Is it a Great Housing Recession or Great Housing Bust?

Economists worldwide are of the unanimous opinion that the current financial crisis and global downturn economy has been triggered by the housing bubble in the US. It is also common knowledge that the housing market in US, as seen by financial experts and market watchers, is yet to recover from its sickness – arising out of the foreclosure virus caught in early 2006. The debate among experts has started whether the present economic crisis in the US country is a “Great Housing Recession” or a “Great Housing Bust” not eventually leading to Recession.

A Recession – as defined by economists is “a general slow -down in economic activity over a period of time”. The indicators of recession are “drop in production measured by Gross Domestic Product (GDP); employment potential; fall in investment spending; capacity utilization in manufacturing plants; fall in household incomes; business profits; causing inflation and cost of living; and increase in bankruptcies and unemployment rate. Sounds familiar as these words are repeatedly used in recent news stories?

In this context, the popular business site Forbes.com has released a detailed analysis on the subject by two eminent economic Professors – Thomas F. Cooley and Peter Rubert. While illustrating the comparison of the present behavior of the housing markets, with those of the previous peaks of real estate meltdown US has come across, Forbes.com has published the following three graphs:

You will see from the above graph there were cycles of housing meltdown in the recent history of US in 1981, 1990, and 2001 earlier, but none of them were as fierce as what we are seeing currently. The percentage increase in foreclosures, shown as redline in the above graph, over the last one year is simply twice as big, compared to the previous one in 2001, not to speak of the low-lying lines of 1981 and 1990.

These two economists also caution against complacency over the media reports that there is slight drop in the figures of delinquencies by borrowers and total foreclosure filings overall in the country. This is only a ripple in the big stream and the condition of the present US housing market is anything but “dire”.

In the next graph published by Forbes.com, it shows how the present housing market crisis has become universal and not a phenomenon contained in certain States alone.

There were similar cycles of housing meltdown in the States – in Texas in 1980; in Massachusetts in late 1980s and early 1990s; and in late 1990s in California as also spreading in Florida, Arizona, and Nevada, joined later by Ohio and Michigan. There was decline in the housing prices and increase in foreclosure filings like the present scenario. But what is strikingly different is, while the earlier ones were more localized and were connected with specific shocks in those respective regions, the present one is felt by the US country as a whole.

You can see the blue line in the graph representing the country going upwards steeply from the year 2007 and the only other line – in light-green representing California, going much steeper upwards than this.

The economists narrating the current recession go on to describe it as “The Perfect Foreclosure Storm” since there are several factors combined to drive the present housing market meltdown further more. The chain reaction of these aligned factors are – the falling housing prices trigger negative equity position of properties – where the market value of the property is less than the outstanding balance of mortgage loan.

This combined with loss of job by the bread-winner of the family, leads to default in repayment of mortgage loan and culminates in foreclosure and the overall foreclosure rates go upwards.

The third graph published by the site below explains the dramatic fall in housing prices, compared to earlier recessions:

You will see the comparison of US housing prices in the above graph – blue line denoting the 2001 cycle going upwards during the real estate boom years, where housing prices touched the peak and the red line representing the current cycle dipping to the lowest ebb.

In the previous recessions taken for comparison, there was no noticeable downfall in the housing prices like the present one. The employment population ratio in the present recession has also been dramatic.

Regarding unemployment and foreclosure relativity, some of the observers put forth an argument that unemployment can never be a reason for rise in foreclosures. In support, they point out that during 2006 the unemployment rates of the country were still falling (and began to go up only in mid 2007), but the foreclosures were on the rise.

The Forbes economists refute this argument, by saying that they are overlooking the fact that typically every week nearly 350,000 individuals are filing claims of unemployment and this figure was about 600,000 during the depth of the recession. They maintain that even with 350,000 people entering unemployment per week, the total employment potential would not be affected significantly.

The economists assert that the real cause behind delinquency in housing mortgage repayments and thereby the foreclosure is loss of jobs by those earning income and not by the number of persons already without jobs. The other issue is period of duration of unemployment. During recession the duration of being unemployed is increased always.

In this present recession, the duration of unemployment is dramatically high – as seen never before in the history. The previous record of high was 2.6% of the total labor force in 1983. Against this, the percentage of those unemployed for at least six months during this recession is recorded as 4.3% of the total labor force.

The authors quote an example to prove that if housing prices rise during a recession, there may not be an increase in foreclosures. In California during the recession of 2001, the unemployment rate percentage rose to 6.5% a year later from 4.7% in January 2001. Importantly, the housing prices were rising during this period in California and foreclosures were showing a declining trend.

In concluding where are we now – the economists cite the mitigation programs of Obama government, planning to spend $75 million, some $50 million of this to come from TARP bailout funds. They blame the program as “poorly designed” and had “very little noticeable effect”.

They point out that about 2.8 million foreclosures of properties were initiated in the year 2009 and this will exceed nearly 3.7 million foreclosures, judging from the way they are going, as in the first quarter of 2010, there were 932,000 foreclosure filings. The rate of secondary default by borrowers – re-defaulting even after loan modification – has been extremely on the higher side.

All these have arisen out of the unemployment problem in the country. The policies of the government in execution have failed to achieve the desired impact and it is evident that only a fraction of the allocated money has been spent.

The economists also made a passing reference to HAFA – the latest revision announced in March – in the mitigation plans to include further incentives to lenders for writing down the principal amount of mortgages and subsidies for forbearance shown to borrowers unemployed for six months.

Summing up the analysis, the economists are of the view that “we are not at the end of this housing cycle and there is more pain yet to be borne”. They name the present economic downturn as “Great Housing Bust”.

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