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from Breakingviews:

US housing recovery shows subsidies need trimming

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own. The U.S. housing recovery shows it’s time to trim subsidies. The market finally looks close to bottoming out. Prices are reasonable and rates for borrowing mortgages are ultra-low. Mortgage interest tax deductions, loan guarantees and even some foreclosure assistance are looking increasingly unnecessary.

Take, for example, the delinquency rate. It dropped to 7.4 percent in the first quarter, according to the Mortgage Bankers’ Association. That’s almost a full percentage point below last year. The number of new homes being built is a third higher than this time last year, while sales of both new and existing homes are also on the up. And the National Association of Homebuilders index is 20 points above its nadir and now at its highest level since the end of 2007.

All this suggests that much of the assistance the state gives to the housing market is no longer needed. The home mortgage tax break, for example, is a pre-crisis crutch that primarily benefits those who don’t need the help - wealthier borrowers, who get more back simply because they pay more tax. Scrapping the deduction completely risks causing hardship to those borrowing more modest amounts, but capping it at $10,000 would limit its market distortion without removing a prop from middle-market housing.

The most obvious distortions to eliminate are the outsize guarantees on home loans provided by government-backed mortgage agencies. Fannie Mae and Freddie Mac backstop qualifying loans up to $625,500, while the Federal Housing Authority’s limit of $729,750 is even more excessive. These are both hangovers from the crisis. Capping guarantees at the old rate of $420,000, or even lower, would limit the subsidy to middle-class borrowers. That could then mark the first step in reducing the overall influence of the agencies on the market.

There’s no quick and easy fix for the housing market. But it’s looking healthier each month. That makes keeping some of these more egregious distortions in place harder to justify. Cutting them would restore some balance to the market and allow the cash to be put to more productive uses.

from Felix Salmon:

Rent vs buy, Manhattan edition

Yesterday, I published the chart on the right, showing that in the nation as a whole, houses look like they're a pretty good value, relative to rents, for the first time in many years. The chart elicited an email from one New Yorker, asking whether the same thing was true here in Manhattan.

It's a good question, so I asked Jonathan Miller, of Miller Samuel, to provide some New York data which I could overlay on the US chart. And here's the result:

The most striking thing, of course, is how expensive New York is relative to the country as a whole: that huge spike in the original chart now just looks like more of a foothill.

But it's also clear that even with record-low interest rates, Manhattan prices are still a lot higher than Manhattan rents.

It wasn't always that way. Rents were higher than prices from the fourth quarter of 1994 through the fourth quarter of 1999 -- a full five years, during which prices rose from $227,500 to $320,000. Which in hindsight was a great time to buy, seeing as how prices now are at $775,000.

Obviously the Manhattan data series, with fewer transactions, are much noisier than the national series. But broadly speaking, it costs you the same amount to buy a house today, in terms of your monthly mortgage payment, as it did at the end of 2004, when the median sales price was just over $600,000. By the standards of recent history, then, Manhattan real estate is a lot more affordable than it was during the bubble. But look back a couple of decades, and it still looks expensive. And compare it to rents, and it still looks like you'd be better off renting than buying.

from Felix Salmon:

Principal reductions begin in earnest

This is an important milestone, even if it's too little, too late:

Bank of America Home Loans has begun reaching out to customers who may be eligible for forgiveness of a portion of the principal balance on their mortgage under terms of a recent settlement...

The bank estimates average monthly savings of 30 percent on mortgage payments of customers who qualify for this program…

Bank of America actually began making principal reduction offers under the program guidelines in March, initially concentrating on homeowners who were already in the modification review process. So far under this early initiative, about 5,000 trial modification offers have been mailed, providing a potential total of more than $700 million in forgiven principal. Homeowners are required to make at least three timely payments before the modification can become permanent.

On average, the principal reduction being offered is substantial: it's on the order of $150,000. And this offer is being extended to some 200,000 homeowners, which means we're talking a lot of mortgage principal here: some $30 billion.

In reality, however, the actual amount of principal forgiven by BofA is likely to be much smaller than that. As we've seen with HAMP, banks are incredibly good at putting people into three month trials, and then managing to determine that for whatever reason they don't qualify for conversion to permanent modification. What's more, ironically, many homeowners might not be able to afford to accept this principal reduction, since after the end of this year, forgiven principal will count as income, for income-tax purposes, and the income tax on $150,000 of windfall income is substantial.

Still, principal reduction is exactly what the country needs right now, and I'm glad that it's finally beginning to happen. I wrote about the subject in The Occupy Handbook, and this seems as good a time as any to put my chapter up online. So here goes.

There’s a lot of blame to go around when it comes to the causes of the financial crisis, but at heart, it was about debt — or, as the the financial markets like to call it, leverage. Investment banks created highly leveraged mortgage-backed securities that blew up; commercial banks backed up their holdings of super-senior debt instruments with little or no capital; homeowners bought houses with no money down, paying for them by borrowing amounts they could never afford to repay.

In many ways, the debt-fueled housing bubble was the financialization of America carried to its logical conclusion. From the early 1980s onward, economic growth was increasingly a function of leverage: small improvements amplified by being turbocharged with debt. A little debt can do wonders for growth — but like a drug addict, the economy eventually needs that much debt just to stand still, and ends up having to take on more and more leverage to sustain the growth it’s used to.

from Felix Salmon:

Chart of the day: Let’s go buy a house!

Many thanks to Ben Walsh for putting this chart together for me. The source is this data at the Census bureau, inspired by page two of the first-quarter 2012 Census bureau report on rental vacancies and homeownership.

The first thing to look at here is the blue line, which shows that the median asking rent for vacant rent units tends to rise pretty steadily. It doesn't spike during housing bubbles, and it doesn't plunge when those bubbles burst. Which is one reason why if you can, it's always a good idea, when you're buying a home, to take a look at what rents are like in the area. That'll help you work out whether prices are too high.

David Leonhardt performed this exercise two years ago, and came to the conclusion that in some parts of the country, including South Florida, Phoenix and Las Vegas, buy-to-rent ratios were making houses look attractive again. I wasn't completely convinced, but over the past two years, prices have continued to fall, while rents have continued to rise -- sometimes painfully so.

In the chart, the red line shows the mortgage payment you'd have to make if you took out a standard 30-year mortgage for the median asking sales price for vacant sale units. In reality, your mortgage payment would be lower, since this doesn't take into account any downpayment. But in any case, thanks to ludicrously low mortgage rates below 9% 4%, that number is now lower than the median national rental price. This is the first time that's happened since 1988, and probably for quite some time before that, too.

Remember that houses for sale tend to be bigger and more valuable than houses for rent, too -- which only goes to underscore how good a deal buying is versus renting right now.

Of course, not all markets work this way: around New York, there are lots of places where it's still a lot cheaper to rent than to buy. But if rental prices are a good gauge of the value of housing -- and I think they are -- then I think we might finally have reached the point at which most Americans are getting good value when they buy a house.

from Global Investing:

Three snapshots for Wednesday

Spanish house prices fell 7.2 percent in the first quarter from a year earlier while Spanish banks' bad loans rose to their highest level since October 1994 (see chart).

The Bank of England is poised to turn off its money-printing press next month. Minutes of the Bank's April meeting, combined with a stark warning on inflation from deputy governor Paul Tucker on the same day, signalled a sharp change in tone that could bring forward expectations for interest rate rises.

Does the E in PE need a reality check too?

from MacroScope:

U.S. housing slump: Six years and counting

Just as Americans begin to regain some hope that the housing sector might be on the mend, we get another batch of data showing the sector’s not quite there yet.

Groundbreaking on homes fell unexpectedly in March to an annual rate of just 654,000, down from 694,000 in February and well short of the 705,000 Reuters consensus forecast. Some context: permits peaked above 2.2 million in early 2006, at the apex of the housing bubble. On the bright side, permits for future construction rose to their highest level in 3-1/2 years.



In other housing data this week, homebuilder sentiment deteriorated again after posting a pretty decent rebound from the very depressed levels seen in 2011.

from Felix Salmon:

Ed DeMarco and the spectre of strategic modifiers

After Ben Walsh covered Ed DeMarco's speech in the Counterparties round-up yesterday, I got a very smart note from the undisputed kind of the housing blogosphere, Calculated Risk:

I think DeMarco made a key point about "strategic modifiers" as opposed to what people have been calling "strategic defaulters".

In the 2nd case, these are people who can afford their mortgage, but walk away because they are so far underwater that continue to pay makes no sense.

DeMarco is talking about people who will want to keep their home, but default for the purpose of receiving a principal reduction.

I think this is more likely than the classic strategic defaulter (something I've played down for years).

The reason is Fannie and Freddie will have to make the program guidelines clear and public. People are very good at figuring out how to game the rules. So, unless the rules are very tight, there will be more "strategic modifiers".

Certainly this is something that DeMarco is worried about: in his speech, he defines a “strategic modifier” as "a borrower that either claims a financial hardship or misses two consecutive mortgage payments in order to attempt to qualify for HAMP and a principal forgiveness modification." If there are enough of these borrowers, he says, then the financial benefits of principal reduction could go away quite quickly.

DeMarco's worries are not entirely unfounded, given, as he says, that three quarters of the Enterprises’ deeply underwater borrowers are current. But the distinction between a strategic defaulter and a strategic modifier is a very subtle one, given that their actions -- defaulting on their mortgage while being capable of making payments in full -- are indistinguishable.

The difference is not in what they do, but rather in their motivation: the strategic defaulter expects to lose the house at some point, while the strategic modifier expects to retain the house, and the mortgage, but get a principal reduction along the way.

Personally, I don't believe that the problem of strategic modifiers (over and above the problem of strategic defaulters) is likely to be huge. One reason is that I've been writing about the upside of strategic default for a long time, and it really hasn't caught on, outside a few second homes and the like. Strategic default is not something that Americans like to do, and one of the main reasons is that they really care about their credit rating. Even if a strategic modifier keeps her house, she'll suffer the same hit to her credit rating as a strategic defaulter would. And people don't like that at all.

On top of that, the strategic modifier will still be running the risk of getting far behind on her mortgage payments, being unable to make them up, and then for some reason not qualifying for a principal reduction or indeed any other kind of modification. DeMarco is right that the principal-reduction program would be broadly publicized. But it will be publicized to people who are having real difficulty making their mortgage payments. If you can't make those payments, then applying for a principal reduction is a no-brainer: it's all upside and no downside. But if you can make those payments, the calculus is a lot more complex.

from Felix Salmon:

Charts of the day, house-price edition

If you haven't read it, I can highly recommend Paul Kiel's magnum opus on the US foreclosure crisis, available online or as a Kindle Single. Kiel tells the national story using synecdoche: the story of Shelia Ramos is representative of millions of others. And Kiel makes it very clear just how typical her tale is, zooming back out to a big-picture view on a regular and welcome basis.

What Kiel doesn't do is look forward, and give his informed opinion on whether the new rules being outlined by the Consumer Financial Protection Bureau are likely to work to prevent such events from happening again. The question isn't whether the new rules are good ones; the much more important and salient question is whether they will be followed and enforced. I'll believe it when I see it: as Kiel shows, servicers are really bad at this kind of thing, and there's a strong case to be made that they're simply not capable of following the rules that the CFPB is laying out.

Meanwhile, the weird cognitive disconnect in the housing market seems greater than ever. If you look at Fannie Mae's latest monthly survey, it shows lots of new highs being set: the percentage of people thinking that house prices are going up, the percentage of people thinking it's a good time to buy, and, especially, the amount that people think they're going to have to pay for housing if they don't buy.

And yet, the facts on the ground don't support any of this. Check out the latest quarterly home price report from LPS, for instance. Not only are prices still falling, they're actually falling at a faster rate than they were a couple of years ago:

The rate of relatively slow price declines, from January 2009 to May 2010, was the time when there were tax incentives for first-time homeowners. When those tax incentives went away, so did the artificial support for the housing market; in hindsight, most of those first-time buyers would probably have been better off just waiting, and buying a house now without the tax incentive instead.

from Global Investing:

No hard landing for Chinese real estate

The desperate days when Chinese property developers offered free cars as an inducement to homebuyers look to be over.

Sales and earnings figures indicate some of the gloom is lifting as developers have enjoyed a second straight month of rising sales. Vanke, China's biggest developer by sales, said last week that March sales had risen 24 percent year on year, while  2011 profits rose 30 percent. Another firm, China Overseas Land, posted a 21.5 percent profit rise last year.

The mood is reflected in stock prices. While the Shanghai shares index has risen less than 5  percent this year,  a sub-index of Chinese property companies has risen 13 percent. Shares in Vanke and COL are up 13 percent and 22 percent respectively. A Reuters poll of fund  managers showed that investors had upped their weighting for property stocks to 10.9 percent at the end of March, the highest level in two years.

The share rally has continued even though the government has dashed hopes it will soon wind down its two-year campaign  to bring down property prices.  It has also bucked a broad housing market slowdown (home prices fell for the fifth straight month in February) amid signs that Chinese authorities are unlikely to provide the economy with any further stimulus. Analysts at Citi said in a recent note:

Developers' comfort under current tightening (policy) and confidence in a stable outlook suggests the toughest time for China's property sector is over.

For a long time, the country's real estate market -- and the possibility of a crash there -- has generated fear in the minds of China-watchers. That danger is by no means over -- economic growth is cooling but inflation remains high. Companies too have warned that tough times still lie ahead.

But many such as Karine Hirn, Shanghai-based chief representative of asset manager East Capital, have never believed in an outright property sector collapse. China has an 80 percent home ownership rate and 25 million people work in construction, she points out. Real estate accounts for 13 percent of China's GDP. So it is unlikely the government would ever have risked a property price crash. Hirn also points out that while sales in cities like Beijing and Shanghai are indeed slowing sharply,the market remains robust in Tier-3 cities -- home to over half of China's urban population.

from MacroScope:

Housing healing

More than six years after its spectacular collapse, the U.S. housing market – the laggard of the struggling economic recovery – may be poised for pickup, driven in part by an upswing in remodeling, Bank of America-Merrill Lynch economist Michelle Meyer thinks.

Gains are likely to be modest at first, and are subject to volatility since overall economic growth may well slow in the second half of this year. Also, given the deep hole housing has fallen into, the market is still far from a robust recovery, Meyer wrote in a note to clients drawn from recent research.

Still, some evidence points to the beginnings of an upswing. For one, data already indicate a rebound in spending on renovations. Remodeling will pick up steam as investors convert foreclosed properties into rentals, and homeowners who have held off doing repairs or additions decide the time is ripe, Meyer said.

Stronger housing markets are also likely to be supported by a reversal of declines in household formation, which slowed dramatically as graduates opted to live at home or as people who lost their homes through foreclosures went to live with relatives or friends, she said.

Meyer and her colleagues also see an unleashing of pent-up demand for homes among homeowners who have put off the voluntary move up to a larger or more expensive home:

The long-awaited recovery in one of the most depressed sectors in the economy has begun, but it will be a long journey.