Everybody wants the Financial Crisis to be over. The media is quick to highlight any signs of a recovery but there’s actually still a lot more pain in store for ordinary Americans and the economy in general.

As we approach the end of 2009, sentiment is definitely not as jittery compared to 12 months ago. However, the are a number of important issues that need to be resolved in order to create a sustainable recovery.

Here are some of the problems that must be addressed to bring and end to the US financial and mortgage crisis:

1. Housing inventory: The United States has an historically large number of vacant homes. Of the houses built in the past decade, almost one in ten is currently empty. Then we have the “shadow inventory” of around 600,000 new or foreclosed properties that the construction companies, banks and lenders are keeping out of the market in an attempt to stop prices sinking further. Add to that all the homes that are likely to be foreclosed on over the next two or three years (three million is an often-quoted number) and you can see how the supply glut will keep a lid on property prices.
2. Mortgage resets: While most subprime home loans have already reset to higher payments, resulting in a wave of defaults and foreclosures, the real problem will come when a slew of option ARM mortgages reset at 40-80% higher levels in 2010-2012. Around 80% of option ARM holders pay only the minimum every month, so their debts have been increasing while their home values have been falling. There are an estimated $500 billion in option ARM loans outstanding around the country, with California’s one million or so accounting for 60% of the total value. When the payments on these loans jump, many people will default and risk foreclosure, which in turn will keep prices down.
3. Foreclosures: As at mid-2009, a quarter of all home loans in the U.S. were already under water, and industry pundits say that half will be in the red by early 2011. The number of delinquent borrowers is increasing fast, and is set to snowball over the next few years as more homeowners find they can’t afford to pay the mortgage. Only a small percentage of delinquent borrowers have so far had their loan terms modified, and many of these have simply defaulted again. Foreclosures haven’t kept pace with defaults either, meaning that there is a big backlog of pre-foreclosure properties. Unless a speedy solution to the problem can be found, the market will be flooded with foreclosed homes.
4. FHA mortgages: Since 2007, an increasing number of new home loans have
   been FHA-issued. The FHA (Federal Housing Authority), which provides home loans
   with low down payments to qualified low-income, high-risk buyers, accounted for
   close to 40% of new mortgages at the end of 2008.The risk is that this fount of
   liquidity for the real estate market would dry up if the FHA were to impose
   stricter conditions on buyers or lower its lending limits. Many of the
   properties currently being bought with FHA mortgages are foreclosures. The
   buyers typically have few assets and are particularly vulnerable to economic
   shocks such as job loss or an interest rate increase, so it’s safe to bet that
   quite a lot of these homes will be back on the market as foreclosures before too
   long.
5. End of the $8,000 first-time home buyers’ tax credit: A recent study by J.D. Power and Associates found that first-time buyers made up 56% of the market in the first half of 2009, compared with 44% in the first half of 2008. Many of them were enticed to enter the housing market by the federal government’s $8,000 first-time homebuyer credit, which, unlike in previous years, doesn’t need to be repaid. We still don’t know whether the government will extend the program after it expires on November 30, 2009, or if it will roll out a new first-time buyers’ scheme next year.
6. Employment and earnings: Hundreds of thousands of jobs are being lost every month in the United States, and the unemployment rate is the highest since 1983. Those regions where job losses have been particularly severe – such as the former manufacturing powerhouses of Ohio, Michigan and Indiana – have some of the lowest house prices. The fact that average earnings for Americans who are working are almost 5% lower than a year ago is another blow to consumer spending power, and is also weighing on home values.
7. Fear and uncertainty: In the current climate of recession, rising unemployment and billion-dollar bailouts, people are tending to be more conservative with their spending and taking on fewer large debts. Many prospective homebuyers are delaying their purchasing plans and staying in their old homes or even saving money by renting while the market stabilizes. With interest rates at an all-time low, people are also concerned that they will go up soon, which would add to the cost of owning a home.
8. Consumer credit ratings down: Millions of Americans have had their credit scores slashed, are drowning in debt and don’t have the cash for a down payment on a house. At the same time, lenders are tightening up their approval conditions and often turning down applicants with less than perfect credit. This is making it harder to buy property and many homes are going unsold.
9. Baby boomers will sell to fund their retirement: Of the 77 million Americans who were born between 1946 and 1964, a third have no retirement savings. The oldest baby boomers are now 63 years old. For many boomers, the only asset they have is the equity in their homes, which they will have to sell in order to live. This will unleash a steady stream of properties onto the market and help prevent prices from recovering.

The Obama administration may have implemented commendable policies to put us on the right track to recovery, but the truth is, this is a huge problem that requires a lot to contain it, and it will be some time before the US financial crisis is over.