The Breakdown

Explaining Southern California's economy

The Housing Crisis: Can prices fall even farther?

A foreclosure sign sits in front of a home for sale.
A foreclosure sign sits in front of a home for sale. Justin Sullivan/Getty Images

Another month, another Case-Shiller index on housing prices — and more bad news for the housing economy. This is from the Wall Street Journal:

The Case-Shiller data come on the heels of the White House's revamp of a mortgage-refinance program for "underwater" borrowers—those who owe more than their homes are worth. But economists say there are few quick fixes for the housing crisis, and easier refinancing rules will do little to address weak demand for homes.

"It was a very bad spring-to-summer-market season," said Nancy Wallace, a finance professor at the University of California at Berkeley. She said a turnaround in the housing market remains largely dependent on loosening credit and a surge in hiring. "People are almost afraid to apply for mortgages and lots of people have little scratches and dents on their credit right now."

Even if the White House plan is successful, it will probably only be able to help about a million homeowners who are underwater to refinance. But that's out of 11 million total borrowers in the U.S. And forget about borrowers who are behind on their monthly payments, heading toward foreclosure.

Ultimately, this is all about banks, banks, banks. But they're not going to mark down the values of the loans on their books, even if the market says the houses that collateralize those loans aren't worth what the buyers paid for them anymore. The investors in those loans — who bought bonds when houses were worth more — won't stand for it. 

The banks won't ease their lending requirements, either. Damaged credit plus a 20-percent downpayment isn't a formula for clearing a glut of properties, especially in hard-hit areas like California and Nevada. In some markets, this could continue to drive prices lower. Like, 20 percent lower. If that sounds insane, that's because it is. But the people in the housing market I've talked to don't expect any serious effort at rescue until after the 2012 election.

Meanwhile, the foreclosure process, on hold due to legal issues, is gearing back up again. This means even more properties hitting the market.

This whole mess started with the housing market and through it all — investment bank bankruptcies, bailouts, the U.S. debt downgrade, the European debt crisis — the core of the problem remains in the housing market. It needs fixing. But nobody wants to fix it.

You could call this a failure of imagination. Or you could tell beleaguered homeowners that, when it comes to American dream, they're on their own.

Follow Matthew DeBord and the DeBord Report on Twitter.

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