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Turmoil In The Housing Market Makes Recovery All But Impossible

• BusinessInsider.com/
 
The housing market is likely to remain at historically low levels in 2011 to the detriment of the economy. According to data provider Zillow.com home prices fell by another 2.7% in the 4th quarter of 2010, the largest quarterly decline since the first quarter of 2009. Prices were down for the quarter in all 25 of the nation's largest metropolitan areas, and down year-to-year in all but one. A full 27% of homeowners carrying a mortgage were under water at year-end. This amounts to 15.7 million homeowners and is a leading indicator of future foreclosures that will throw large amounts of additional inventory on the already burdened market. Moreover, the under-water homes were not confined to the well known trouble spots such as California, Florida and Arizona. Mortgages were 39% under-water in Chicago, 54% in Atlanta, 42% in Minneapolis-St. Paul, 41% in Denver and 38% in Cleveland. Actual foreclosures dropped in the 4th quarter as a result of bank moratoriums and the delays associated with the "robo-signing" scandal, but are expected to rise once again as the mess is unwound and more defaults occur among the huge number of households with under-water mortgages. The renewed rise in foreclosures is likely to result in a continued drop in home prices, particularly when we consider that homes are still somewhat overvalued compared to disposable income and rentals, and that mortgage rates have risen from 4.7% to 5.3% over the last two months. We expect the housing situation to cause additional problems for the economy. According to the Center For Economic Policy Research (CEPR), if house prices decline by another 15%, the loss in household net worth would amount to about $2.5 trillion. A consensus of various studies indicates that consumers spend about 6 cents for every dollar of housing net worth. Therefore a $2.5 trillion decline in consumer net worth would lead to a drop of $150 billion in consumer spending, amounting to 1% of GDP.

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