USA Today

WASHINGTON (AP) — Three reports out Thursday demonstrated the depth of the housing industry’s weakness and pointed to more trouble ahead.

In a troubling report, the Federal Reserve said Americans’ equity in their homes has fallen below 50% for the first time since 1945.

Home equity is the percentage of a home’s market value minus mortgage-related debt.

The Fed’s flow of funds report shows home equity slipped to a revised 49.6% in the second quarter 2007 and fell further, to 47.9%, in the fourth quarter. It marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

The total value of equity also fell for a third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.

Home equity has steadily declined even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans, lines of credit and an increase in 100% or more home financing.

Economists expect equity to drop even further as declining home prices eat into the value of most Americans’ largest asset.

Moody’s Economy.com estimates that 8.8 million homeowners, or about 10.3% of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9%, will be “upside down” if prices fall 20% from their peak. That is, they will owe more than the home’s current market value.

The latest Standard & Poor’s/Case-Shiller index showed U.S. home prices plunging 8.9% in the final quarter of 2007 compared with a year ago, steepest decline in the 20-year history of the index.

Pending home sales flat

Also Thursday, industry data showed that January pending home sales were below analysts expectations and remained at the second-lowest reading on record.

The National Association of Realtors said its seasonally adjusted index of pending sales for existing homes held at 85.9, the same reading as December and just short of a revised record low of 85.8 in August, at the start of the worldwide credit squeeze. The reading was 19.6% below year-ago levels.

Economists had predicted the index would inch up to 86.2.

Typically there is a month or two lag between when a buyer signs a home sales contract and the closing of the deal. Sales completed last month and into this month should be reflected in the January reading.

Regionally, pending home sales were down in both the Northeast and the South. They were up slightly in the Midwest and the West.

“Our members are telling us there’s been a pickup in shopping activity.” said Lawrence Yun, the trade group’s chief economist. “Our hope is that the increased traffic of buyers looking at homes will translate soon into more contract offers.”

The Realtors group, which is more optimistic about the housing market than most economists, projects home sales will start to rise in the second half.

“Forgive us, if you will, but may we suggest that an outsized 13% climb in prospective sales in the West will not hold up upon further review,” said Joseph Brusuelas, U.S. chief economist at IDEAglobal in New York.

“Some may be tempted to make a call of a bottom or stabilization in the housing sector, but we think that this is extremely premature. Prospective buyers may be probing the market for deals, but we strongly expect any surge in purchasing activity to a number of months, if not years away,” he said.

Foreclosures hit record

Home foreclosures soared to an all-time high in the final quarter last year, underscoring the suffering of distressed homeowners and the growing danger the housing meltdown poses for the economy.

The Mortgage Bankers Association, in a quarterly snapshot of the mortgage market, said the proportion of all mortgages nationwide that fell into foreclosure shot up to a record high 0.83% in the October-to-December quarter. That passed the previous high of 0.78% in the prior quarter.

“Clearly, it’s the worst it’s been,” chief association economist Doug Duncan said.

More homeowners, meanwhile, fell behind on monthly payments.

The delinquency rate for all mortgages climbed to a seasonally adjusted 5.82%, up from 5.59% and highest since 1985. Payments are considered delinquent if they are 30 or more days past due.

The foreclosure report showed that homeowners with tarnished credit who have subprime adjustable-rate loans were hardest hit. Foreclosures and late payments for these borrowers swelled to all-time highs in the fourth quarter.

The percentage of subprime adjustable-rate mortgages that entered foreclosure soared to 5.29% from 4.72% in the prior quarter, the previous high. Late payments rocketed to a record 20.02%, up from 18.81% — the previous high.

The association’s survey covers almost 46 million home loans nationwide.

The worsening foreclosure and late payment figures come as fears grow that the country is teetering on the edge of a recession or is in one already.

The wave of foreclosures threatens to dump more homes on the already severely depressed housing market. That forces more cutbacks by home builders. Harder-to-get credit, meanwhile, has thwarted some would-be home buyers.

“Declining home prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,” Duncan said.

Even with relief efforts underway by industry and the government, Federal Reserve Chairman Ben Bernanke, earlier this week, warned that foreclosures and late payments on home mortgages are likely to rise “for a while longer.”

The MBA’s Duncan agreed. “We expect some increases in the next couple of quarters,” he said. The economic slowdown, harder-to-get credit and lofty energy prices are adding to the strains, he said.

Against this backdrop, Bernanke called for additional relief and urged lenders to help distressed owners by lowering the principal amount of their loans. “This situation calls for a vigorous response,” Bernanke said in a speech Tuesday.

Bernanke’s recommendation for lenders to reduce the amount owed on troubled home loans goes beyond the position staked out by the Bush administration. The Fed chief, however, didn’t go as far as to endorse some proposals embraced by Democrats on Capitol Hill.

Among the initiatives promoted by the administration is allowing some homeowners with certain subprime home loans to freeze their interest rate for five years.

California and Florida continued to represent a disproportionate share of the country’s foreclosures. The two states accounted for 30% of mortgages starting the foreclosure process, the association said.

“In states like California, Florida, Nevada and Arizona, overbuilding of new homes created a surplus that will take some time to work through,” Duncan said. That glut has pushed down house prices, he said.

 

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