The Second Housing Market Collapse Is Upon Us

There's no doubt in my mind we're seeing a second dip in the housing market, considering the $8000 tax credit ended in April. Mortgage activity has all but ceased (but refinance activity has picked up a bit). There are other signs the housing market is softening further, and that we aren't anywhere near the bottom.

We've been in the process of trying to refinance our mortgage, seeing the interest rates are quite favorable. We're planning on a shorter term at a rate a little over 1 point lower than our present mortgage, meaning our monthly payment will be the same, but the mortgage will mature in a third of the time. Others are refinancing in order to reduce their monthly payments. Anyone capable of doing so would be crazy not to. But that doesn't help the housing market in any fashion.

One of my biggest worries about declining housing values is that what equity we do have in our home will dwindle further, if not disappear. While this may seem like an unlikely scenario, it isn't impossible. In fact, it's highly probably.

In the real world, the U.S. housing market has fallen less than half the distance it needed to fall to bring U.S. housing prices back to sane levels. While defining "sanity" is an ever more difficult task in this age of disinformation, let's start by going back to the mid-1990s. It was in the second half of that decade U.S. housing prices began a much steeper incline than previous years, and (depending on whose numbers you look at) U.S. home prices roughly tripled over that span.

I know housing prices in the Northeast have been too high for decades, going back to the first housing bubble during the late 1980's. Prices were going up at a rate many times that of inflation. It didn't help that a group of speculators were helping to drive up housing costs by churning properties (buying from a homeowner then reselling to other speculators to drive up the price) and then dumping them on unsuspecting buyers. It didn't help that a small number of banks were helping the speculators. When the bubble burst right during the 1990 recession, a lot of people found themselves upside down on their mortgages. What made it even worse was that many homeowners lost their jobs, meaning they had no way to make their mortgage payments. A lot of them ended up abandoning their homes, in effect handing the keys over to the bank and telling them “Good luck!”

Even though prices fell then, they didn't fall to a level that would have reflected the actual value would have been without the bubble.

With this second round of the housing market collapse, is it possible the decades overdue correction is about to take place?

Should U.S. homes fall back to 1970 prices (while U.S. workers earn their 1930's wages), that implies that U.S. home prices will fall more than 75% from today's prices.

Could home prices could fall that much? I don't know. I'm not sure that the quote above is based on actual 1970's prices or inflation adjusted prices. Either way it doesn't bode well for present homeowners.

Should that happen almost anyone with a mortgage would find themselves upside down on their note, which in turn could lead to an even greater round of defaults and walkaways. Those capable of doing so could first buy a house at the greatly reduced price and then let their first home go into foreclosure. (It's being done today in places where real estate values have fallen so much that many homeowners have found their homes to be virtually worthless.) Of course I'm assuming the Frank-Dodd Finance Reform bill doesn't make it through Congress, because if it does pass it's highly unlikely anyone will be able to get mortgages unless they don't need them. And that will only make things even worse in the housing market.

It will be the 1930's all over again.