The reaction on Wall Street has been swift, shares plunged in a wild sell-off that pushed stocks down more than 100 points in a matter of minutes. US Treasuries rallied on the news sending bond yields lower as jittery investors sought safety from the ongoing avalanche of dismal economic data. The 10-year slid to 2.49% while the 2 year note dipped to 0.46%. Bond yields are a gauge of investor pessimism. At present, confidence in the management of the economy is at its nadir.
Analysts expected that housing sales would suffer after the Obama administration's First-time Home-buyer credit expired in April, (Deals had to close by the June 30 deadline) but they hadn't expected a real estate holocaust ending in sales that are a paltry 25% of their peak in 2005. Most experts surveyed anticipated sales in the 2.65 million per annum range, not 3.83 million! The shocking drop in sales has added 2.5 months to the massive stockpile of unsold homes that is presently clogging the system and threatens to send prices into freefall. The pace of existing home sales is now slower than any time on record.
This latest housing smackdown will put more pressure on homeowners who are already in arrears or trying to decide whether its in their interest to make payments on a $300,000 mortgage for a house that is currently worth only $150,000. Expect foreclosures to rise sharply. 24% of all mortgages already have negative equity. That's 11.2 million loans.
According to housing expert Charles Hugh Smith:
"Since there are about 47 million outstanding mortgages, and 24 millions homes owned free and clear (no mortgage), then we can calculate that free-and-clear owners hold about a third of the $16.5 trillion in home equity -- roughly $5.3 trillion. That leaves about $1.2 trillion in equity spread amongst the 47 million homes with mortgages...Foreclosures have exceeded 300,000 for 17 months in a row. 10% of the population is presently subsisting on foodstamps and handouts. The unemployment lines have lengthened in every city and town across the country. The shelters are full, the food banks are empty, and the economy is flat on its back. And, yet, not one banker has been indicted, prosecuted, arrested, convicted or sent to prison. Where's the justice?
"Never before have American homeowners with mortgages held such a thin slice of equity, and never before have so many homeowners been at risk of negative equity. Predicting accurately how many homeowners end up underwater is impossible, as the future of home prices is unknown. But anyone claiming that the number of underwater homes can't rise further is on thin ice." ("Real Estate: The Worrying Numbers Behind Underwater Homeowners," Charles Hugh Smith, Daily Finance)
It's been four years since problems with subprime mortgages triggered the deepest slump since the Great Depression. Still, housing has yet to find a bottom. $6 trillion in home equity has been wiped out leaving baby boomers scrambling to make up for lost wealth so they can add to their battered retirement savings.
Today's bleak housing numbers are not the result of a "cyclical downturn", but of a crime perpetrated on the American people. There must accountability. Someone's gotta pay!