Foreclosures are down year-over-year but spiked sharply in May — up 9 percent. Both home sales and prices have recovered a bit recently, both up about 10 percent year-over-year. What seems to be happening is that a great number of foreclosures that were delayed in the past year are now getting under way as lenders begin to figure out how to prove that they own mortgages in default, having fecklessly failed to do so previously.
As usual, politics is making things worse, extending the problem rather than mitigating it. Nevada’s anti-foreclosure law, for instance, which increases documentation requirements, seems to be effective mainly in lengthening the foreclosure process, rather than in keeping people in their homes. (Though there is no excusing the mortgage industry’s shockingly shoddy documentation process.)
More houses going into foreclosure will put downward pressure on prices, because banks don’t like to be homeowners, and consequently dump properties ASAP. Bank-owned homes sell for a third less than other houses.
The underlying problem, as ever, is negative equity — which is increasing, in spite of all of the political attention focused on the problem. This has had some perverse consequences. A great deal of those recent gains in house prices have occurred at the bottom end of the market, where there is the highest level of negative equity. Simply put, people with significant negative equity can’t really sell their houses, so the number of low-end houses on the market has decreased, driving up prices for the remaining inventory. But negative equity also correlates with mortgage default. So a significant rise in housing prices could draw a lot of new product onto the market, possibly reversing recent housing gains, while a significant economic downturn — say the result of a worldwide financial crisis resulting from the collapse of European financial institutions — could send a lot of borrowers into default and houses into foreclosure. And if current free-money mortgage-interest rates should start going up, sales and prices are sure to suffer. Short version: We’re still playing real-estate roulette.
Negative equity has some other less obvious economic consequences, too, such as inhibiting labor mobility. If you are anchored in California because you cannot afford to take a $30,000 hit selling your house, it is more difficult to take that job in Texas.
The Obama administration’s response to the housing meltdown is widely held to have been a comprehensive failure (when you’ve lost Businessweek . . .), but then there was no ingenious idea from Washington that was ever going to have changed the fundamental problem: Lots of people bought houses they couldn’t afford, and lots of people irresponsibly lent them money to do so, in part as the result of a wildly popular bipartisan consensus that government should encourage people to buy houses. Remember that the next time some guy seeking elected office tells you he is going to fix the economy by legislating away economic facts.