Monday saw the release of a headline “ Existing Home Sales Reach Highest Level in 2.5 years”. That is good news, and very exciting. That headline and the NABE (see previous article) about their prediction on unemployment only getting worse for another 5 months sent markets up 1.5% early in the day.  But read the data on housing sales. The rate with which existing (not new) home sales increased was the highest in 2.5 years.  The rate increased.  House prices have made small gains during the primary US annual house selling season (summer), but remain down about 10% from 12 months ago.  And this includes the impact of the new home buyer tax credit. 30% of house sales were distressed transactions. Now that we’re in the traditional weak part of the house selling season, let’s see what the next 4 months brings us.

The National Association of Realtors (NAR) says there is 3.6M unsold homes in the US.  That’s a reasonable inventory and sign that things are improving.  Too bad it’s not anywhere near accurate. There are 3.5M vacant housing units (houses + apartments) in the US.  The NAR data only lists houses for sale, not those houses / apartments that are vacant because the seller is waiting to sell later when the market is not terrible, or because the bank that owns the foreclosed property is waiting to list the house when it won’t overwhelm the market with sellers (shadow housing inventory).

Tuesday’s Wall St Journal headline was: “1 in 4 Borrowers Under Water”.   23% of homes with mortgages in the US are in the situation whereby the homeowner is in a negative equity position i.e., they owe more on the home than the house is worth. That’s 10.7M homes. Also of note: the organization supplying this data recently changed their process of accounting for borrowers under water. Under the previous method (in order to compare with historical data), the rate would not be 23%. It would be 33.8%. So 1 in 3 in homes with mortgages the US is under water from a historical comparison point of view.

This is devastating economic news (but not surprising to us). As unemployment continues to go up, this number is likely to get worse. This feeds the cycle because unemployed people with negative equity are far more likely to stop making mortgage payments and let the house fall into foreclosure. This adds to the shadow housing inventory and lowers prices further. Wash, rinse, repeat.

What is worse is over half a million people with mortgages, jobs, and the ability to pay their mortgage walked away from their commitment to pay in 2008.  They did this because:

-          They see others escaping their responsibility and commitment.

-          They see people and organizations getting bailed out for living beyond their means / or making bad decisions.

-          They suspect they’ll be paying the mortgage for decades before the home is worth what they paid.

For years I’ve been writing about a change in the social fabric of this country that may come to pass by virtue of crossing a tipping point whereby sufficient numbers of people walk away from their responsibilities for pure self preservation reasons. I had not factored in the multiplier effect of people who can and should meet their obligations.

The numbers:

-          65% of homes with mortgages in Nevada are under water

-          48% of homes with mortgages in Arizona are under water

-          45% of homes with mortgages in Florida are under water

-          Michigan, California, Virginia, and Georgia fall within the 22-40% range.

-          Here (NC) were are in relatively good shape with 6-11% under water.

Other than the past 2 years, when would you have thought we were better off than most if 6-11% of homes with mortgages in NC were under water?  Then again, when would you have thought it was possible for janitors and policemen to have mortgages in the $450-600K range. I point these examples out merely because they were cited in the WSJ articles.