Housing market worse than Depression

More than 1 million home foreclosures in U.S. last year
The housing market just got more severe than the 1930s Great Depression.

In November, home prices fell for the 53rd straight month, taking the value decline past the fall experienced during the Depression, CBS News reported.

Home prices have fallen nationwide 26 percent during their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928-1933.

More than 1 million homes were foreclosed in 2010. As of today, 5 million home borrowers are at least two months behind on their mortgages.

One in 45 U.S. households received a foreclosure filing last year, for a record high of 2.9 million homes.

The home-mortgage crisis doesn't show any signs of abating.

Last year, buyers purchased new homes at a seasonally adjusted rate of 329,000, the fewest number of new homes purchased on records going back 47 years and nowhere near the healthy rate of 600,000 a year, according to the Associated Press.

"A double-dip [in the U.S. housing market] could be confirmed before Spring," David Blitzer, S&P 500 Index Committee chairman, told CNBC.

Red Alert has reported that the crisis in the U.S. housing market will not bottom out until home prices have dropped a full 50 percent from the 2006 peak, a prediction that means a double dip in the U.S. housing market is inevitable.

Housing prices to drop even more

Yale economist Robert Shiller created an index of U.S. home prices going back to 1890, estimating the price of a standard home over that period of time.

The goal was to track the value of housing as an investment over time, presenting housing values in consistent terms over more than 100 years and factoring out the effects of inflation.

Shiller's analysis demonstrated home prices peaked in 2006, at prices that began rising dramatically as Federal Reserve Chairman Greenspan and the Federal Reserve held interest rates at or near 1 percent, in 2003 and 2004.

If a standard home sold in 1890 for $100,000, with inflation adjusted to reflect today's dollars, the house dropped to $66,000 in 1920, a level that more or less persisted until end of World War II and the housing expansion that accompanied the post-war baby boom. In 2006, the standard house was priced at $199,000, up to 199 on the index scale, or 99 percent higher than the standard house in 1890.

What this means is that the housing bubble had approximately doubled the value of the standard home in the United States by 2006.

The hard news here is that homeowners may have to take the estimated price of their home in 2006 at the maximum point of the bubble and divide that value in half to get a true estimate of the home's value in a normal market valuation.

As housing markets have adjusted downward since 2006, most homeowners have felt the pain with even a 10 percent drop in values.

Underwater mortgages increase when homeowners make small down payments, 10 percent or less, to purchase the home, and the home decreases in value by 10 percent or more.

The housing market in the U.S. will not stabilize until home values reduce to 50 percent of their 2006 peak market value, making unfortunately realistic the prediction that that 1 million homes will be foreclosed this year, plus an additional 9 million homes foreclosed by 2012.

Obama mortgage-modification program fails

In January 2009, the Obama administration announced its Making Home Affordable Program, or HAMP, to commit $75 billion to help 3 to 4 million homeowners refinance their homes.

The HAMP effort from the beginning was hampered by the program design.

HAMP does not allow judges in bankruptcy cases to modify home loans, and HAMP government employees do not have the authority to insist that banks reduce outstanding home loan principal amounts to a level where the borrower might be able to stay in the home.

Instead, HAMP is limited to bringing down interest rates in an effort to reduce home borrowers' monthly mortgage payments to no more than 31 percent of their income.

As of May 2010, HAMP had reworked only 340,000 mortgages, a number experts consider to be only about one-fifth of the homes eligible for a loan modification under the program.

Treasury Department officials report that only 4 percent of troubled homeowners have received long-term help under the Obama administration's foreclosure prevention program.

The inevitable economic reality is that the bursting of the mortgage bubble demands home prices must devalue, to come back in line with true market values, with the unavoidable result that losses in inflated home values must be taken by someone – the homeowner, the bank or the government.