FT Alphaville � Underwater mortgages and US housing

Thanks to Economix for directing us to these two impressive charts from the San Francisco Fed:

The charts show the dramatic rise in underwater mortgages throughout the US in the last ten years, a result of the big fall in house prices since the crisis. As we’ve noted before, a prevalence of underwater homes has reduced labour mobility in the US, and there is preliminary evidence showing that negative equity is correlated with unemployment.

In separate housing-related news, New York Fed president William Dudleycommented at length today about the housing market, but we’ve excerpted the especially interesting parts:

Housing market activity—both new construction and sales—remains depressed. On the construction side, total housing starts are running at just 600,000 units per year (seasonally-adjusted) in recent months. This is up from 530,000 units at the trough in the first quarter of 2009 but it is still extremely low by the standards of the last 50 years. In fact, the rate of new construction is so low that there is barely any net growth in the U.S. housing stock these days.

One reason why so little housing is being built is that many existing homes stand vacant. We estimate that there are roughly 3 million vacant housing units more than usual. …

Impediments to home sales include tight lending standards, a weak job market and continued uncertainty regarding the future path of home prices. The large decline in home prices that occurred between 2006 and 2008 is also important. This decline reduced the amount of equity that owners have in their homes, making it difficult for people to come up with the funds needed to “trade-up” and move into better homes. …

While RealtyTrac reports that foreclosure completions in the United States exceeded 100,000 for the first time in September, it is important to remember that foreclosure is a lengthy process in most states. Our data indicate that, in recent quarters, borrowers are becoming less likely to fall behind on their mortgages, so fewer households are now entering the foreclosure process. At the same time, though, major lenders have acknowledged serious problems in the processes they have used to repossess homes and announced moratoria on new foreclosures. Taken together, these developments suggest that the situation in housing remains uncertain for the foreseeable future. …

At present, the extent of the documentation problem and its wider ramifications are still uncertain. In conjunction with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, the Federal Reserve is therefore seeking to establish the facts through a review of the foreclosure practices, governance and documentation at the major bank mortgage servicers.

And as we mentioned earlier this month, the number of underwater homeowners means that increasingly lower rates are required for people to refinance.

Needless to say, all of this adds a sobering perspective to the news this week that housing starts climbed again in September, and that homebuilder confidence has rebounded somewhat. It’s always a relief when these figures don’t surprise the other way, but neither represents a dramatic improvement in this depressed market.