Housing woes continue to drag the economy
Early reports indicate that Bank of America, Wells Fargo and other big banking institutions will need to raise additional capital to prepare for the possibility of another economic downturn. A critical problem for Bank of America is that in the first quarter 2009, non-performing assets surged 41% to $25.74 billion. On top of these staggering figures, the Treasury has forced banks to add an alarming 12% failure rate to their Commercial Real Estate portfolios.
The Obama administration initially set the banking industry as the central element in stabilizing the overall economy. Now that banks have received more than $200 billion in TARP funding, a degree of stabilization has occurred. Wall Street and Washington will now begin debate about the best way to protect the taxpayer from banks that are too big to fail. It is expected that government will add regulatory procedures to the commercial bank holding companies.
Last weekend, investment guru Warren Buffett of Berkshire Hathaway stated that the focus must now shift to the troubled real estate sector. Residents and businesses in the Baltimore area would agree that his concerns are well-founded.
With a high percentage of non-performing real estate loans and with bank balance sheets loaded with over-valued mortgages, banks need improvement in the real estate sector to reverse defaults and raise market values. This week, the real estate industry took heart as March construction spending increased 0.3%. More sobering is the reality that construction spending was still 11.1% below March 2008 expenditures. Furthermore, commercial construction activity may be misleading as The Obama administration has launched aggressive infrastructure renovations, which have impacted commercial construction figures.
Baltimore Draws Dubious Distinction
Private residential construction fell 4.1% compared to March 2008. Housing prices have tumbled by 21.8% since market peaks in 2006-2007. According to a U.S. Postal Service and Housing and Urban Development report, 3% of U.S. homes or approximately 4 million residences have been vacant for 90 days or more.
Vacant homes and increasing foreclosure activity are driving market values to sharp declines. As property levels shrink below mortgage amounts, “it becomes a vicious cycle,” according to Jennifer Vey of the Brookings Institute.
Vacant housing leads to decreasing property values and falling tax revenues. Neighborhoods with vacant properties have troubling social characteristics and tend to deteriorate very quickly, dragging surrounding property values with them.
According to the Postal Service report, Franklin County in Ohio has the largest percentage of vacant housing. Baltimore County is the tenth most vacated county in the U.S.
22% of Americans Have Negative Equity
Around the country, there are pockets where residential real estate values are in free fall. The Zillow Home Value Index states that national year-over-year values have decreased by 14.2%.
In its sobering first quarter report, Zillow indicates that during the first quarter 2009 residential properties lost more than $704 billion of their value. Over the past 12 months, residential values have shrunk by $3.8 trillion.
21.9% of American homeowners now have negative equity in their homes and those homeowners and their banks are feeling the pinch. Foreclosures are at an all-time high. Adding the government’s projected 12.1% commercial real estate failure to the staggering residential losses adds to the banking burden.
Declining real estate values and unemployment increase go hand in hand. As Baltimore City is the tenth most vacated community in the country, it also is burdened with a 10.1% unemployment rate.
Now that the taxpayers have stabilized the banks, it is time for Main Street to receive its due. The banks, the administration and the economy cannot stabilize without improving employment, which in turn will result in increased home sales.
One of the highest unemployment rates in the country exists in Fort Myers, Florida, long a bustling new construction economy. The Fort Myers economy has been especially hard hit by the recession and unemployment now sits at 12.2%. According to Zillow, areas like Fort Myers, which has endured nine consecutive down quarters, have seen median property values decline by 50% or more. Of the country’s 161 real estate markets, 85 now have negative or flat market values over the past five years.
Homeowners indicate discouragement with market conditions and are resisting selling their homes. Typically, Americans sell a home every seven years. If market conditions improved, 31% of today’s homeowners indicated they would place their homes on the market within the next 12 months.
The Zillow report has other statistic eye opening details including statistics showing that over the past 12 months, 20.4% of all real estate transactions were foreclosures while another 11.9% were short sales.
The National Association of Realtors Report
According to a new report from the National Association of Realtors, March pending transactions increased by 3.2% and 1.1% from year-to-year transactions. These gains are directly related to the association’s Housing Affordability Index which approached record highs and includes data relative to market buying conditions.
The Housing Affordability Index includes such factors as interest rates, home prices and family income. The Obama administration’s First Home Buyer Tax Credit allows qualified first home buyers to claim an $8,000 tax credit/refund has helped bring new homeowners into play. As these buyers do not have homes to sell, these buyers are deemed critical to the residential recovery.
The Housing Affordability Index assumes a down payment of 20% and a qualifying ratio of 25% of gross income. Mortgage programs for new construction allow for the tax credit, which, unlike the 2008 tax credit, requires no repayment. These programs are designed to help overcome the 20% down payment requirement.
By Thursday afternoon, the American taxpayer will know where the banks stand. On Friday, unemployment figures showing fewer new applications will be released.
Once again, Warren Buffett has his finger on the pulse of the recession. The residential real estate sector will soon become the center of the nation’s attention.
When unemployment and housing stabilize on Main Street, conditions on Wall Street and in Washington will stabilize. While the financials are rallying with taxpayer funding, Main Street residents have miles to go before they sleep in homes worth more than the mortgages.
For more information: www.zillow.com, www.realtors.org
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