Foreclosures and home prices
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KPCC business analyst Mark Lacter talks about foreclosures and home prices.
Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, if the recession is over, as most economists seem to believe, why all the foreclosures?
Mark Lacter: How much time do we have Steve? There are a lot of explanations, and none of them all that encouraging. Thing is, if there's a pickup in foreclosure filings into 2010, which seems quite possible, it means that home prices will probably remain stalled or start falling again.
That could leave more homeowners with negative equity (in other words, you owe more than the home is worth) and that means you can't sell your house very easily and you can't take out a second loan. You're stuck.
Julian: This was the big problem last year with the subprime disaster...
Lacter: ... but things have taken a turn for the worse because unemployment is so high. Some of the folks who have lost their jobs do not fit into the subprime stereotype. They’ve been homeowners for many years and didn't take on crazy mortgages.
They're defaulting on their payments because they just don't have enough money in the bank – and most economists don’t expect companies to be hiring in any great numbers for another year, maybe longer. So you can see the concern about foreclosures.
Julian: But what about the president’s program to help modify the problem loans?
Lacter: Well, progress has been really slow; it’s worth noting, Steve, that many of these mortgages are beyond help and any effort at modifying the loan just delays the inevitable foreclosure. There’s a new report that says foreclosures will outpace loan modifications by two to one. So that's not great.
Julian: And what’s this about defaults on homes that people recently purchased?
Lacter: A kind of good news/bad news thing. For the last several months, we've seen a pretty steady increase in home sales, many of them purchased by first-time homebuyers and many of them insured through the FHA (that's the Federal Housing Administration). In August, these FHA-insured mortgages made up more than 37 percent of all loans in Southern California, which is way higher than last year.
Julian: Is the FHA taking on too much?
Lacter: That’s the concern. There's even talk that all the bad loans will result in the government having to bail out the FHA within the next two to three years (its reserve fund has already fallen to under the required levels). Not yet a crisis situation, but it's getting there – and that's why real estate remains such a wild card in the recovery.
Julian: The other side of this, Mark, is that home prices are expected to go up in 2010, right?
Lacter: Well, yes, but look at the numbers. The California Association of Realtors is forecasting a 3.3 percent increase statewide in the median price next year, which sounds decent until you remember that this year the association is projecting a 22 percent decline in the median price, and that in 2008 there was a 38 percent drop. In L.A. and Orange counties, I've seen forecasts in the 2 to 3 percent range for next year.
Julian: So there's a lot of catching up to do...
Lacter: There is – home sales might actually fall next year because there’s still very little activity at the upper end of the market. But Steve, the forecasts just seem so tentative. The phrase everyone keeps using is "the new normal," which means we shouldn't get our hopes up about any big rebound.
Actually, if you look back to the last recession in 1991, it took almost 10 years before local home prices got back to what they had been. This time, who knows? For now, the big challenges is getting past these foreclosures.
Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes a business blog at LAObserved.com.
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