An economist with the Federal Reserve Bank of St. Louis says we haven’t emerged from the housing crisis.
Assistant Vice President Bill Emmons with the Federal Reserve in St. Louis says the core problem in the housing crisis is negative equity: the mortgage is more than the house is worth. Emmons says too many lenders have left the 80-20 benchmark, requiring 20-percent down to secure a mortgage.
“Even going into the crisis, we were already in a riskier situation, because there was less equity to begin with,” Emmons tells the Missourinet. “And, then, we’ve had the most severe decline in house prices in at least 70 years, going back to the 1930s. So the equity that was there, in many cases, was fairly quickly wiped out.”
There has been a 30% decline in equity nationwide, a bit less in Missouri. Without equity, the homeowner has no escape route. He can’t refinance. He can’t even sell to get out from under the debt.
Emmons says a noticeable increase in payment delinquencies and house foreclosures occurred in 2006, but he charts the beginning of the crisis back to 2004/2005 in Michigan, when automobile sales began to slide and unemployment crept up. Foreclosures spiked in Florida and California in 2007 and 2008, sending shockwaves across the country. Missouri held steady until the middle of this year, when foreclosures began to rise.
Delinquencies and foreclosures continue to rise nationwide. Federal statistics indicate that while foreclosures hit the million mark in 2006, they likely will total 10 million before peaking. Emmons says the country has never seen anything like this. In Missouri, there were 10,000 foreclosures in 2001. That rose to 32,000 last year. It is estimated that foreclosures in Missouri will reach 38,000 this year.
Emmons says the country must face some hard facts in its effort to emerge from the crisis.
“It’s just a very bad idea to expect home prices to bounce back and solve all these prices,” Emmons says. “There’s just no good reason to expect that.”
He says federal efforts to stem the crisis haven’t worked and likely won’t, because they haven’t targeted the problem of negative equity. Another obstacle is the recession. Emmons expects an extremely slow recovery with high unemployment, in the 9-to-10% range, for the next couple of years. He says it could take as long as five years for the housing crisis to end.
Read Emmons’ article on the housing crisis.