Simon has been traveling the country with a 28-page PowerPoint presentation for clients that illustrates the dire state of today’s housing market. Three of 10 homes, he notes, are now sold for a loss. American homeowners have equity (market value minus mortgage debt) equal to 38 percent of their homes’ worth, down a third since 2005 and half what it was in 1950. A lot of the decline is attributable to people who have negative equity — they owe more on their mortgages than their homes are worth.The markets are now in the process of filtering those millions of people out of their homeownership and back into renting status. This problem is worse in some parts of the country than others, particularly in Nevada, California, Arizona, and Florida, but there are local pockets throughout the country where speculation resulted in overbuilding and the housing crash means that there's far too much inventory and too few people who are willing or capable of buying those homes, especially as the price continues to slide.
Simon also points to the affordability index, which measures the ability of a family with the median national income to buy a median-price home at current mortgage rates. The index is near an all-time high and double its level in 2006 at the peak of the bubble — meaning buyers should find many more homes within their budgets. “I would never have believed this index could get so high,” he says. A rise in affordability should have spurred purchases, boosting prices and keeping a lid on the index. “What this instead means to me is that the credit is not available to most people,” he says. “Houses aren’t cheap if you can’t get the loan.” Simon worries that the problem will get worse in October, when Fannie Mae, Freddie Mac and the Federal Housing Administration drop the maximum mortgage they will buy to $625,000 from $729,750 as a temporary increase expires.
The crux of Simon’s analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners, and that the market is in the protracted process of evicting this group. He believes housing prices will decline 6 percent to 8 percent nationally, with 6 million to 7 million more foreclosures yet to come.
That isn't to say that some parts of the country have been comparatively resilient to the crash; the New York metro area has been largely unscathed from the housing crash, and there remains a housing shortage in parts of the city because the area is so highly developed. There just isn't space to build new housing fast enough to accommodate additional growth and that's served to stabilize and moderate the pricing.