Wall Street and Main Street are a million miles apart, says economist and former Clinton administration Labor Secretary Robert Reich, and that doesn’t bode well for the recovery.
The Dow Jones Industrial Average has busted through the psychologically important 12,000 mark, the first time it has seen those numbers since the middle of 2008. Yet housing prices are falling, and that’s what matters to most Americans, Reich contends.
Reich points out that the vast majority of Americans simply aren’t taking part in the recent stock boom. The richest 1 percent of the country owns more than half of the shares traded, and the next 9 percent own 40 percent, he notes.
“What do most Americans own? To the extent they have any significant assets at all, it’s their homes,” Reich writes on his blog.
“And the really big story right now — in terms of the lives of most Americans, and the effects on the U.S. economy — isn’t Wall Street’s bull market. It’s Main Street’s bear housing market.”
Home prices have already fallen more from their peak than they did in the Great Depression, 26 percent versus 25.9 percent then, according to home-pricing site Zillow. Right now, approximately 11 percent of all homes in the United States stand empty, reports the Census Bureau.
The home ownership rate has slipped back to 1988 levels and the coming foreclosure figures are numbing to even contemplate: Eight million Americans are a month behind on their mortgage payments, 5 million are two months or more behind, and 1 million will be kicked out of their homes this year.
Three million homes have been taken by banks and must now be sold to someone else. Deutsche Bank figures 14 million people are "underwater" on their home loans and that number will rise to 20 million by the end of this year. (Homeowners are underwater when their house is worth less than the value of their mortgage.)
Meanwhile, 11 states — including foreclosure hotspots such as California and Arizona — don't allow banks to chase borrowers who walk away in so-called “strategic” defaults. The bank and its investors simply have to eat the loan.
Prices have fallen in all the major U.S. metros, according to numbers published by The Wall Street Journal, even in places relatively unscathed before, such as Seattle and Portland, Reich notes.
“Things could easily get worse on the housing front because millions of owners are in various stages of foreclosure or seriously delinquent on their mortgages. Millions more owe more than their homes are worth, and, given the downward direction of the housing market, are going to be sorely tempted to just walk away,” Reich says.
“This means even more foreclosure sales, pushing housing prices down even further.”
Washington is incapable of turning the tide in the housing crisis, Reich says, and Wall Street has simply turned its back on the issue. “Don’t be fooled. The American economy isn’t back,” he says.
Karl Case, one of the economists who co-founded the S&P/Case-Shiller home price index, says he believes housing prices have bottomed.
“Prices have gone flat, bouncing around at what I think is essentially a bottom,” Case told Bloomberg News in a radio interview. “We’re really going to have to wait to see what the spring market brings.”
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