Nowhere Near The Bottom

If these Deutsche Bank analysts are right about the housing market, we're nowhere near the bottom of the recession (emphasis mine:)

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.

Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

If these figures are accurate, with 48% of homeowners underwater? Forget it. Our consumer-driven economy will be driven into the ground. You won't just have a devastated housing market, hell you won't have a housing market period in some locations. It's a meltdown, millions more people are going under and the market will not be able to take something like that.

We're talking systemic risk time again. Exactly what consumer goods and services are people going to be able to buy when underwater with no buyers? Nothing. They're going to walk away and jingle mail the keys back to the banks. If this is true, we'll be wishing for 9.5% unemployment by 2011. Summer 2009 will look like a picnic compared to two years from now.

Basically Deutsch Bank is calling for a double dip recession that might as well be a depression.

Scary, scary bad if this comes true. And yet given where we are and the stubborn refusal of our elected officials to rein in the banks, I'd have to say the possibility of this happening is there, if not somewhat likely given our current trajectory. The rebound we've seen in the markets will not last much longer. The bottom will fall out again at some point, and soon. There's nothing to me that indicates the market's current path is sustainable.

Every other homeowner underwater. Wiped out. No equity. Screwed. How bad could this get?

Watch. We're nowhere near out of the woods yet.