Foreclosure Mess Holds Economy Back

Ronald Greenspan portrait
Ronald Greenspan

“This country is about halfway through the foreclosure bubble and the process needs to accelerate” before the economy will turn around. 

Real estate bankruptcy guru Ronald Greenspan delivered that glum assessment on Monday to western bankruptcy judges during a gathering of 600 federal judges and lawyers at the 9th Circuit Judicial Conference in Carlsbad, Calif.

He got their attention. Greenspan, the senior managing director of FTI Corporate Finance, is the guy who predicted the mortgage meltdown in a 1999 American Banker article.

His dour message now is particularly meaningful for the nation’s largest appellate court, which is swamped with real estate-fueled bankruptcies. Four of the nine states in the 9th circuit rank among the top 10 states for foreclosures: Nevada (1), California (2), Arizona (3) and Idaho (8).

“This is going to mean tons more work for us,” said Judge Dennis Montali, a long-time bankruptcy judge in San Francisco. 

 While national bankruptcies rose 2.6 percent in the 12 months prior to March 2011, the figure neared 12 percent in the 9th circuit, the highest of any of the 11 regional circuit courts, according to federal bankruptcy statistics released Thursday.

The effect extends far beyond the bankruptcy courts. Greenspan pointed out that in the last 50 years, every economic recovery has been preceded by a rebound in new housing construction. That isn’t happening in the current environment.

Private residential construction has “fallen off a cliff,” down from 1.1 million new homes per year – what’s considered necessary to supply new families and immigrants – to 400,000 in the last year, he said. 

The loss of new home construction is a major drag on the economy.  New home building is 2.5 percent of GDP, according to Greenspan. And as for jobs, the mortgage crisis has cost 2.2 million construction jobs.  If those workers were back on the payroll, unemployment would be closer to 7 percent nationally, Greenspan told the audience, which included 75 bankruptcy judges and lawyers. 

He warned that the housing market has farther to fall. Greenspan believes the country is in the process of reverting to what economists consider the longstanding norm for home ownership, which for decades ranged from 63 to 65 percent of households.

The U.S. went on a 12-year tear in the 1990s, when the homeownership rate rose to 69 percent, with each percentage point representing 1.5 million homes.

Even after the 2008 mortgage crash, ownership was still 66 percent. Greenspan expects it to revert to the 63 to 65 percent range. He doesn’t expect a return to the 2007 peak any time soon. 

Wealthy Americans whose chief assets may be in stock or other investments have nearly fully recovered from the 2008 collapse, according to Greenspan. But the vast majority of Americans have their wealth in their homes. Household residential wealth dropped from $14 trillion to $6 trillion with the declining value of homes. 

“Most Americans had 50 percent of their personal wealth wiped out,” Greenspan said.  “The mass effect on consumption is that they are not spending because they are trying to rebuild their balance sheets and save for retirement.” 

In the end, he sidestepped the debate over whether we’re headed for a double dip recession. 

“We’re not having a double dip recession,” he told the jurists. “We are in the same dip that was just interrupted by the federal stimulus.”

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