 2. But that did not happen this time. Instead, new home sales have just continued to decline. This is absolutely unprecedented, and economists are puzzled. So what is going to happen if the U.S. economy suffers another major downturn?
New home construction has always been one of the foundational pillars of the U.S. economy. When times were good new home construction would boom, and when times were bad new home construction would falter.
Well, unfortunately the industry is stuck in the midst of a multi-year decline right now. The reality is that you can stick a fork in the new home construction industry in the United States. It is toast. There is going to be no recovery for the foreseeable future.
Not that previously owned homes are doing that much better. According to the National Association of Realtors, sales of previously existing homes in the United States dropped 9.6 percent in February. But at least sales of previously owned homes are not at all-time record lows like new home sales are.
As you can see from the facts posted below, new home sales are absolutely abysmal right now, and there are a lot of indications that things may get even worse. The following are 18 reasons why you can stick a fork in the new home construction industry….
#2 Only 19,000 new homes were sold in the United States during the month of February. The previous record low for new home sales during the month of February was 27,000, which was set last year.
#3 The “months of supply” of new homes in the U.S. rose from 7.4 months in January to 8.9 months in February.
#4 The median price of a new home in the United States declined almost 14 percent to $202,100 in the month of February.
#5 The median price of a new home in the U.S. is now the lowest it has been since December 2003.
#6 As of the end of 2010, new home sales in the United States had declined for five straight years, and they are expected to be lower once again in 2011.
#7 Now home sales in the United States are now down 80% from the peak in July 2005.
#8 New home construction starts in the United States fell 22.5 percent during the month of February. This was the largest decline in 27 years.
#9 In February, the number of new building permits (a measure of future home building activity) declined to the lowest level in more than 50 years. In fact, new building permits were 20 percent lower during February 2011 than they were in February 2010.
#10 There is a major glut of foreclosed homes that still need to be sold off. David Crowe, the chief economist for the National Association of Home Builders, recently told CNN that the constant flow of new foreclosures being put on the market is a huge hindrance to a recovery for new home sales….
“One of the biggest detriments to building new homes is the flow of existing foreclosed homes.”
#11 The number of foreclosures just continues to increase. This means that those trying to sell new homes are going to continue to be competing against a giant mountain of foreclosed homes for the foreseeable future. An all-time record of 2.87 million U.S. households received a foreclosure filing in 2010, and that number is expected to be even higher in 2011.
#12 In fact, there are a whole lot of signs that there will be very high levels of foreclosures for years to come. For example, according to the Mortgage Bankers Association, at least 8 million Americans are at least one month behind on their mortgage payments at this point.
#13 A stunningly high number of Americans are “underwater” on their mortgages right now. This could lead to an increase in the number of “strategic defaults”. 31 percent of the homeowners that responded to a recent Rasmussen Reports survey indicated that they are “underwater” on their mortgages, and Deutsche Bank is projecting that 48 percent of all U.S. mortgages could have negative equity by the end of 2011.
#14 The truth is that the U.S. doesn’t need a whole lot of new housing at the moment. Right now, 11 percent of all homes in the United States are currently standing empty.
#15 Mortgage lending standards have become extremely tight. Back during the housing bubble, almost anyone that was breathing could get a zero-down mortgage. Today, mortgage lenders have made it extremely difficult to acquire a home loan, and it is quite typical these days for lenders to demand down payments of 20 percent or more. This is dramatically reducing the number of home buyers in the marketplace.
#16 American families cannot buy homes if they do not have good jobs. Unfortunately, it has become extremely difficult to find a job in the United States today. This is especially true if you are looking for a good job. It now takes the average unemployed worker in America about 33 weeks to find a job.
#17 There is not going to be a jobs recovery until the overall economy improves. Unfortunately, the price of oil continues to rise dramatically and economic disasters all over the planet threaten to plunge the global economy into another major recession.
#18 On top of everything else, perceptions regarding home ownership are shifting in the United States. In 1996, 89 percent of Americans believed that it was better to own a home than to rent one. Today that number has fallen to 63 percent.
We are officially in the middle of the worst housing collapse in U.S. history – and unfortunately it is going to get even worse. Already, U.S. housing prices have fallen further during this economic downturn (26 percent), then they did during the Great Depression (25.9 percent). Approximately 11 percent of all homes in the United States are currently standing empty. In fact, there are many new housing developments across the U.S. that resemble little more than ghost towns because foreclosures have wiped them out. Mortgage delinquencies and foreclosures reached new highs in 2010, and it is being projected that banks and financial institutions will repossess at least a million more U.S. homes during 2011. Meanwhile, unemployment is absolutely rampant and wage levels are going down at a time when mortgage lending standards have been significantly tightened. That means that there are very few qualified buyers running around out there and that is going to continue to be the case for quite some time to come. When you add all of those factors up, it leads to one inescapable conclusion. The “housing Armageddon” that we have been experiencing since 2007 is going to get even worse in 2011.
Right now there is a gigantic mountain of unsold homes in the United States. It is estimated that banks and financial institutions will repossess at least a million more homes this year and this will make the supply of unsold properties even worse. At the same time, millions of American families have been scared out of the market by this recent crisis and millions of others cannot qualify for a home loan any longer. That means that the demand for unsold homes is at extremely low levels.
So what happens when supply is really high and demand is really low?
That’s right – prices go down.
Hopefully housing prices don’t have too much farther to go down. Ben Bernanke and the boys over at the Federal Reserve are doing their best to flood the system with new dollars in order to prop up asset values, but you just can’t create qualified home buyers out of thin air.
Many analysts are projecting that U.S. housing prices will decline another ten or twenty percent before they hit bottom. In fact, quite a few economists believe that the total price decline from the peak of the market in 2006 will end up being somewhere in the neighborhood of 40 percent.
But whether prices go down any further or not, the truth is that the housing crash that we have already witnessed is absolutely unprecedented.
The following are 12 facts which show that we are in the midst of the worst housing collapse in U.S. history….
#3 According to the S&P/Case-Shiller index, U.S. home prices fell 1.3 percent in October and another 1 percent in November. In fact, November represented the fourth monthly decline in a row for U.S. housing prices. Many economists are now openly using the term “double-dip” to describe what is happening to the housing market.
#5 According to RealtyTrac, a total of 3 million homes were repossessed by mortgage lenders between January 2007 and August 2010. This represents a huge amount of additional inventory that somehow must be sold.
#672 percent of the major metropolitan areas in the United States had more foreclosures in 2010 than they did in 2009.
#8 It is estimated that there are about 5 million homeowners in the United States that are at least two months behind on their mortgages, and it is being projected that over a million American families will be booted out of their homes this year alone.
#9 Deutsche Bank is projecting that 48 percent of all U.S. mortgages could have negative equity by the end of 2011.
#10 Some formerly great industrial cities are rapidly turning into ghost towns. For example, in Dayton, Ohio today 18.9 percent of all houses are now standing empty. 21.5 percent of all houses in New Orleans, Louisiana are standing vacant.
#11 According to Zillow, U.S. home prices have already fallen further during this economic downturn (26 percent) than they did during the Great Depression (25.9 percent).
#12 There are very few signs that the employment situation in the United States is going to improve any time soon. 4.2 million Americans have been unemployed for one year or longer at this point. While there has been some nominal improvement in the government unemployment numbers recently, other organizations are reporting that things are getting even worse. According to Gallup, the unemployment rate actually rose to 9.6% at the end of December. This was a significant increase from 9.3% in mid-December and 8.8% at the end of November.
But even many Americans that do have jobs are finding out that it has become very, very hard to qualify for a home loan.
In an attempt to avoid the mistakes of the past, banks and financial institutions have become very stingy with home loans. While it was certainly wise for them to make some changes, the truth is that perhaps the pendulum has swung too far at this point. The U.S. housing industry will never fully recover if they can’t get their customers approved for mortgages.
Congress is talking about passing even more laws that will make it even more difficult to get home loans. Even though they give speeches about how they want to help the U.S. housing industry, the truth is that Republicans and Democrats are both backing proposals that would make home mortgages much more expensive and much more difficult to obtain as a Bloomberg article recently explained….
Government officials and lawmakers want to make the market less vulnerable to another credit crisis, and all the options lead the same general direction: Borrowers will need larger down payments than in the bubble years, have higher credit scores, and pay extra fees to cover risks and premiums for federal guarantees on government-backed mortgage bonds.
While all that may sound reasonable, the truth is that the U.S. middle class has become so cash poor that the vast majority of them cannot afford homes without the kind of mortgages that were available in the past.
Not that we should go back and repeat the mistakes of the past 20 years. It is just that nobody should expect the U.S. housing market to “bounce back” in an environment that has fundamentally changed.
The housing market is not like other financial markets. It is difficult to artificially pump it up with funny money. If the U.S. housing market is going to rebound, it is going to take lots of average American families getting qualified for loans and going out and buying houses. But they can’t do this if they do not have good jobs. Today, only 47 percent of working-age Americans have a full-time job at this point. Without a jobs recovery there never will be a housing recovery.
In fact, there are all kinds of warning signs that seem to indicate that the U.S. economy could get even worse in 2011. Many economists are now openly using the word “stagflation” for the first time since the 1970s. Back in the 70s we had both high unemployment and high inflation at the same time.
Well, we have already had very high unemployment, and thanks to the relentless money printing of the Federal Reserve, it looks like we are going to have high inflation as well.
Middle class American families are going to be spending even more of their resources just trying to survive, and this is going to make it more difficult for them to purchase homes.
In fact, in recent years average Americans have been getting significantly poorer. Over the past two years, U.S. consumers have withdrawn $311 billion more from savings and investment accounts than they have put into them. That is very troubling news.
Now the price of food is soaring and the price of oil is about to cross $100 a barrel again. So what is going to happen if we have another major financial crisis and we witness another huge spike in the unemployment rate?
The Federal Reserve is trying to smooth all of our problems over with a flood of paper money, but it isn’t going to work. Yes, increasing the money supply will produce some false highs on the stock market and some false economic growth statistics for a while, but the tremendous damage that will be done to the economy is just not worth it.
In any event, let us all hope that we see some really great real estate deals over the next couple of years, because in the times ahead land will be something very good to own. In fact, down the road it will be much better to own land than to have your money sitting in the bank where it will continuously decline in value.
Use your paper money wisely. It will never have more value than it does today.
So what do all of you think? Is the “housing Armageddon” almost over, or do housing prices still need to decline a bit more? Feel free to leave a comment with your opinion below….
2010 was quite a year, wasn’t it? 2010 will be remembered for a lot of things, but for those living in the United States, one of the main things that last year will be remembered for is economic decline. The number of foreclosure filings set a new record, the number of home repossessions set a new record, the number of bankruptcies went up again, the number of Americans that became so discouraged that they simply quit looking for work reached a new all-time high and the number of Americans on food stamps kept setting a brand new record every single month. Meanwhile, U.S. government debt reached record highs, state government debt reached record highs and local government debt reached record highs. What a mess! In fact, even many of the “good” economic records that were set during 2010 were indications of underlying economic weakness. For example, the price of gold set an all-time record during 2010, but one of the primary reasons for the increase in the price of gold was that the U.S. dollar was rapidly losing value. Most Americans had been hoping that 2010 would be the beginning of better times, but unfortunately economic conditions just kept getting worse.
So will things improve in 2011? That would be nice, but at this point there are not a whole lot of reasons to be optimistic about the economy. The truth is that we are trapped in a period of long-term economic decline and we are now paying the price for decades of horrible decisions.
Amazingly, many of our politicians and many in the mainstream media have declared that “the recession is over” and that the U.S. economy is steadily improving now.
Well, if anyone tries to tell you that the economy got better in 2010, just show them the statistics below. That should shut them up for a while.
The following are 20 new economic records that were set during 2010….
#3 The price of gold moved above $1400 an ounce for the first time ever during 2010.
#4 According to the American Bankruptcy Institute, approximately 1.53 million consumer bankruptcy petitions were filed in 2010, which was up 9 percent from 1.41 million in 2009. This was the highest number of personal bankruptcies we have seen since the U.S. Congress substantially tightened U.S. bankruptcy law several years ago.
#6 Back in 1970, 25 percent of all jobs in the United States were manufacturing jobs. Today, only 9 percent of the jobs in the United States are manufacturing jobs, which is believed to be a new record low.
#7 The number of Americans working part-time jobs “for economic reasons” was the highest it has been in at least five decades during 2010.
#8 The number of American workers that are so discouraged that they have given up searching for work reached an all-time high near the end of 2010.
#9 Government spending continues to set new all-time records. In fact, at the moment the U.S. government is spending approximately 6.85 million dollars every single minute.
#10 The number of Americans on food stamps surpassed 43 million by the end of 2010. This was a new all-time record, and government officials fully expect the number of Americans enrolled in the program to continue to increase throughout 2011.
#12 The U.S. Census Bureau originally announced that 43.6 million Americans are now living in poverty and according to them that was the highest number of Americans living in poverty that they had ever recorded in 51 years of record-keeping. But now the Census Bureau says that they miscalculated and that the real number of poor Americans is actually 47.8 million.
#13 According to the FDIC, 157 banks failed during 2010. That was the highest number of bank failures that the United States has experienced in any single year during the past decade.
#14 The Federal Reserve brought in a record $80.9 billion in profits during 2010. They returned $78.4 billion of that to the U.S. Treasury, but the real story is that thanks to the Federal Reserve’s continual debasement of our currency, the U.S. dollar was worth less in 2010 than it ever had been before.
#15 It is projected that the major financial firms on Wall Street will pay out an all-time record of $144 billion in compensation for 2010.
#18 According to Zillow, U.S. housing prices have now declined a whopping 26 percent since their peak in June 2006. Amazingly, this is even farther than house prices fell during the Great Depression. From 1928 to 1933, U.S. housing prices only fell 25.9 percent.
#19 State and local government debt reached at an all-time record of 22 percent of U.S. GDP during 2010.
#20 The U.S. national debt has surpassed the 14 trillion dollar mark for the first time ever and it is being projected that it will soar well past 15 trillion during 2011.
There are some people that have a hard time really grasping what statistics actually mean. For people like that, often pictures and charts are much more effective. Well, that is one reason I like to include pictures and graphs in many of my articles, and below I have posted my favorite chart from this past year. It shows the growth of the U.S. national debt from 1940 until today. I honestly don’t know how anyone can look at this chart and still be convinced that our nation is not headed for a complete financial meltdown….
How soon will it be before people finally start using the term “depression” to describe what has happened to the U.S. housing market? It has been four and a half years since housing prices began to decline, and they are still falling. In fact, U.S. housing prices have now fallen further during this economic downturn than they did during the Great Depression of the 1930s. Just think about that. We are now in unprecedented territory, and most analysts believe that U.S. house prices will continue to decline in 2011. Mortgage rates have been moving up, mortgage delinquencies are on the rise again, U.S. mortgage lenders have really tightened lending standards and “foreclosuregate” continues to plague the entire mortgage industry. It would be really nice for the overall economy if house prices did go up in 2011, but right now it looks like that simply is not going to happen.
For many U.S. homeowners, all of this is absolutely sickening. Millions of homeowners are stuck in houses that they desperately want to sell, but they don’t want to take huge losses on their investments either.
Millions of other U.S. homeowners are stuck paying on mortgages that are for far, far more than their homes are now worth.
Could you imagine paying $400,000 for a home that is now only worth $200,000?
Unfortunately, U.S. house prices just continue to decline.
According to CoreLogic, U.S. house prices have fallen for four months in a row, and in November (the last month CoreLogic has released numbers for) housing prices actually fell 5.1% on a year-over-year basis.
Sadly, house prices have dropped so much at this point that we have entered truly historic territory.
According to Zillow, U.S. housing prices have declined a whopping 26 percent since their peak in June 2006. Amazingly, this is even farther than house prices fell during the Great Depression. From 1928 to 1933, U.S. housing prices only fell 25.9 percent. A brand new record has now been established.
So have we hit bottom yet?
Will house prices recover in 2011?
Unfortunately, every indication seems to point to even more declines in U.S. home prices. The following are five key factors that will continue to drive house prices down….
#1 Mortgage Rates Are Going Up
Over the past couple of months, mortgage rates in the United States have been moving up fairly steadily. That is going to make mortgages even more expensive for potential home buyers.
#2 Mortgage Delinquencies Are Increasing Again
As we approached the end of 2010, the number of mortgages in the U.S. that are “seriously delinquent” started to creep up once again. That means that we are likely to see another bump in foreclosures at some point in 2011. There are already way, way too many homes on the market, so more foreclosures will only add even more supply to a market that already has way too many homes for sale.
#3 Mortgage Lenders Have Really Tightened Standards
Most large financial institutions have responded to the mistakes of the past decade by really, really tightening mortgage standards. It is now much harder to get a home loan in the United States. But if less people can qualify for a mortgage that means that less people will be out there buying homes.
#4 The Entire Mortgage Industry Continues To Be Mired In Legal Problems
Foreclosuregate is a huge story that simply refuses to go away. For example, just the other day the highest court in Massachusetts voided the seizure of two homes after the big banks involved failed to prove that they actually held the mortgages at the time they foreclosed. This case made headlines all over the nation, and precedents such as this will encourage even more homeowners to challenge their foreclosures in court. This is going to be really bad for the big mortgage lenders and it is going to really slow down the pace of mortgage lending.
#5 The Underlying Economy Continues To Be Very Poor
The American people cannot afford to buy good homes if they do not have good jobs. But today there are seven million fewer middle class jobs than there were about ten years ago. As 2007 began, there were just over 1 million Americans that had been unemployed for half a year or longer. Today, there are over 6 million Americans that have been unemployed for half a year or longer. Until there is a “jobs recovery” there simply is not going to be a “housing recovery”.
There are very few top economists that are actually optimistic about the U.S. housing market in 2011. In fact, there seems to be an emerging consensus among analysts that house prices in America are going to decline quite substantially this year….
*Mark Zandi of Moody’s Analytics says that U.S. house prices are “double dipping” and that we will likely see another 5 percent decline in housing prices during 2011.
*Zillow chief economist Stan Humphries expects home prices to continue to fall until at least mid-2011 and he is convinced that more hard times for the U.S. real estate market are still to come….
“Zillow believes that we’ll see bottom in national home values in Q2 or Q3 of 2011 (more likely the latter), that home values will fall another 5-7% nationally (in the Zillow Home Value Index) between now and then, and that we’ll experience a very long, protracted bottom before home value appreciation returns to historically normal rates.“
So it looks like the U.S. housing crash is going to continue for a while.
For those that make a living by building or selling homes, this has got to be very depressing news.
But for those that are seeking to buy a house or that are seeking to buy some land, there could potentially be some very good deals out there over the next year or two.
So what do you think is going to happen to house prices in 2011? Please feel free to leave a comment with your analysis….
Over the past several years, the Federal Reserve and the U.S. government have tried everything that they can think of to stimulate this dead horse of an economy but nothing has worked. The Fed has slashed the federal funds rate to record low levels, mortgage rates have been pushed to all-time lows and the U.S. government has spent hundreds of billions of dollars in an effort to get the economy going. But despite all these of these extraordinary efforts, the U.S. economy continues to just lie there like a dead corpse. Never before have the Federal Reserve and the U.S. government done more to try to stimulate the economy and never before have their efforts produced such poor results. Home sales continue to set new record lows, more than 14 million Americans continue to be unemployed, foreclosures continue to soar, personal bankruptcies continue to soar and an increasing number of Americans continue to sign up for food stamps and other anti-poverty programs. All of the things that once worked so well to stimulate the U.S. economy seem to be doing next to nothing here in 2010, and the American people are becoming increasingly frustrated by economic problems that just keep getting worse.
Once upon a time, a big drop in mortgage rates would get Americans running out to buy homes in big numbers. But that is just not happening this time.
As you can see from the chart below, mortgage rates are at ridiculously low levels right now. The average rate for a 30-year fixed mortgage was 4.32 percent this week. That is the lowest it has ever been since Freddie Mac began tracking mortgage rates back in 1971.
These low rates have motivated millions of Americans to refinance their existing home loans, but sales of new and existing loans remain at record low levels. In fact, the number of Americans refinancing their homes is now at its highest level since May 2009, but the U.S. housing crisis just continues to get worse. Despite these record low mortgage rates, existing home sales declined 27 percent during the month of July and new homes sales dropped to the lowest level ever recorded in July.
So if Americans are not buying houses when mortgage rates are this ridiculously low, what in the world is going to cause a turnaround in the U.S. housing market?
The Federal Reserve has sure been trying to do what it can to resuscitate the U.S. economy. For decades, a drop in the federal funds rate could always be counted on to give the economy a jump start. But the Fed has dropped the federal funds rate almost to zero for quite some time now and it has done next to nothing to get things moving again.
So is the Federal Reserve out of ammunition? Well, let’s just say that they have used up all of their “best” ammunition. The Fed has been telling us since March 2009 that the federal funds rate will remain between zero and 25 basis points “for an extended period” of time, but the U.S. economy doesn’t seem to care.
Of course Ben Bernanke insists that the Fed is not out of ammunition and that everything is going to be okay, but at this point there is just not a lot left of Bernanke’s fading credibility.
The U.S. government tried to do their best to help the economy by passing stimulus bill after stimulus bill, but it just has not helped much. The government spent hundreds and hundreds of billions of dollars on some of the most wasteful things imaginable, and while the massive injection of cash may have helped temporarily stabilize the economy, it has not brought about the “recovery” that our politicians were hoping for.
Now the pendulum has swung the other way in Congress and there is very little appetite for more economic stimulus spending. But if the economy was not recovering when the government was throwing giant piles of money at it, what is going to happen as the economic stimulus totally dries up?
Already there are signs that the U.S. economy is in big, big trouble. General Motors announced this week that U.S. sales in August fell 24.9% to 185,176 vehicles from 246,479 vehicles in August 2009.
But don’t let up and down sales reports fool you. One month they may be down and the next month they may be up a bit. The important thing is to keep your eyes on the truly disturbing long-term trends.
Thanks to the nightmarish U.S. trade deficit, far more wealth leaves the United States each month than enters it. That means that the United States is getting significantly poorer each month. As I noted yesterday, the United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States. That is not sustainable and China is going to continue to bleed us dry for as long as we allow it to continue.
In addition, the United States continues to go into more debt every single month. Each month the U.S. national debt gets bigger, state governments go into more debt and local governments go into more debt.
So what we have is a nation that is getting poorer and that is going into more debt month after month after month.
We are on the road to economic hell, and the American people don’t even realize it because things are still relatively good – at least for now.
But as the economy continues to unravel, is there anything that the folks over at the Federal Reserve can do?
Well, yes there is. It is called “quantitative easing” and the Fed has already indicated that they are going to start doing it again. Essentially, quantitative easing is when the Federal Reserve creates money out of thin air and starts buying things like U.S. Treasuries, mortgage-backed securities and corporate debt.
But isn’t there a good chance that this could cause inflation?
But “Helicopter Ben Bernanke” seems determined to live up to his nickname. Anyone who thinks that Bernanke is going to just sit there and do nothing is delusional. At some point he is going to fire up his helicopter and start showering the economy with money.
And the reality is that feeding massive quantities into the economy will create more economic activity. However, it will also come with a price.
Someday soon, you may wake up to newspaper headlines that declare that our economy is growing at a 10% annual rate, but what they won’t tell you is that the real rate of inflation will be running about 15 or 20 percent at the same time. In fact, the U.S. government will probably try to convince us that the “official” rate of inflation is only about 5 or 6 percent.
The cold, hard truth is that the U.S. economy is going to continue to get worse. Whether it will be a deflationary decline or an inflationary decline depends on the boys over at the Fed. But it is going to be a decline.
Meanwhile, millions of American families are hanging on by their fingernails and are hoping in vain for the great economic recovery which is never going to come.
On Tuesday the National Association of Realtors announced that existing home sales in the United States dropped a whopping 27.2% in the month of July. The consensus among analysts was that we would see a drop of around 13 percent, so when the 27 percent figure was announced it sent a shock through world financial markets. To say that the real estate industry is alarmed by these numbers would be a tremendous understatement. What we are seeing unfold is essentially “Armageddon” for those involved in the housing and real estate industries. The real estate market is grinding to a standstill and a shockingly low number of people are actually in the market to buy a home right now. In the months ahead home sales may pick up a little bit, but only if housing prices start to fall. Why? Because right now there are tons of houses on the market and there are very few qualified buyers available to purchase them and potential buyers are starting to realize this. Buyers are beginning to understand that they have all the leverage now and they are waiting for prices to fall.
Anyone who has taken Economics 101 in college knows that when supply is high and demand is low prices will fall, and that is exactly the situation we have in the U.S. housing market right now.
At the moment, most home sellers in the United States are very hesitant to lower the prices on their homes too much. Many have no intention of selling their homes below what they originally paid for them, and many others truly believe that the housing market will eventually rebound.
But the truth is that housing prices are simply not going to rebound to 2006 levels. If anything, they are going to continue to fall.
The following are the three basic points that every American needs to understand about the U.S. housing market right now….
1) There Is A Gigantic Mountain Of Unsold Homes On The Market
There are a staggering number of unsold homes on the market right now. As you can see from the chart from the Calculated Risk blog below, there is now over a year’s worth of unsold homes flooding the marketplace….
So who is going to buy all of those unsold homes with so few qualified purchasers in the marketplace?
That is a very good question.
Unfortunately, all the signs indicate that the glut of unsold homes is going to get even worse.
As of this March, U.S. banks had an inventory of 1.1 million foreclosed homes, which was a new all-time record and which was up 20 percent from one year ago.
And the tsunami of foreclosures and repossessions just keeps growing….
*U.S. Banks repossessed 269,962 U.S. homes during the second quarter of 2010, which was a new all-time record.
The supply of unsold homes is already incredibly massive and it is growing at a staggering rate.
With such a flood of homes on the market, why in the world would anyone in their right mind pay a premium price for a home in 2010?
2) There Are Not Nearly Enough Qualified Buyers Seeking To Buy Homes
The banks and lending institutions that survived the subprime mortgage crisis of 2007 and 2008 learned some very valuable lessons. The days when even the family dog could get approved for a home loan are long gone. Now the pendulum has swung to the other end of the spectrum. Fearful of making more bad loans, banks and lending institutions have really, really tightened up lending standards. So a lot fewer people are getting approved for home loans these days.
That makes a lot of business sense for banks and lending institutions, but it also means that there are a lot fewer qualified buyers out there looking for homes.
Not only that, but millions of Americans who could potentially buy homes are waiting for the market to go down even further.
When you add that all together, you get the kind of home sales numbers discussed at the beginning of the article.
The Mortgage Bankers Association recently announced that demand for loans to purchase U.S. homes has sunk to a 13-year low. Unless the number of Americans getting approved for home loans starts increasing, you simply are not going to see housing numbers recover much.
And the truth is that Americans are not even doing much browsing for homes right now. Even Internet searches for homes are way down. Internet searches on real estate websites are down about 20 percent compared to this same time period in 2009.
So with a massive flood of houses on the market and with very few qualified buyers to purchase them, how in the world are housing prices supposed to go up?
3) The Housing Industry Will Never Fully Recover Without A Jobs Recovery First
In order to get qualified for home loans, Americans have to have good jobs first. But in this economy that is a huge problem.
Robert Dye, a senior economist with PNC Financial Services Group, recently told USA Today what he believes the bottom line problem of this housing crisis is….
“Jobs, jobs, jobs”
Today, 14 million Americans are unemployed and millions more are underemployed. Unfortunately, there are not nearly enough good jobs for all of them.
Today it takes the average unemployed American over 8 months to find a job. The number of Americans receiving long-term unemployment benefits has risen a staggering 60 percent in the past year alone.
Things have gotten so bad that according to one recent survey 28% of all U.S. households have at least one person that is searching for a full-time job.
To get an understanding of how horrific the unemployment situation has become in the United States, take 38 seconds to watch the incredible video posted below….
The truth is that without jobs, Americans simply cannot buy homes.
So is there any hope that we will see a robust jobs recovery any time soon?
Fannie Mae and Freddie Mac have become gigantic financial black holes that the U.S. government endlessly pours massive quantities of money into. Unfortunately, if the U.S. government did allow Fannie Mae and Freddie Mac to totally implode, both the mortgage industry and the housing industry in the United States would completely collapse. So essentially the U.S. government finds itself between a rock and a hard place. Prior to the financial crisis of the last few years, Fannie Mae and Freddie Mac were profit-seeking private corporations that also had a government-chartered mission of expanding home ownership in America. But now that they have been officially taken over by the U.S. government, they have become gigantic bottomless money pits. It is hard to even describe just how much of a mess Fannie and Freddie are in. However, the unprecedented intervention by Fannie Mae and Freddie Mac in the mortgage market over the past couple of years has been about the only thing that has kept it from plunging into absolute chaos. So what does the future hold for Fannie Mae and for Freddie Mac? Well, according to one estimate, it could take another 5 trillion dollars to “fix” Fannie Mae And Freddie Mac.
An exit strategy could involve adding Fannie and Freddie’s roughly $5 trillion in obligations, in effect, to a federal balance sheet that already includes $13.3 trillion in federal government debts. The GSE obligations would be a different animal, because those liabilities would need to be covered by taxpayers only if things went bad in the housing market.
It is hard to even put into words how much money that is. If you were alive when Jesus was born, and you spent one million dollars every single day since then, you still would not have spent one trillion dollars by now.
But Fannie Mae and Freddie Mac are not a one trillion dollar problem.
They are a five trillion dollar problem.
And if the housing market gets even worse (which it will), that figure could rise substantially.
Of course the U.S. government should have never gotten into the mortgage business in the first place, but these days the U.S. government is intervening in virtually every industry.
And don’t expect U.S. government support for the mortgage industry to stop any time soon. In fact, U.S. Treasury Secretary Timothy Geithner says that the U.S. government plans to continue to play a prominent role in back-stopping mortgages in order to keep the U.S. economy stabilized.
But if the only thing keeping the U.S. housing industry from plunging into the abyss is unprecedented intervention by the U.S. government, what does that say about the overall health of the U.S. economy?
Mortgage defaults and foreclosures continue to set new all-time records even with all of this government intervention. In fact, major U.S. banks wrote off about $8 billion on mortgages during the first 3 months of 2010, and if this pace continues it will even exceed 2009’s staggering full-year total of $31 billion.
As of March 31 this year, 6.3 percent of mortgages held by Fannie and Freddie are either seriously delinquent or in foreclosure. Although that’s down slightly from the figure three months earlier, it represents a big one-year rise (from 3.9 percent in early 2009).
An increase in delinquencies of over 50 percent in just one year?
That is not a promising trend.
If the U.S. housing market takes another big dive in the next few years, and things certainly look very ominous at the moment, what in the world is that going to do to Fannie Mae and Freddie Mac?
So what is the solution?
Well, on Tuesday the Obama administration invited prominent banking executives to offer their thoughts on the mortgage market.
So what was the consensus?
It was something along the lines of this: “Please, oh please, oh please continue propping up the 11 trillion dollar mortgage market.”
So much for capitalism, eh?
When even the banksters are begging for massive ongoing government intervention you know that the game has changed.
Adam Smith must be rolling over in his grave.
But this is where we are at.
We are on the verge of a horrific economic collapse, and it is only enormous intervention by the U.S. government that is holding things together.
Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration backed approximately 90 percent of all home loans made during the first half of 2010.
So where would we be without the government?
Of course we could let the whole thing collapse and allow housing prices to eventually settle at a level where people could actually afford them, but what fun would that be?
No, for now the U.S. government will continue to endlessly spend billions of dollars to prop up a system that is artificially inflated and that is destined to collapse one way or another.
The truth is that the American middle class is slowly being wiped out and they just can’t afford to pay $300,000, $400,000 or $500,000 for their houses anymore.
Without good jobs, the American people are not going to be able to afford hefty mortgages. Unfortunately, millions upon millions of middle class jobs are being offshored and outsourced every single year and they are not coming back.
There simply will never be a recovery in the housing market without jobs. But in the new global economy, American workers have been put in direct competition with the cheapest labor in the world. It doesn’t take a genius to figure out that jobs are going to be taken away from American workers and given to people who are willing to work for less than ten percent as much.
So, no, the housing market is never going to fully recover. Things got dramatically out of balance over the past couple of decades, and the housing market is going to try to restore that balance regardless of what the U.S. government does.
The U.S. government can continue to throw billions (or even trillions) of dollars at the problem, but in the end the underlying economic fundamentals are simply not going to be denied.