This is an excellent article.
I recommend that you read this.
This is the real world.
So anybody who is thinking that the bull market is back - please step back and read this article as an example and try to understand what is going on in the real world.
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April 27 (Bloomberg) -- Christine Johnson has reduced her spending on clothes, travel and home improvements -- all so she can stay current on the house she bought in Phoenix at the peak of the housing bubble.
Johnson, 44, a professional photographer, owes $330,000 on a ranch home that she says might fetch $270,000 in today’s market. She’s also about $70,000 underwater on a rental property. “I’m nervous now. How am I going to make enough money to pay everything on time?” the single mother said in an interview. “I used to be able to spend money on clothes. I don’t buy anything anymore.”
One year ago, there were signs that housing was healing; new home sales were up and prices rising. Now, new home sales are below levels hit at the depth of the recession two years ago, and 23 percent of all borrowers -- more than 11 million homeowners -- owe lenders more than their homes are worth. The renewed weakness is keeping a lid on consumer confidence, consumption and growth.
“It keeps the recovery from being all that strong,” says Mark Vitner, senior economist for Wells Fargo Securities in Charlotte, North Carolina. “We don’t see how the economy can get above 3 percent growth, except for a short period of time, with housing being so deeply underwater,” he said.
In the 18 months after the recession ended in June of 2009, the economy grew at an average annual rate of 3 percent a quarter. A survey of economists by Bloomberg News produced a median forecast that growth slowed to a 2 percent rate in the first quarter of this year, not enough to ease the nation’s unemployment crisis.
Further Declines Seen
Further home-price declines this year -- expected by analysts such as Robert Shiller of Yale University -- would push several million more Americans into negative equity. Home prices dropped 5.7 percent in February from year-earlier levels, according to the Federal Housing Finance Agency, the fourth consecutive month of backsliding.
In Phoenix, the problem is especially acute. Nearly 202,000 individuals are 50 percent or more in negative equity, according to a Corelogic Inc. analysis prepared at the request of Bloomberg News. More than one in every five Phoenix-area mortgage holders would need their homes to double in value just to break even.
“The mortgage drag and negative equity? I think it’s a serious problem. It’s the elephant in everybody’s room and nobody quite knows what to do about it,” says Jim Lundy, chief executive of Alliance Bank of Arizona, an eight-year old business lender in Phoenix.
Rebound Hampered
Housing is hampering the state’s economic rebound. Arizona’s 9.5 percent unemployment rate in March was above the nation’s 8.8 percent figure. Over the past year, the state, with 303,000 unemployed, has added just 1,700 jobs, according to seasonally-adjusted figures from the Bureau of Labor Statistics.
Nationally, the housing industry led recoveries from previous recessions, typically contributing 1 percentage point to GDP growth at this stage of a recovery, says Paul Dales, an economist with Capital Economics Ltd. in Toronto. This time, the sector’s dead weight impedes the economy’s advance.
On April 7, San Francisco-based Wells Fargo & Co., the largest U.S. home lender, eliminated 1,900 positions in its mortgage unit. KB Home, a Los Angeles-based homebuilder that specializes in first-time buyers, this month reported first- quarter revenue of $196.9 million. In the same period in 2007, the company had $1.4 billion in revenue. KB Home shares have fallen 18 percent this year after declining nearly 2 percent last year.
‘Stubborn Parts’
Brian Moynihan, chief executive officer of Charlotte, North Carolina-based Bank of America Corp., last month said “delinquent mortgages and falling home values is one of the most stubborn parts of this crisis. It’s going to take the longest to get through.”
Homeowners who are underwater may be slower to relocate for employment, leaving job-poor markets clogged with surplus workers. Would-be entrepreneurs are unable to tap their non- existent home equity for start-up cash, meaning some good ideas for new businesses never get off the ground.
Most of all, millions of homeowners who have seen their principal asset melt in value are in no mood to spend. During the easy money days last decade, rising home prices helped power the American economy. From 2000 to 2005, homeowners funded about 3 percent of annual consumption spending by borrowing against the equity in their homes, according to a 2007 paper by Alan Greenspan, then-chairman of the Federal Reserve Board.
In the past six years, Americans have lost more than $6.9 trillion in housing wealth, according to the Fed. “Consumers are very cautious,” says Lee McPheters, an economist with the W.P. Carey School of Business at Arizona State University. “There’s just not a lot of big spending.”
Retail Sales
Lingering effects from the housing implosion can be glimpsed in retail sales and consumer confidence readings, economists say. Nationwide, almost two years after the recession’s end, inflation-adjusted retail sales may have declined in March, their worst performance in nine months, according to Capital Economics. The Bloomberg Consumer Comfort Index stands at minus 42.6, down from minus 20 at the start of the recession in December, 2007.
For some homeowners, prolonged financial trauma has transformed their attitudes toward spending. Tom LeTendre, 47, a food services warehouse operations manager, and his wife Diane, 50, lived well in the years after their 1998 purchase of a $98,000 home on the west side of Phoenix. “We were very comfortable. We went to dinner when we felt like it. We bought the things we needed to enjoy life,” he said in an interview.
Repeated Borrowing
Over the next few years, as home prices rose, the LeTendres repeatedly borrowed against their home. They refinanced into an adjustable-rate mortgage for the final time in 2006, a year that saw Phoenix prices jump more than 40 percent. Today, with an annual household income of about $80,000, they owe about $260,000 and have stopped paying their mortgage. Homes in their neighborhood have sold recently for $45,000 to $65,000, according to Zillow.com.
During the housing boom, homeowners like the LeTendres routinely tapped their homes for extra spending money. So-called “cash-out” refinancings peaked at $318 billion in 2006. Last year, consumers extracted just $32 billion, the smallest inflation-adjusted annual total since 1997, according to Freddie Mac. “That channel of wealth, which was driving consumption spending in the first half of the decade, is closed,” said Michelle Meyer, an economist with Bank of America Merrill Lynch in New York.
Dental Bill
As recently as 2007, the LeTendres used their housing equity to pay a $25,000 dental bill, fund a Caribbean cruise and cover thousands of dollars in home improvements. Tom LeTendre, now hoping his bank will permit him to dump the house for whatever the market will bear and walk away, was a regular customer at the local Home Depot, spending freely as he took down an interior wall, extended a carport roof and did some cabinet work. He rarely patronizes the store these days; on his last visit, he spent $8.
“My outlook on a lot of things has changed,” he said. “I don’t need an iPad. I don’t want to give anybody my money for something unless I think it’s worth it. I’m very reluctant to buy into the commercialism.”
Atlanta-based Home Depot Inc.’s $3.3 billion net income for the year that ended in January was 43 percent below its peak profit five years earlier.
Smaller Projects
Such cautious consumption also has touched local businesses. Brandon Holtzman, of family-owned Holtzman Home Improvement, says homeowners have pulled back from the full-scale projects that cost $100,000 or more. Today, the typical job involves perhaps installing a new bathroom for $10,000, he said in a telephone interview. “They don’t want to pay as much. The jobs are smaller,” he says.
Some victims of the housing catastrophe should have known better. Les Meyers, 74, spent a half century in real estate in Indiana and Illinois before moving to Arizona. Five years ago, he and his wife bought a $330,000 home with two bedrooms and a den and then spent an additional $70,000 improving it. In December, his lender agreed to a short sale of the home for $229,000.
In 2005, Meyers says he made about $300,000. This year, having returned to his roots as a real estate salesman, he’ll be lucky to make $35,000. He filed earlier this month for personal bankruptcy. “We’re starting over. We don’t have a nickel of any asset other than a car my wife owns,” he says.
Blaming Wall Street
The experience has left him bitter and broke. Meyers blames “thieves” on Wall Street who have corrupted the political system and left homeowners stripped of their principal asset.
“If you think about it, it gets difficult,” he says. “So you can’t. You just have to think: ‘I’m ok.”
Overall, housing’s drag on consumption could be significant. A 10 percent drop in house prices shaves $105 billion from consumption and 1 percentage point from GDP growth, according to a 2008 paper by Raphael Bostic and Stuart Gabriel of the University of Southern California and Gary Painter of the University of California. Since peaking in 2006, home prices have fallen nearly 33 percent, according to the S&P/Case-Shiller 20-city index. The index yesterday recorded another drop to just above its recession low.
Maricopa, the name of a community ravaged by the housing downturn, isn’t Spanish for “negative equity,” but it might as well be. On a recent Wednesday evening, Chad Chadderton, a local realtor, welcomed about two dozen people to a seminar for underwater homeowners with the news that most homeowners in the desert town a 40-minute drive from downtown Phoenix are upside down on their mortgages.
Retired Warden
Bill Smith is among them. A retired Maryland prison warden, Smith, 65, bought a home in a development called Rancho El Dorado for $238,000 in 2006. Last month, a house almost directly across the street sold for $59,900, according to Zillow.com.
Seated at a table in the back room of a local Native New Yorker restaurant, Smith said he was still making payments on his mortgage despite the loss of value. “Maybe in three to five years” the home would again be worth what he’d paid, he said.
A Marine Corps veteran who lost three fingers in Vietnam, Smith a few moments later acknowledged reality. “It’s like you’re putting money in a hole,” he said. “It’s eating at me.”
A few miles south in the neighborhood of Maricopa Meadows, a young couple mulled costs that go beyond the financial. Sitting at their kitchen table, John and Mary Arrison are a study in dejection and regret. Their four-bedroom 1,600 square foot home cost $193,000 in 2006. They still owe about $170,000, plus a $60,000 home equity line they took out as home prices peaked.
Last Payment
John, 44, a factory service representative for a maker of outdoor security systems in Tempe, says the mortgage became unmanageable after his wife, 43, quit her job at Minneapolis- based Target Corp. to return to school. In March, a potential buyer offered the couple $56,000 for their dream home. The Arrisons, who made their last mortgage payment seven months ago, are waiting for their bank to approve the sale.
Dirk Street, where the Arrisons planned to grow their family and build a life, now is lined with “For Sale” and “For Rent” signs. The neighbors, next door and across the street, are renters and strangers.
It was a nice street when the Arrisons and their two little boys moved in. Not today, they say. The police have become frequent visitors, drawn by a spate of domestic disputes. Another renter nearby scared them with a pair of pet pit bulls.
“It came to the point I didn’t feel safe walking to the park at the end of the street with my kids,” says Mary. “It’s not even a place I want to live anymore.”
Loan modification has recently become the most viable method for homeowners to reach out for assistance from their lenders to avoid foreclosure.
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