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5 Steps Necessary for a Housing Cure

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My street has 17 homes on it. That means that if my neighbors and I are typical of that great statistical average known as "the rest of the country," nearly three of the households owe more for their homes than they're worth.

I've sussed out five reasons why the housing sector is in such a pickle, and by examining them we can see more clearly what needs to be done to make it so that the sun again shines on our nation's housing sector. And maybe we'll get a feel for how long that will take.

1. The teetering and the fallen. It's easy to become consumed with numbers, but the key is that a rapidly growing swath of Americans either couldn't unload their homes without writing a big check at closing or have already received vamoose notices from their lenders. According to numbers tossed out recently by The Wall Street Journal, of the 75.5 million U.S. households that own their own homes, one in six owes more than the hacienda is worth.

That's a sobering 16%, for those who'd rather deal in percentages. It compares to 4% just two years ago and 6% last year. And among those who've owned their homes for fewer than five years, the underwater share is 29%. Beyond that, since the numbers work out to about 12 million homes that are affected, if you assume that the median value of the homes is about $200,000, the total liability for all the mortgages is about $2.4 trillion, should all the owners' keys be mailed back to the lenders. So maybe the $700 billion bailout number could be just a starter figure.

And then, as we learned Tuesday from RealtyTrac Inc., which keeps tabs on foreclosures, 766,000 homeowners received at least one foreclosure-related notice in the September-ended quarter. That's up fully 71% from the year-ago quarter. The firm is forecasting that more than a million bank-owned homes will have been piled up on the market by year's end. Therein, of course, lies the problem: Until the foreclosure metrics slow meaningfully, home prices won't -- can't -- stop sliding and that 16% figure will only expand.

2. Nailed by the builders. This year, the likes of Lennar (NYSE: LEN  ) , Pulte (NYSE: PHM  ) , Ryland (NYSE: RYL  ) , and Centex, along with the smaller regional builders, will sell more than 450,000 homes. That's a paltry number when you compare it to the 1.2 million new units sold three years ago. Nevertheless, it would be wonderful if the builders could all take a year off -- which, of course, they can't -- and allow that massive inventory of listed new and pre-owned homes to be slimmed down.

3. The waiting-in-the-wings inventory. I've maintained for a while that there's actually a huge inventory of homes that folks would love to list and sell, but that are off the market because their owners realize the folly of even putting up "for sale" signs. Should the market begin to strengthen nationwide, those "waiting-in-the-wings" homes will begin to be listed, thereby slowing the recovery.

4. Mortgage Madness. It's still possible for those with superb credit to be granted mortgages. But the process is far more difficult -- if saner -- than was the case in days of yore, like three years ago.

But with Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) having become wards of the federal government … Washington Mutual being bailed out by JPMorgan (NYSE: JPM  ) … and the now-infamous Countrywide going to Bank of America (NYSE: BAC  ) , only time will tell how long it'll take to create a sensible and streamlined mortgage lending process in the U.S.

5. Consumers shed their confidence. On Tuesday, The Conference Board told us that its consumer confidence index fell to 38 this month, the lowest level ever. The new number compares to a revised 61.4 for September and was well short of the 52 that economists had expected. Those who lack confidence in the economy or in their own job situations simply don't buy big-ticket items, like houses, cars, or even washing machines.

So there you have it: five situations that have to be cured, at least to some degree, before housing will even begin to stabilize. All this will, of course, occur over time. But at this point, "over time" likely means years, rather than months. On that basis, the homebuilders aren't generally good targets for Foolish investment funds.

Related Foolishness:

Fool contributor David Lee Smith does sport a mortgage, but doesn't own shares in any of the companies mentioned. He does welcome your questions or comments. Bank of America and JPMorgan are Motley Fool Income Investor picks. Try any of our Foolish newsletters today, free for 30 days The Fool has a disclosure policy.  

Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2008, at 8:31 PM, jsteve13 wrote:

    It's news like this that makes me think we have a long way to go before the economy as a whole gets back on track. It's pretty hard for the average person to spend freely while their house is declining in value. As a small business owner I've had to work harder and smarter to grow my business in these rough times. I got lucky and came across a website with an amazing tool that has helped me increase my bottom line. It's Enjoy!

  • Report this Comment On October 31, 2008, at 1:10 PM, megalon81 wrote:

    I am extremely naive, so my comment may not be worth much, but if I imagine myself as a person who owes more than my house is worth, I'm not sure I'd react with extreme pessimism. First, I would like to think I would buy a home I knew I could afford-- not one that I hoped I'd be able to afford after my next raise or whatever. Then, I think I would buy a home I wanted to keep, and was pretty sure I could keep (i.e., I wouldn't be transferred in the near term, etc-- or if I would be transferred, I'd get a really good assistance package). Then I would be paying monthly mortgage checks and thinking, "Daggone it! My house is now worth less than what I'm paying for it! Oh, well, maybe it will be worth more in five years or so. Then I'll have some home equity to play with. In the mean time, can I put in a bigger garden?"

    Of course, I recognize that lots of people *have* to move, or have bought a house and their financial condition has changed for the worse, or simply made the mistake of buying more than they can really afford. These folks really have problems-- and those problems cause real problems in the economy as a whole. But are all 16% of the folks who owe more than their house is worth in this category?

  • Report this Comment On November 18, 2008, at 2:37 AM, justmytake wrote:


    Problem #1 – The banks are not equipped to effectively market and sell the tidal wave of foreclosed homes that are coming back to them. Their solution thus far, has been to continually and rapidly discount the surging inventory of homes that they are acquiring. This has served to severely undermine the average Americans concept of and expectations for homeownership. New home builders have been prolonging the agony by continuing to build new homes – albeit at a rate of approximately one third of the peak production.

    Problem #2 – Consumers have dramatically curtailed their spending because: 1) they have lost their job or 2) they are afraid they will lose their job or 3) they are afraid they will incur a pay cut. Of course, the more everyone retreats from spending, the more these become self fulfilling prophecies.

    Problem #3 – The federal government’s effort thus far to restore consumer confidence and stabilize the economy has not been perceived as effective – much too nebulous to inspire hope.

    SOLUTION to Problem #1 – In the hardest hit areas of the country, there is a huge chasm between the list price for a bank owned home and a comparably sized and equipped new home. In many cases, banks are pricing foreclosed properties at below replacement cost. If a new home builder tries to compete with the banks, it usually means more losses for both. To solve this problem, the federal government needs to offer low cost loans on a limited basis to new home builders who are willing to establish a used home resale division and purchase the bank’s distressed properties for refurbishment. The builders have the resources in place to quickly return these neglected properties to their former grandeur. Since most of the foreclosed properties are in or near areas where builders still have models and new homes for sale, the marketing of these restored homes could be handled by the builder’s existing staff. Because these refurbished homes could be sold for a profit at a price that would be lower than a comparable new home, but higher than a stripped out and neglected bank owned home, this would quickly put a bottom in for the housing market. Builders could continue profitable operations without building more new homes. Houses that have become eyesores would disappear.

    SOLUTION to Problems #2 and #3 - The federal government needs to offer the American home owning public a one time opportunity to withdraw funds from their 401K’s/IRA’s/SEP IRA’s, etc. equivalent to X number of house payments (say six, for example), for the express purpose of applying these funds to their mortgage balance by moving the money to an escrow account at the applicable mortgage companies. These funds should be transferred without penalties and ideally without taxes. To stimulate new sales, this offer should be extended to those folks who purchase a home during a set period of time. Although this move would cost the government some future revenues, it would stimulate a lot of pent up consumer demand ( a consumer who skips six months of house payments will have plenty of discretionary money) and wouldn’t cost any TARP funds. The banks would love the security of knowing they already have a customer’s next six months payments on hand. Although most people would love to take money out of the stock market right now, paradoxically, this would be a signal to the savvy investor that a stock market bottom was near.

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