Nervous homeowners and economic analysts have been wondering how much worse the housing market could get. On Thursday they got an answer: plenty.
Foreclosures are at a record high. Home equity is at a record low. The housing market is spiraling down with no end in sight and taking people's sense of economic security with it.
For the first time since the Federal Reserve started tracking the data in 1945, the amount of debt tied up in American homes exceeds the equity homeowners have built.
The Fed reported Thursday that homeowner equity actually slipped below 50 percent in the second quarter of last year, and fell to just below 48 percent in the fourth quarter.
And that was just one example in a day of dismal housing reports.
The Mortgage Bankers Association said foreclosures hit an all-time high in the final quarter of last year. And pending U.S. home sales those in the gap between when a buyer signs a contract and when the deal closes came in below analyst expectations for January and remained at the second-lowest reading on record.
"There is no sign that we're near the bottom in the housing market," said Douglas Elmendorf, a senior fellow at the Brookings Institution and former Fed economist. "Housing prices will probably fall for a year, two or three to come."
In Utah, the percentage of homes in foreclosure also increased in the final three months of last year, according to the bankers association.
The state's foreclosure rate moved up to 0.80 percent in fourth quarter 2007, a increase of 0.14 percent from 0.66 percent during the third quarter of 2007. The national fourth quarter foreclosure rate came in at 2.04 percent, up 0.31 percent from 1.73 percent in the third quarter 2007.
Doug Duncan, senior vice president and chief economist for the Mortgage Bankers Association, said the trend upward in foreclosures in Utah and nationwide is due to flattening housing prices and the dwindling secondary securities market that no longer purchases high-risk adjustable mortgages.
"Some of those folks who had adjustables in previous periods would have re-financed and solved their problems," he said. "But in the current market without securitization, that's no longer an option."
Duncan said the fact that homeowners in many areas of the nation are no longer accumulating equity also contributes to the overall housing malaise.
Foreclosure rates nationally increased for both prime and subprime mortgages. The foreclosure rate of prime loans nearly doubled, going from 0.50 in fourth quarter 2006 to 0.96 in the same period in 2007. The subprime foreclosure rate increased from 4.53 percent in fourth quarter 2006 to 8.65 percent during the final three-month period of 2007.
Utah's foreclosure rates did not increase as steeply because the local economy is strong and the state's housing market is relatively stable, he said.
Nationally, the trifecta of reports illustrates a housing market caught up in a "very negative, reinforcing downward spiral," said Mark Zandi, chief economist at Moody's Economy.com.
Home equity, the percentage of a home's market value minus mortgage-related debt, has steadily decreased, even as home prices and homeownership rates jumped earlier this decade. That was due to a surge in cash-out refinancings, home-equity loans and lines of credit and an increase in no-down-payment mortgages.
Now, declining home prices are eating into equity, and economists expect the figure to drop even more.
Economy.com estimates 8.8 million homeowners, or about 10 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households will be "upside down" if prices fall 20 percent from their peak. The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007, compared with a year earlier.
Experts believe foreclosures will rise as more homeowners struggle with monthly payments and as the interest rates on their mortgages adjust higher. Problems in the credit markets and eroding home values are making it harder for people to refinance their way out of unmanageable loans.
The threat of so-called "mortgage walkers," or homeowners who can afford their payments but decide not to pay, also increases as home values depreciate and equity diminishes. Banks and credit-rating agencies already are seeing early evidence of it.
"If you're struggling with payments and you have negative equity in your home, your struggling isn't getting you very far," Elmendorf said. "It's very likely you want to stop and walk away."
Even for those who retain some equity, the effect on consumer sentiment and spending will be profound.
Homeowners who once happily tapped home equity for expenditures and home improvements may instead save money, as they watch their total net worth wither. Those who are willing to spend their home equity will find lenders reluctant to give out home-equity loans or lines of credit.
"People were relying on home equity to maintain consumption. They can't keep doing that once the equity's gone," said Dean Baker, co-director at the Center of Economic Policy Research. "Undoubtedly, this is one reason for the falloff in consumption in last couple of months."
Economists worry that the prolonged housing downturn has put the economy on the brink of recession. The economy grew an anemic 0.6 percent in the fourth quarter.A massive loss in home equity could even mean some Americans won't have enough money to retire. On average, housing is Americans' single largest asset, representing 39 percent of a household's total net worth.