Are you a dope for buying a home in the U.S. right now?

If you need and want one, there’s no harm in that. Yet if you think it’s an investment that will actually appreciate, you’re taking a sucker’s bet.

During the bubble years, the “greater fool” theory prevailed. When you bought a home, you were confident that someone would buy it for a higher price than you paid. “Flippers” prospered from this mass psychology.

Right now, it’s a “lesser fool” market: You’re hoping that you’re not foolish for buying a depreciating asset in a troubled economic climate. Millions stay out of the market just to avoid the feeling of doing a fool’s errand.

Home prices are still dropping in many areas with no real bottom in sight. Zillow, the real estate tracking service, recently reported that first quarter prices were approaching the declines last seen in the Great Depression.

The U.S. home market is no longer in triage mode. It’s a train-wreck. Zillow said home prices “are no longer due to bottom out” this year. When will they, then? It may take years, and here’s why.

Anyone who bought during the bubble may never see any appreciation. Since most of them are “underwater” — the mortgage is more than the home’s value — they have no economic stake in the house. They may join a growing wave of “strategic defaults.” At least one quarter of the entire market is stuck in this way.

I’ve known several neighbors who’ve walked away. Why pay financing, taxes and maintenance on a property that isn’t likely to pay you back in the near future — if ever? It’s not an investment. The more you pay, the deeper you get into a sinkhole. Banks won’t re-value the home and lower your payment, so what’s the point? It’s simple emotional math.

Adding insult to injury are two more pieces of bad housing news. There are about $20 billion worth of mortgage resets coming due on adjustable-rate mortgages this coming year, my colleague Linda Stern reports.

If banks and mortgage insurers adhere to unusually high credit standards, millions won’t be able to refinance and will lose their homes.

On the high end of the market, the loss of federal mortgage guarantees for homes prices $729,750 and above, will hurt even more. Residents of expensive coastal states such as California, Connecticut, Massachusetts, New York and New Jersey may see prices plummet.
Will there be even more price declines as desperate sellers compete with highly-discounted bank-owned properties? In several markets, banks own from 40% to 56% of all properties (Detroit, Cleveland, Chicago, Minneapolis, Memphis, Tampa and Fresno), according to ClearCapital, a property information company.

With foreclosures at an all-time high, prices can only drop more unless bargain-hunting buyers come into the market en masse or the government brings back home buyer tax credits to stabilize the worst markets.

Markets with the highest negative equity ratios — those the most underwater — will have the hardest time recovering. Leading in negative equity by percentage, according to Zillow, are Phoenix (68%); Orlando (64%); Riverside, CA (48%); Tampa (47%) and Miami (43%). Only Boston, Dallas and Pittsburgh had underwater ratios in the single digits.

Since the federal HAMP program didn’t force banks to negotiate with homeowners to reduce principal or interest payments, they are under no obligation to keep people in their homes. That’s why I’m no fan of HAMP. Congress should either fix it with something that will protect homeowners or dump it. To do that would involve a heart-searing national conversation on the importance of homeownership and the American Dream. This talk is long overdue.
There is some hope that state attorneys general will be able to negotiate some flexibility on terms with major banks, but don’t count on anything meaningful. Outside of an outright tax by municipalities, counties or states on banks to slow foreclosures, there’s no real relief in sight.
Welcome once again to the ownership society, where your ability to negotiate with the mammoth, bailed-out money trust is critical and most likely inadequate. At this point, though, you’re more like a boxer who’s been hit too many times. You’re trying to stay on your feet and playing “rope a dope” until the referee calls the fight — even though the bout looks like it’s been fixed.