Opinion

John Wasik

Home market isn’t on rebound yet

March 11, 2011

A vacant house for sale is pictured at the Green Valley Ranch neighborhood in Denver, Colorado July 26, 2007.  REUTERS/Rick Wilking Are we there yet? Is the U.S. home market on the upswing?

As Alan Greenspan would say, “there are shoots,” although a true spring in housing is still hampered by a chilly economic climate throughout most of the country.

One positive sign came from new mortgage applications, which jumped to the highest level in three months last week, according to the Mortgage Bankers Association.

As Congress and state attorneys general wrangle with a number of reforms to seed a housing rescue, most of the country is not out of the woods. Yale Economist Robert Shiller warned recently that housing prices could “slip another 15 to 25 percent”.

Foreclosures and defaults are continuing unabated. Most of the news concerning housing is still frosty. The S&P Case-Shiller Index (for the fourth quarter of last year), showed prices in 19 out of 20 markets surveyed down for December over November. Washington, D.C. was the only major market that rose.

Cities gob-smacked by the bust — Las Vegas, Miami, Phoenix and Tampa — all hit new lows in December. Even markets that weren’t inflated as much in the bubble saw new lows (Atlanta, Charlotte, Seattle and Portland, Oregon).

Although the percentage of distressed sales is still alarmingly high at more than one-third of all sales, according to CoreLogic, they are down from their peak in January of 2009.

Why would I be remotely optimistic that we’re not in a sustained double-dip housing recession? Unemployment has been improving of late. That’s always a plus for housing and figured in the meager spurt in mortgage applications.

The other hopeful sign is that Congress slowly seems to be moving to fix what’s broken in the housing market. The Obama’s Administration main housing aid program, known as “HAMP,” is targeted for elimination.

Good riddance. HAMP has been so ineffective that Elizabeth Warren, the new consumer financial bureau adviser, likened it “bailing out the boat with a teaspoon as it takes on gallons of water.”

An even more aggressive — and potentially helpful — proposal is being discussed by major banks and state attorneys general trying to settle over alleged “robo-signing” mortgage abuses.

The states’ proposal would allow homeowners to write down principal balances while renegotiating mortgage terms.¬†Although it’s too early to tell, this one measure could prevent a large number of foreclosures. It’s only fair since homeowners attempting to refinance were unable to negotiate lower payments based on home values that crashed. Congress has failed to allow mortgage holders to write down balances in bankruptcy court, so this could provide some buoyancy for the ever-sinking housing market.

There are millions of foreclosures in the pipeline that create a shadow inventory of homes. Banks can still dump these properties on the market, which will further depress housing prices.

Only keeping people in their homes and stimulating sales could forestall a full double dip. Back in Washington, policymakers are sluggishly attempting to restructure the debt-besotted mortgage insurers Fannie Mae and Freddie Mac, which were seized by the Treasury Department in late 2008. The companies now account for more than 80 percent of the U.S. mortgage market.

One item that the Fannie/Freddie reconstructive surgery team needs to consider: Softening the rule that credit scores be nearly perfect for home buyers.

In recent years, the mortgage insurers have raised the standards so high that only a few qualify for loans now. One mortgage broker friend of mine says her business is so dismal (citing the credit score problem) that she’s getting out of it.

If the states and Feds can get on the same page, maybe they’ll figure out that keeping people in their homes is still a good idea — and one way to buoy the market. Otherwise, expect the long winter in U.S. housing to continue. Better to be a hedgehog than a groundhog.

Comments
5 comments so far | RSS Comments RSS

A lot of people had mortgages they could afford, but when they were suddenly worth much less than the remaining balance it just didn’t make sense to keep on paying for it.

Posted by breezinthru | Report as abusive
 

As I’ve noted in earlier columns, corporations are allowed to write down values of depreciated assets all the time. Why not homeowners? I think HAMP is a failure, but doesn’t mean that Fannie and Freddie should be entirely eliminated. Maybe downsized. It’s hard to tell what the right course is with the market so dismal.

Posted by johnwasik | Report as abusive
 

johnwasik, corporations write down the value of their *assets*. For a homeowner, the mortgage is a *liability*.

It is pretty rare for a corporation to reduce the value of its liabilities. That is known as “default” and typically only happens in “bankruptcy”, at which point the creditors seize control of the corporation.

You are welcome to write down the value of your house in Quicken, but you still owe the original balance on the mortgage.

Posted by TFF | Report as abusive
 

The problem here is not likely to be solved by conventional government action to protect a few homeowners in a market decline that affects virtually everyone (note that the exception is Washington, DC, where government cranks along on its $1.5 trillion in annual borrowings, spending lavishly in its hometown).

The government actions taken so far and proposed by superficial thinkers in D.C. can lengthen the period of the decline, but is unlikely to arrest it.

At worst, the bottom of this market could be much, much lower. In the stock market crash of 1929, many buyers borrowed up to 90% of the value of stocks, about the same as home buyers. The result was that stock prices dropped 90% over three years, and recovered to the 1929 peak only after 25 years.

The borrowed money stimulating housing prices, too, is all air — money created by fractional reserve banks (90% of their loans, too, are not backed by solid assets).

Just as has occurred with higher education, government-backed loans have driven prices through the roof — far beyond any real value. Does anyone think that a degree from Hampshire College (founded in 1965, ranked #119 among liberal arts colleges) is worth four years of one’s life and $200,000. For those interested, that works out to about $100 for each hour a student spends in class (or in a class of 30 — $3,000 an hour for the teaching). Even Harvard isn’t worth that. You could buy a video of a better teacher for about $10.

Until banks learn to be conservative (loaning over 50% is high risk), and government stays out of it, housing is a speculation more than an investment. Since governments tax the owner annually for the privilege, it is an expensive risk.

To solve the problem there are two steps — both unlikely to be taken by the government muddle in Washington and around the country. The first is to allow immigration to any otherwise qualified person if they purchase a home meeting certain standards, provided they purchase it entirely for cash. This simple step would stimulate demand both short and long-term, since the supply of people wishing to immigrate is substantial.

Second, allow a single residence to be exempt from all taxation (e.g., real estate taxes), provided that the contiguous land area is below a specified size. It is time people actually owned real estate — rather than paying rent to the government. This would give a permanent boost to home ownership without directly rewarding speculators.

It is demand that must be stimulated to reverse the market decline — and cash demand at that. Tax deductions for mortgage interest must end, too, to encourage solvent individuals to own homes they can pay for, not speculators or borrowers speculating on inflation, the overall economy and their future employment prospects.

Posted by fredricwilliams | Report as abusive
 

“The first is to allow immigration to any otherwise qualified person if they purchase a home meeting certain standards, provided they purchase it entirely for cash.”

An interesting idea — very different from our present system in which we have effectively unlimited illicit immigration, but mostly individuals with no education or money.

“Second, allow a single residence to be exempt from all taxation (e.g., real estate taxes), provided that the contiguous land area is below a specified size.”

Property taxes are the primary funding source for schools and local services. Can you think of a fairer way of raising that money? (I can think of several, but there is huge momentum behind the present system.)

Demand isn’t going to rise until prices fall substantially. You can reasonably afford to buy a home that costs 3x your annual salary, but many people were stretching for 5x, 8x, or even 10x… That’s when you get into trouble.

In some countries, real estate is largely cash-transfer. I do appreciate the societal value of being able to take a low-interest mortgage, though I agree with you that this principle was taken WAY too far. There really is no need to offer anything greater than 80% LTV. Don’t have the downpayment? Rent for a few more years…

Posted by TFF | Report as abusive
 

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