Here's wishing that 2011's debut was brighter. The corner we hoped we had turned in 2010 looks more like a long blind bend in a never-ending road. We face the risk of another major downturn in the housing market, a so-called double dip that seems on the way with the news that, according to the S&P/Case-Shiller index, home prices fell by 1 percent in November from October after declining 1.3 percent in October from September across 20 major markets—and fell for the fourth month in a row. This now represents the greatest strategic threat to the recovery of the economy.

Millions of homes and condos stand empty. We have had a dramatic decline in prices and home equity values. The latter has declined by some $9 trillion since 2006, according to Zillow.com, the property information service company. Simultaneously, mortgage rates have tumbled so far that the affordability index compiled by the National Association of Realtors is the most favorable on record for buying a home since the association started measuring it in 1970. As of October, families earning a median income of $62,141 needed to devote only about 13.6 percent of their income to payments on a median priced home, compared to the conventional affordability level of 25 percent of income.

Yet still the signs proliferate across the land: For Sale! Foreclosed!

Other indices are glum. Home-buying intentions have slid back, and as of last fall, mortgage applications were down 36 percent from the already depressed levels of a year earlier. Experts once believed that home prices never declined for more than a calendar year. How wrong they were. True, that was the experience posted in the period after World War II, but according to the Home Value Index compiled by Zillow, values nationwide now have kept falling for more than 50 months.

Not only is short-term demand weak, but the long-term picture grows grimmer. People no longer count on receiving the rewards of ownership once taken for granted in the second half of the 20th century. According to Fannie Mae, only 67 percent of buyers expect housing to be a safe investment, compared with 83 percent in 2003. What is more, demand is slowing because household formations have slowed down. The recession has resulted in perhaps 1.5 million fewer new households. Nor is it likely that any price recovery will gain enough momentum to change all this. According to a survey by Zillow, about 30 percent of respondents are at least somewhat likely to put their home on the market once prices turn up, threatening to smother any incipient recovery.

Homeowners wishing to sell are faced with unique pressures. Not only is the backlog in unsold homes roughly double the normal level, but there is a burgeoning cloud of potential foreclosures. Estimates of homes either with loans in delinquency or in some stage of foreclosure are as high as 8 million, a so-called shadow inventory. Many of them will be dumped on the market sooner or later.

Even more worrisome today is the unprecedented threat to the housing market described as negative equity, where the mortgage exceeds the value of the home. An estimated 5.5 million U.S. households are tied to mortgages that are at least 20 percent higher than the current home value. These are the borrowers most likely to default. For these families, the American dream of home ownership has turned into a nightmare—as it has for lenders. Deutsche Bank, an authority on housing, is the most pessimistic; its analysts predicted in 2009 that as many as 48 percent of the mortgages in America could have negative equity by this year. In any case, the raw material for foreclosures—delinquencies—are on the rise, so we can certainly expect a significant increase in the roughly 25 percent of home mortgages already underwater and with that, more delinquencies and foreclosures.

Here too the statistics are depressing. The Mortgage Bankers Association estimates that 8 million homes are 30 days or more behind on mortgage payments or in foreclosure. Very few of these delinquent loans are being cured and the bucket of non-performing mortgage loans is being filled every month with new defaults and delinquencies. In 2005, homeowners retrieved 66 percent of the loans delinquent for 60 days or longer. By the middle of 2009, this percentage had shriveled to a paltry 5 percent, according to Alan Abelson of Barron's magazine.

Nearly 3 million homes were repossessed by banks between January 2007 and August 2010, according to RealtyTrac, and many others have been taken over in the months since. The result is a continued dead weight dragging down homeowners, the financial world, and the economy at large, for residential construction and housing have long been the single most important economic engine in the United States.

There is little prospect of improvement. Add impending foreclosures to the backlog of 2 million homes for sale and there seems to be ample justification for the expectation that all prices will continue to decline for at least a year, and perhaps two years, before there is a rebound. The estimates are that prices will fall from 10 to 20 percent over the next several years. This would bring the total decline from the peak valuations of the first quarter of 2006 to about 40 percent. But the stabilization of housing prices is impossible given the prevailing amount of inventory, both real and shadow.

All of the above is what shapes the shadow inventory threatening still more downward pressure on home prices. Median resale prices have been declining at an accelerated pace, according to the National Association of Realtors, particularly as mortgage lenders continue to tighten already restrictive standards that have depressed sales and takeovers. As David Rosenberg of Gluskin Sheff put it, "If home prices don't decline at least another 10 percent, then the laws of supply and demand will end up being repealed as far as it pertains to residential real estate." In an atmosphere of dormant demand, declining home-buying intentions, and mortgage applications remaining near decade-low levels, residential real estate markets have not yet found anything like a bottom. Millions more American families remain at risk of losing their biggest asset—their home equity.

What is to be done? The options are all bad. A moratorium on foreclosures would reward those who game the system and stay in homes rent-free, and it would be opposed by people struggling to keep paying their mortgages who ask, "Why not us?" As for a repeat of the tax credit given for first-time borrowers, it cost taxpayers about $15 billion, twice the official forecast. Part of it was due to fraud; there were 19,000 tax filers who claimed the credit but didn't buy homes and 74,000 who claimed at least $500 million in tax credits who already owned homes.

Using the government-supported agencies like Fannie Mae and Freddie Mac to mediate housing markets has been a mistake. They have distorted mortgage markets and left taxpayers holding the bag to the tune of at least $150 billion and still rising compared to the $25 billion asserted in Congress when they were taken over by the government. Making profits is no longer the objective of Fannie and Freddie; their objective has become saving the housing sector.

Perhaps the only thing to do is to find a way to reduce the principal of the mortgage to the value of the house. But the cost to the lenders—be they banks or the taxpayer through Fannie and Freddie—would be gigantic: in the range of a trillion dollars. The record of modifying mortgages is poor. Standard & Poor's believes 70 percent of loans already modified will redefault. This would be another huge bill that taxpayers and investors would assume on behalf of those people who purchased homes they couldn't afford, believing that prices would continue to rise.

If mortgages represented roughly 50 percent of the total home value, the 30-plus percent decline in home prices to date has reduced the homeowner's equity by 60 percent. Now we face the possibility of another major down-leg in home equity and its negative consequences for the confidence of consumers and their willingness to spend.

Holiday spending has encouraged hopes of stiffening the fragile recovery. This time our recovery will not be able to depend on a growing U.S. housing market, as was the case in all postwar recessions. It is a recovery that is at risk and the risks are heightened by the distraught conditions in the U.S. housing market.

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