NEW YORK (
) - The toxic-asset dilemma of mortgage debt has moseyed over from Wall Street balance sheets to Main Street's front door.
During the height of the financial crisis,
banks were plagued by the specter of residential real-estate assets whose values were indeterminable. Few buyers wanted to touch the stuff, no matter
how low the price or
how seductive the federal incentive.
The issue mostly pertained to mortgage-backed securities tied to subprime mortgages and their derivative products, which were all going bust. But now the issue has become prevalent at the brick-and-mortar level - actual homes that can't be bought or sold.
A healthy chunk of existing homeowners are out of the running - already saddled with unworkable mortgage debt or homes that can't be sold profitably. For the sliver of enviable borrowers who can both afford a home and qualify for a new mortgage, the home-price outlook is too uncertain.
The small decline in the Case-Shiller Home Price Index on Tuesday provided the latest evidence that the country may be headed for a double-dip in housing, if not the broader economy. The index showed home prices in the top 20 metropolitan areas had declined by 0.1% on a seasonally adjusted monthly basis.
Data from the Census Bureau and National Association of Realtors have shown worse trends. Prices of new homes have plummeted in recent months, and have been dropping on an annual basis since the fourth quarter of 2007. Existing home prices have also remained soft, if flatter, in most markets since homebuyer tax credits expired in April.
Mortgage rates, meanwhile, have plunged by more than half a percentage point over the past four months, hitting historic lows under 4.5% in August.
Almost any way you slice it, homes are cheap and so is mortgage debt. Yet few are buying - consumers are simply too afraid to pile reams of new housing debt onto their balance sheets.
"People understand the good affordability conditions with stable home prices in most areas, but they're concerned about the economy and speculation on Wall Street," says Vicki Cox Golder, president of the National Association of Realtors, which tracks data on existing home sales.
>>>Refinance Bill Drastically Alters Market
Only four of the 20 metropolitan areas tracked by the Case-Shiller index showed improvement in pricing, the lowest number in over a year. Among them were unsurprising areas like New York, one of the strongest economic regions, where home values have remained resilient and Washington, the nucleus of economic activity for the United States.
Jared Franz, an associate economist at T. Rowe Price, predicts more pain ahead. He says the springtime "bounce" in housing data was largely the effect of the homebuyer tax credit and not much else.
"A payback of these tax-induced price effects is likely over the next few months, which, combined with seasonal slowing in housing activity could see more softness than is typical through year-end," says Franz.
With top mortgage lenders like
Bank of America
running a tighter ship, questionable borrowers are out of luck. Recent research by the mortgage-information site Zillow found that about one-third of Americans wouldn't qualify for a mortgage today and more than half would have to pay above-market rates.
Meanwhile, creditworthy borrowers have been reading the headlines about mortgage woes and home-price declines, watching neighborhoods decline under the dark curtain of foreclosure. Who wants to make a $200,000 or $300,000 home purchase - even at a supremely cheap rate - if the asset stands to depreciate by the holidays like a $20,000 car driven off the lot? If a potential borrower is lucky enough to have remained above water over the past few years, there's little chance he wants to dive into the housing market right now.
-- Written by Lauren Tara LaCapra in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.