This article first appeared in the St. Louis Beacon, June 3, 2011 - What is your home actually worth these days? That was the question posed at a housing conference Thursday sponsored by the Federal Reserve Bank of St. Louis and the Public Policy Research Center of the University of Missouri-St. Louis.
If you've been following the housing market news this week, the answer probably won't surprise you: The typical St. Louis home price is now 10 to 20 percent below its value in 2007, the peak of the housing bubble.
Oh, and you can expect more price declines this year -- and probably next year as well.
That was the bottom line delivered by economist Bill Emmons, an assistant vice president at the Fed. Using data from the Federal Housing Finance Agency and Zillow, Emmons has determined that an average St. Louis home valued at $153,860 in the fourth quarter of 2006 was worth $133,010 in the first quarter of this year.
Nevertheless, St. Louis home prices are still about 20 percent higher now than in 2001, an indication, perhaps, of just how inflated prices were before the bubble burst.
Participants represented the local real estate, financial, regulatory and nonprofit sectors. While the conference focused on data -- and the need to develop a St. Louis home price index -- there was also discussion of the current state of the housing market. Two words sum up the concerns: double dip.
A Double Dip -- and the Inevitable?
Two years since economists tell us the Great Recession ended -- that was in June 2009 -- the nation's busted housing market shows little sign of real recovery, and recent gauges indicate that it is heading in the wrong direction.
According to the highly regarded Case-Shiller Home Price Index, national home prices hit a new low in the first quarter of 2011. The numbers released earlier this week showed that prices declined by 4.2 percent through March, after having fallen 3.6 percent in the last quarter of 2010. Nationally, home prices reached a new recession low and are back to their mid-2002 levels.
Although St. Louis is not one of the 20 metropolitan statistical areas covered by Case-Shiller, Emmons dispelled any notions that things are better here because of the steadier nature of the region's housing market. While it's true that house prices in the region were never as overly inflated as in some markets -- and the initial bust wasn't as severe here -- numbers show that St. Louis now correlates closely with national trends.
Some of his major concerns:
- The local economy has stabilized but remains chronically weak.
- With house prices continuing to fall, negative equity is a growing problem for homeowners, placing more of them at risk of foreclosure.
- Delinquency and foreclosure problems continue at high levels.
Nationwide, more than 4 million mortgages are 90 days or more delinquent or already in foreclosure, clogging the pipeline for the foreseeable future with distressed properties that bring overall house prices down.
And that's just the accumulated inventory of foreclosures. There is an additional "shadow inventory" of homes that aren't on the market because homeowners are holding off selling under present conditions, Emmons said. A pent-up flood of these properties into the marketplace could keep prices down even longer.
The housing market's troubles are risky for the nation's economic recovery, warns Emmons, whose opinions are his own and not those of the Federal Reserve.
He believes the double dip in housing prices is, in fact, a resumption of the market correction that had been temporarily halted by interventions that didn't -- or couldn't -- solve critical ills.
"They were band-aids. The homebuyer tax credit. Frankly, all of the macro stimulus -- the interest rate cuts, the mortgage-backed securities purchases, the Social Security tax cuts. All of that. We're throwing everything we've got at it, but it's not fixing the underlying problem,'' Emmons said.
Emmons believes the housing bust was due to fundamental problems in the housing and mortgage markets.
"House prices were way out of line. There was way too much debt behind it, and what we're seeing is this unwinding to get back to a more sustainable situation,'' he said. "The reason it looks like a double dip is we had this full-out charge to try to stop it from it happening, but it didn't solve the underlying problem. Now what we're seeing is the resumption of the correction that started back in 2006. It's discouraging, but I think inevitable."
'We're So Sick of It'
Emmons has always maintained that the housing crisis was precipitated by the nation's savings crisis.
"We had this artificial prosperity built on debt and rising house prices,'' he said.
He believes the nation has little appetite for more market interventions -- or bailouts -- and the housing correction will play itself out now, almost by default.
"I wrote this article in 2008 that said, 'Let markets work and help the truly needy.' I still think that was the right approach, and maybe that's the right approach now. There is not going to be this scale of interventions this time, both because we're so sick of it and because those who probably could or should be aware of it are looking elsewhere,'' he said. "People say the risks are oil prices -- and that is a risk. And the European debt crisis is a risk. But that's not the big one. The big one is right here under our noses. It's this unfinished correction back toward a sustainable household financial situation.''
Emmons suspects that this second dip won't take as major a toll on house prices -- because they are no longer as overvalued -- but he warns that it could be just as damaging this time around.
"We're in a much weaker position today than we were in 2007 in terms of equity, the level of employment, savings. It won't take as big of a drop in house prices to be potentially as devastating at this level in terms of foreclosures,'' he said. "How do you want to look at this? It could get really bad really fast, but then we'd be through it faster. Or it could be more of a slow burn like we've had and then maybe it would take another five or 10 years.''
Emmons accepts the fact that his assessment isn't popular, and neither is his opinion that housing is not the great financial investment that most Americans believe it to be. From 1991 to 2011, the return on investment on an average house was just 0.9 percent, when taking inflation into account -- about the same as a Treasury bill, he said.
With that paltry return on investment, he believes homes should be financed with more equity and less debt. He believes in large down payments, and he is no fan of the 30-year mortgage that has become the gold standard for American homebuyers.
"The point of a 30-year mortgage is to increase the amount of debt you can carry, which is the wrong direction. Public policy should be directed toward how can we get homeowners as little debt as possible, rather than as much debt as possible,'' he said. "That's the volatile cocktail -- the way we financed our housing stock. We had way too much debt, and the predatory stuff was just tragic.''
