3 Reasons Housing May Keep Falling

Despite some slightly better housing data as of late such as existing home sales and a 'less bad' Case-Shiller home price index, the forecast for next year still looks cloudy with a chance of another drop.

The reasons are: 1) an estimated 23% of homeowners owing more on their house than it's worth, 2) a continued increase in foreclosures, and 3) the risk of higher interest rates.

A disturbing new report from First American CoreLogic estimates that 10.7 million households had negative equity.     And the numbers may be worse than that because CoreLogic recently changed its valuation methodology.    From the WSJ article:

The changes reduced the total number of borrowers under water -- although both old and new methodology show increases from the previous quarter. Using the old methodology, the portion of underwater borrowers would have increased to 33.8% in the third quarter.

About 24 million households own their homes with no mortgage.

Foreclosures also remain a huge problem.    RealtyTrac estimates that while foreclosures did drop fractionally from September to October of this year, nationwide foreclosures jumped 19% from last year.

It's not just people who have lost their job that are being foreclosued upon.   Many of those foreclosures are what's being called "strategic defaulters;" individuals who can afford to pay their mortgage but simply choose not to, presumably because they are so far underwater they see little incentive to try and catch up.   This is the 'moral hazard' many have spoken about the last few years and doesn't bode well for housing confidence down the road as many of these folks may put their house on the market as soon as prices begin to stabilize in their neighborhood.

The biggest risk may be higher interest rates.    Home sales remain weak even with lower prices and lower rates.    When rates rise, sales and purchase prices tend to fall.   Interest rates may remain low through next year, but at some point they will rise.    And when they rise, borrowers get less for their money and drive prices down, potentially creating another leg down as frustrated homeowners try to get out of their houses.