Wall Street Journal article on housing is not pretty.

There was an article this morning in the Wall Street Journal which speculates that according to First American CoreLogic, a real-estate information company based in Santa Ana, California, nearly 1 in 4 homeowner is underwater on their home in the USA.  That is they owe more on the mortgage than the home is worth. This runs counter to the some of the recent home data like existing home sales which showed a sharp 10.1% gain last month and suggests that the housing market may be bottoming.  Instead,  the gains from 1st time homeowner measures, may in fact be suckering new purchasers into a declining market and sharing the burden with current homeowners.

The implications of the data is that more and more homeowners will likely feel the squeeze from what has always been a safe investment for Americans.  In addition, it also reminds the market that the odds are increasing that if you lose your job, you lose your house.  With the weekly initial claims still showing 500,000 new people losing their jobs every week, unless those people find jobs, the prospects for homeownship is bleak.

In addition, turnover is likely to remain lower than usual as people are likely to remain tied to their house absent a maor principle restructuring by the bank.   Lower rates are also of limited benefit as people cannot refinance if they are appraised lower than the equity in the house and they don’t have the cash to ante up again nor the incentive to put more money into the house.   What’s the old adage, if you owe $10,000 to the bank, you are in trouble. If you owe milllions to the bank the bank is in trouble.  Well what happens when 10.7 million American’s combine forces and owe the bank trillions of dollars.  The bank is in trouble.

Banks are sitting on a knifes edge and playing a game of chicken with the homeowner.  Will the homeowners squeeze the bank and force their hand, or will the homeowner do the right thing and live through the rough time and continue making their payments? 

The article states that to prevent foreclosures, banks have been willing to restructure payments so homeowners can continue to make mortgage payments.  Although this is good for cash flow issues, it does little to improve the equity situation unless home prices suddenly started to rise again.  Banks have stayed away from writing down principle on the loans for fear of the other homeowners able to pay their mortgage, may catch on and purposely default on payments in order to be absolved from the negative equity dilemma. 

The report is alarming and reinforces the fragile state of the housing market and potential implication to the economy.    The spending power of the consumer cannot maintained and bank safety will likely  be questioned at some point once again down the road.  The long term implications cannot be good for the stock market I would think nor for the knock on effects of the global economy.