Housing Report from DailyReckoning.Com

Yesterday, news came out that Merrill Lynch had lost twice as much money as forecast...Lehman Bros. laid off 1,300 people in its mortgage unit...and housing starts hit their lowest level since ’91.

This last item is really good news, but investors didn’t seem to see it that way. The bear market in housing can’t end until new building slows. Until now, builders have been putting up houses that they had in the works before the crisis hit. These houses merely added to the inventory that needs to be sold off before prices can stabilize.

It’s going to be a long process. There are two million homeowners who face mortgage increases in the next two years. Their houses are already down 5% to 10%...and more. The Bureau of Labor Statistics added that, once discounted for rising prices, the wages of American workers fell 0.9% between December 2006 and December 2007. Now, with unemployment rising...many of them are not going to be able to keep going.

The ratio of unsold, vacant houses to the houses on the rental market is 50% higher than it was 20 years ago. And from the Bay Area of California comes word that sales are at a 20-year low.

It gets worse. Business Week warns of a “home equity crisis ahead.” People not only borrowed to buy houses...they borrowed against their houses to buy other things too. Now there is $14.7 billion of home equity line credit said to be delinquent. Bad home equity loans are up 130% at some lenders, from ’06 to ’07. It’s an $850 billion business...and much of it is going to go bad .

Even “rich” homeowners are having trouble, adds a Reuters article. Elite neighborhoods, of $1 million plus houses, are beginning to look a little gaunt, says the report. The influx of marginal new buyers...and the rise in house prices...teased middle-class homeowners into houses they couldn’t really afford. They stretched their finances in order to enjoy a bigger, more prestigious house...hoping that the rise in prices would pay off big. It didn’t. Now, they’re really stretched...and, for many, the elastic is beginning to snap.

I said it elsewhere on this board, but I'll say it here again. Those homeowners are not rich. Having a home worth 1 million is considered affluent at best. The affluent have more in common with the working poor and the middle class than they do with the elites. The elites are insulated from the housing market downturn due to the sheer size of their wealth. It acts as a buffer against economic hardship. Truly wealthy people wouldn't bother with a mortgage for a million dollar home. They'd simply pay on the spot.

If you fall into a race to keep up with the Joneses, the Joneses have already won.