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Housing Fundamentals

With 9.5 percent of newer houses vacant and prices at 2003 levels, bank bailouts alone won’t solve the housing crisis, notes Andrew Jakabovics.

A vacant home in Cleveland has been boarded up, and writing indicates that the house has been stripped of copper. (Flickr/edkohler)
A vacant home in Cleveland has been boarded up, and writing indicates that the house has been stripped of copper. (Flickr/edkohler)

For all of the lip service paid by the Bush administration acknowledging that the origin of the financial crisis lies with the housing crisis and that the pain is felt far beyond Wall Street, there seems to be little focus by the Treasury Department on the troubled mortgages that have stoked fear among homeowners and investors alike. Stemming the tide of foreclosures must become a priority, as vacant properties drive down house values and attract crime and vandalism.

In fact, we learned this morning from the U.S. Census Bureau that the seasonally adjusted homeownership rate in this country fell to 67.8 percent of households in the third quarter, significantly below the peak of 69.3 percent in the second quarter of 2004. Similarly, the Census Bureau reported a 2.8 percent vacancy rate for homeowner housing in the third quarter—the highest third-quarter vacancy rate on record. A truly staggering figure, however, is the 9.5 percent vacancy rate among homes built since 2000.

The high vacancy rate is probably because of the increase in bank-owned foreclosed properties and unsold new houses. Overall foreclosure activity in the third quarter of this year increased 70 percent over last year, with over 450,000 homes auctioned off or taken by banks during the quarter, according to RealtyTrac.

Problems in the housing market are not limited to those facing default or foreclosure. Homeowners across the country are losing the equity they have built up in their homes as prices continue to fall. By all measures, price declines have been steep. The Case-Shiller Index of the top 20 metropolitan areas released this morning showed a 16.6 percent fall since last August—the largest year-over-year decline on record. The 10-city index, which goes back to 1987, showed an even steeper 17.7 percent drop. Before the current downturn, the largest decline had been a 5.7 percent year-over-year drop, reported in May 1991.

Beginning in October 2007, however, the year-over-year price change has set a new record low every month. The upshot: House prices, after adjusting for inflation, have now fallen to mid-2003 levels at the national level.

Housing woes, however, are not limited to lost equity. Sales of existing homes and new construction continue to be lethargic, with the inventory of unsold homes still near record levels. Sales of new homes in September were 33 percent below last year’s rate, while existing home sales were up a modest 1.4 percent over last September due to a marked increase in sales in the West. Anecdotally, however, many of those sales were by banks disposing of foreclosed homes rather than sales by homeowners. Banks’ willingness to sell at steep discounts is also reflected in the 18.5 percent drop in median sales price in the West, more than double the national decline for existing homes.

New homes are sitting unsold longer, too, even though they are selling for 9 percent less than a year ago. The median length of time between completion and sale is now 9.1 months, the longest in over 25 years. The backlog of unsold new homes translates into 10.4 months of inventory, down slightly from August’s peak of 11.4 months.

This excess inventory must be sold off before new construction and the jobs it creates will return to normal levels. September housing starts were off 31.1 percent over September 2007, with single-family starts down a shocking 41.9 percent. The prospects for a near-term recovery in residential construction jobs are equally bad, with September permits down 33.1 percent.

With bad news continuing to come from all areas of the housing sector, the need for strong actions by Treasury and others to focus on Main Street is clear. Acquiring and restructuring mortgages to prevent foreclosure must become a top priority, as it will help borrowers stay in their homes, protect their neighbors from additional declines in home values and neighborhood quality of life, and clear out the toxic securities that are paralyzing financial institutions.

The original rationale offered for the unprecedented $700 billion authority granted the Treasury Department under the Troubled Asset Relief Program was to purchase mortgage-related assets from institutions as a way to restore confidence by clearing out bad mortgages. Subsequently, Treasury recognized that direct equity investments in banks would be a more effective mechanism for protecting banks’ capital, so it allocated $250 billion for that purpose. The first infusions are being made this week amid criticism that participating banks are getting the funds with few strings attached and are using the money to subsidize mergers.

But these actions only address the Wall Street side of the equation. Little progress has been made in acquiring troubled mortgages. As Treasury ponders expanding its equity purchases to insurers and carmakers, it must also recognize that housing market deterioration continues and that concrete steps must be taken to stanch the declines. Treasury was empowered to act in a manner consistent with the preservation homeownership—we’re still waiting.

Andrew Jakabovics is Associate Director for the Economic Mobility Program at the Center for American Progress. To read more about the Center’s solutions to the housing crisis please go to the Housing page on our website.

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