24/7 Wall St.

The decline of home prices continues at an unprecedented breakneck speed. According to real estate research firm Zillow, “U.S. home values continued to decline in the third quarter, falling 4.3 percent year-over-year, and 1.2 percent quarter-over-quarter.” In addition, “Negative equity rose to 23.2 percent of single-family homes with mortgages, the highest it has been since Zillow began tracking it in the first quarter of 2009.” The declines represent the 17th consecutive quarter of drops.

In some markets, as many as four out of five single family homeowners had underwater mortgages in the third quarter. Las Vegas had the highest percentage, with 80.2 percent in negative equity, followed by Phoenix with 68.4 percent. In total, 11 markets tracked by Zillow had negative equity above 50 percent.

Zillow Chief Economist Dr. Stan Humphries said “The high percentage of homeowners in negative equity continues to be troubling, in that it represents a huge number of people who are not only more vulnerable to foreclosure, but who are essentially trapped in their current homes and are prevented from selling and buying a new home.  This has profound implications for future demand and will be a millstone around the neck of the housing market.”

The data is another sign that none of the government programs meant to salvage the housing market, the most visible of which is HAMP, have done anything to solve the problem. For reasons which cannot be explained, the homebuyer tax credit was allowed to expire this past April although it was the only way that the government had to stimulate demand. Congress may believe that the credit will cost the government billions of dollars, thereby increasing the deficit. But, it is a false assumption that says a modest deficit jump can be compared with the destruction of the home market and trillions of dollars in home equity.

The government’s other failure is to fail to improve unemployment rates. Joblessness and the drop in home prices are inextricably linked. Those without jobs are more likely to default and fall into foreclosure. This also harms the value of homes near the foreclosed properties.

The Administration and Congress really only have one option to prevent the slide in home values and it is both expensive and risky. Banks and mortgage companies must be given extraordinary incentives and tough rules which will drive them to drop the amount of principle due on mortgages which are deeply underwater. This would at least allow homeowners the chance to eventually have some equity in their houses, which would give them the hope that real estate is not simply a bottomless money pit.

Douglas A. McIntyre