Housing’s Humpty Dumpty moment

January 28, 2010

(James Saft is a Reuters columnist. The opinions expressed are his own)

All the King’s horses and all the King’s men have been busy propping up the housing market but sometime this year, perhaps soon, it will face a Humpty Dumpty moment.

While it gets a lot less attention than the banking bailout, the official forces targeted at supporting house prices are truly vast; a generous tax break for buyers and a mortgage market that has essentially been nationalized.

That’s bought a recovery of sorts — Standard & Poor’s/Case-Shiller home-price index released on Tuesday showed that in 20 major cities home prices rose 0.2 percent on a seasonally adjusted basis between October and November, despite a national unemployment rate of 10 percent and a slow-motion cascade of foreclosures.

But like the egg in the nursery rhyme, which once broken cannot be reassembled, housing still faces some pretty horrendous fundamentals. It needs a strong recovery in employment to arrive before political consensus for housing support cools. (Full disclosure: I just bought a house, but hey, everybody’s got to live somewhere).

Already there are signs that housing may be faltering. Existing home sales declined sharply in December, though this was partly because many rushed to close purchases before a now extended deadline for tax rebates expired on Dec. 1.

Housing starts too fell in the month and, significantly, the Federal Reserve removed language pointing to improvement in housing from its statement accompanying its decision to keep interest rates at record lows.

The amount of official support housing has gotten is stunning. Between Fannie Mae, Freddie Mac and the Federal Housing Administration, the mortgage market is getting more direct government support than ever before. FHA loans, which can be made to borrowers with small down payments, have been especially important given bank lenders’ new-found preference to lend to buyers who can put up 20 to 30 percent of the purchase price. The FHA, facing rising delinquencies, is tightening terms to borrowers and may ultimately need to cut back on lending or receive additional support.

As well, the Federal Reserve will have bought about $1.25 trillion of mortgage bonds by the end of the first quarter, bonds which have become a political hot potato due to Congressional ire. If the Fed stops buying, rates will rise by at least a half a percentage point.

A program of tax credits has been extended through the Spring, but it is likely that these types of incentives simply move demand forward. Housing will soon need a strong jobs recovery to remain stable, something far from guaranteed.

Valuation is always a matter of opinion, but cash flow cannot be faked; without loose lending, house prices ultimately are ratified by the rent property can command or the amount of their earnings people are willing to allocate to buying.

Neither measure is reassuring for housing right now; rents nationally fell something on the order of 3 percent last year while stagnant personal income and high unemployment spell trouble for owner-occupied housing.

Remember too the relationship between unemployment and housing; high unemployment is bad for house prices but not nearly as bad as sustained high unemployment. As economists Carmen Reinhart and Kenneth Rogoff detail in their book, This Time is Different, one effect of a typical banking crisis is that it raises unemployment rates by seven percentage points and that, and this is worse for housing markets, unemployment remains elevated for five years. Ask yourself, what would be the effect on house prices if unemployment was still at 8 percent or more in two or three years?

For certain many borrowers are hanging on to their houses for dear life and against their own best interests. Many of these will convert into foreclosures as time passes as employment fails to materialize.

This is probably the untold story of housing stabilization. It has been done at huge expense in order to avoid finding a clearing price, to avoid allowing prices to come down to where natural and reliable demand would take them. FHA, Fannie and Freddie lending and Federal Reserve intervention have all combined to prop prices up, a policy intended to avoid exerting further pressure on the banking system. But in order to do this, huge amounts of capital are being deployed to keep housing expensive that could otherwise find better uses such as developing new technologies or increasing export competitiveness. Less of that kind of productive investment is going to happen because we’ve made a decision to not acknowledge our error in housing, allow it to fall and move on.

This is a Japan solution, and we’ll risk getting a Japan outcome: an extended resolution. This implies another leg down for housing, but perhaps a slow grinding fall rather than a tumble.

(Editing by James Dalgleish)

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)


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Once again, James hit the nail on its head.
If i remember correctly, the initial idea behind the massive public funds poured to support the housing market was that a broad economic recovery would start from a recovery in the housing market.
It didn’t happen, and it’s less likely to happen now.
So, what’s next?

Posted by yr2009 | Report as abusive

This IS the housing recovery. The time of crisis was 1999 to 2006. What is happening now is good and healthy. Lower house prices are good, the same way lower food costs and lower medical costs are good. Housing is a basic human necessity.

I cannot, for the life of me, understand why the government is intentionally trying to drive up housing prices.

Higher housing prices mean a lower standard of living for Americans as they are forced to allocate more of their incomes into a basic necessity rather than into the good things in life.

The market is working perfectly now. People (who are owners), just don’t like what it’s telling them. Let prices fall. If the government needs to throw money at something, try investing in education, new technologies, or almost anything else.

Posted by forecasts | Report as abusive

All the King’s horses and all the King’s men/
have been busy propping up housing again/
but sometime this year/
and perhaps none too soon/
Humpty will fall/
face down in his spoon!

(happy housing)

Posted by jborrow | Report as abusive


Good point, except the market isn’t really working perfectly, yet, because home-ownership is heavily subsidized through negative taxation, various incentives, Fannie & Freddie, and last but not least: the bailout of the banks, and the weird accounting rules that came with it.
It’s like pumping air into an exploded balloon.

Posted by yr2009 | Report as abusive

I do not see housing as a bright spot on the financial scene. People will shy away from long term loans, because they cannot see long term prosperity. People will buy distressed properties for rentals, or if they can pay it off over a 5 to 7 year period. It will take several years before before the trust in Government and the economy will come back.

Posted by fred5407 | Report as abusive


Agreed – the government actions you mention (tax policies, bank bailouts, Fannie) all intentionally distort the market and have made housing costs far higher than they would otherwise be. This is true of the past and remains true today.

All of policies that you mention drive up demand. If the goal was truly affordable housing (as is sometimes suggested), basic economics would suggest stimulating the supply side to produce more homes.

Posted by forecasts | Report as abusive

Come on, Jim. Stability in housing is about as distant a goal as it is “a goal” of current TBTF policy-makers. The concept of diluting mortgages in negative trillionaire CDOs is what’s really undoable without a lot of tears at the top, among those who only goal is Not Getting Caught.

Humpty Dumpty wasn’t just about metaphorical toothpaste you can’t squeeze back into the tube. It was also about values for things being whatever the dominant culture meant them to mean, reality be damned.

Like housing values, concept of ownership and, finally, the myth that borrowers taking mortgages were to blame for the rampant craze of leveraging them umpteen times over by those powerst that be whom we’re supposed to believe actually knew what they were doing, but – never hold them accountable for doing what they did.

I see all the King’s horsemen going, off with their heads, that stability may reign once more.

Posted by HBC | Report as abusive

Wasn’t this the situation back in Germany that brought rise to Hitler and his ideas to take back the country?

Until there is a civil revolution of sorts we will be mired in a depressive and oppressive society – weak kneed by all the uncertainty and too passive to take back control.

There comes a point though where the human psyche gets cornered to far and it will spring back with a vengeance.

We are very close at hand. History will repeat itself – even as it did back in the 13th century.

The question is – what will be the new order. Those that are currently ruthelessly opportunistic cannot hide since we have 7 years of their records. Some will be too arrogant to not get out while they can. This is good.

Posted by Butch_from_PA | Report as abusive

I have been grappling with this one for a long time. It is so easy to blame the mortgage holder/consumer/taxpayer. Most mortgages should be in infancy, which means the interest component must be much higher than the capital component, at low rates what is the problem ?

Something else triggered the global meltdown, what ?

Was it traders that could not close out positions, and how could this happen ?

Posted by Ghandiolfini | Report as abusive

Fact is, people who REALLY run America are great con artists and globaliztion is their tool for transfering wealth from the rest of the world to the USA. Surely you’ve heard of the old scam of inflating house values, getting a big fat mortgage based on the inflated value, using the money on yourself and then letting the lender get stuck with the loss. Who do you think is buying up the bonds issued by fannie mae and freddie mac and FHA??? It’s European pension plans, the governments of Japan and China as well as many individuals who invest in Bond mutual funds; all of that foreign money pours into the USA into the hands of the americans who take out the mortgages. They then spend the money within the USA on crap and pay taxes spent on weapons all of which funnel money to the guys who are facilitating the inflated house values. It’s really quite obvious once you think about it a little bit.

Posted by unbrainwashed | Report as abusive