Refuting The Housing Recovery Falacy Courtesy Of... The Fed?

Tyler Durden's picture

With the Federal Reserve now openly endorsing the ponzi scheme nature of the US stock market, it would be expected that any releases out of the Fed or its regional offices would be strictly within the limits of preapproved propaganda. Which is why we were stunned when we read the following research piece released from the Dallas Fad, titled: "The Fallacy of a Pain-Free Path to a Healthy Housing Market" in which we read unpleasant facts that traditionally are relegated only to the dark and murky world of the blogosphere. Among these are the following pearls: "Prices, in fact, have begun to slide again
in recent weeks. In short, pulling demand forward has not produced a
sustainable stabilization in home prices, which cannot escape the
pressure exerted by oversupply
", "
About 3.6 million housing units,
representing 2.7 percent of the total housing stock, are vacant and
being held off the market....Presumably, many are among the 6 million distressed
properties that are listed as at least 60 days delinquent, in
foreclosure or foreclosed in banks’ inventories.
" (the bulk of which are still populated by squatters who pay no mortgage, yet who are not booted by the lender banks, and who instead can redirect the money to uses such as iPad purchases), and this stunner: "With nearly half of total bank assets backed by residential real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines.....The latest price declines will undoubtedly cause more economic dislocation. As the crisis enters its fifth year, uncertainty is as prevalent as ever and continues to hinder a more robust economic recovery. Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress." This is a stunning admission: in essence the Fed itself is advocating for mark-to-market, and the ensuing bloodbath that would ensue with bank book, and market, capitalization. Will this proposal by authors Danielle DiMartino Booth and David Luttrell see more traction at the Fed or promptly disappear in someone's inbox? Our money is on the latter.

Full must read report:

The Fallacy of a Pain-Free Path to a Healthy Housing Market
by Danielle DiMartino Booth and David Luttrell

In the mid-1990s, the
public policy goal of increasing the U.S. homeownership rate collided
with a huge leap in financial innovation. Lenders shifted from
originating and holding mortgages to originating and packaging them for
sale to investors. These new financial products enabled millions of
Americans who hadn’t previously qualified to buy a home to become
owners. Housing construction boomed, reaching a postwar high—9.1
million homes were built between 2002 and 2006, a period when 5.6
million U.S. households were formed.

The resulting oversupply
of homes presents policymakers with a formidable challenge as they
struggle to craft a sustainable economic recovery. Usually a driver of
economic recoveries, the housing market is foundering as an engine of

Generations of
policymakers since the 1930s have sought to increase the homeownership
rate. By the late 1960s, it had reached 64.3 percent of households,
remaining there through the mid-1990s, in apparent equilibrium with
household formation during a period of sustained U.S. economic growth. A
fresh push to increase ownership drove the rate up 5 percentage points
to its peak in the mid-2000s. Home price gains followed the rate

Reverting to the Mean Price

As gauged by an
aggregate of housing indexes dating to 1890, real home prices rose 85
percent to their highest level in August 2006. They have since declined
33 percent, falling short of most predictions for a cumulative
correction of at least 40 percent.[1] In fact, home prices still must fall 23 percent if they are to revert to their long-term mean (Chart 1).
The Federal Reserve’s purchases of Fannie Mae and Freddie Mac
government-sponsored-entity bonds, which eased mortgage rates,
supported home prices. Other measures included mortgage modification
plans, which deferred foreclosures, and tax credits, which boosted
entry-level home sales.

Measuring the
success of these efforts is important to determining the trajectory of
the economic recovery and providing policymakers with a blueprint for
future action. New-home sales data, though extremely volatile, are
considered a leading indicator for the overall housing market. Since
expiration of the home-purchase tax credit in April, sales have fallen
40 percent to an average seasonally adjusted, annualized rate of
283,000 units. This contrasts with the three years through mid-2006
when monthly sales averaged 1.2 million on an annual basis. Before the
housing boom and bust, single-family home sales ran at half that pace.
Because current sales are at one-fifth of the 2005 peak, new-home
inventories—now at a 42-year low—still represent an 8.6-month supply. An
inventory of five to six months suggests a balanced market; home
prices tend to decline until that level is achieved.

One factor inhibiting the new-home market
is a growing supply of existing units. The 3.9 million homes listed in
October represent a 10.5-month supply. One in five mortgage holders
owes more than the home is worth, an impediment that could hinder
refinancings in the next year, when a fresh wave of adjustable-rate
mortgages is due to reset. The number of listed homes, in other words,
is at risk of growing further. This so-called shadow inventory
incorporates mortgages at high risk of default; adding these to the
total implies at least a two-year supply.[2]

mortgage-servicing industry has struggled with understaffing and
burgeoning case volumes. The average number of days past due for loans
in the foreclosure process equates to almost 16 months, up 64 percent
from the peak of the housing boom. One in six delinquent homeowners who
haven’t made a payment in two years is still not in foreclosure.[3] Mounting bottlenecks suggest the shadow inventory will grow in the near term.

Notably, not all
homeowners in arrears suffer financial hardship due to unaffordable
house payments. Those with significant negative equity in their homes
may choose to default even though they can afford to make the
payments. Such “strategic default” is inherently difficult to measure;
one study found 36 percent of mortgage defaults are strategic.[4]
Though the effect is not readily quantifiable, the growing lag between
delinquency and foreclosure provides an added inducement for this form
of default.

Mortgage Modification Limits

One set of policies
to aid home-owners in dire straits involves mortgage modifications,
though these efforts have only minimally reduced housing supplies. The
most far-reaching effort has been the Making Home Affordable Program
(previously the Home Affordable Modification Program, or HAMP), in
effect since March 2009. After only one year, cancellations—loans
dropped from the program before a permanent change was
completed—eclipsed new modifications (Chart 2). Since March, the
number of cancellations has continued to exceed new trial
modifications, which involve eligibility and documentation review, and
successful permanent modifications.


The fact that many
mortgage holders have negative equity in their homes stymies
modification efforts. In the case of HAMP, the cost of carrying a house
must be reduced to 31 percent of the owner’s pretax income. Even if
permanent modification is achieved, adding other debt payments to
arrive at a total debt-to-income ratio boosts the average participant’s
debt burden to 63.4 percent of income. In many cases, the financial
innovations of the credit boom era, enabling owners to monetize home
equity, encouraged high aggregate debt.

A study found that in a best-case outcome, 20 to 25 percent of modifications will become permanent.[5]
In 2008, one in three homeowners devoted at least a third of household
income to housing; one in eight was burdened with housing costs of 50
percent or more.[6] Failed modifications suggest that, without strong income growth, the bounds of affordability can be stretched only so far.

intervention, modest home price declines could be allowed to resume
until inventories clear. An analysis found that home prices increased
by about 5 percentage points as a result of the combined efforts to
arrest price deterioration.[7]
Absent incentive programs and as modifications reach a saturation
point, these price increases will likely be reversed in the coming
years. Prices, in fact, have begun to slide again in recent weeks. In
short, pulling demand forward has not produced a sustainable
stabilization in home prices, which cannot escape the pressure exerted
by oversupply (Chart 3).

Lingering Housing Market Issues

About 3.6 million
housing units, representing 2.7 percent of the total housing stock, are
vacant and being held off the market. These are not occasional-use
homes visited by people whose usual residence is elsewhere but units
that are vacant year-round. Presumably, many are among the 6 million
distressed properties that are listed as at least 60 days delinquent,
in foreclosure or foreclosed in banks’ inventories.

Recent revelations
of inadequately documented foreclosures and the resulting calls for a
moratorium on foreclosures—what was quickly coined
“Foreclosuregate”—threaten to further delay housing market clearing.
While home price declines may be arrested as foreclosure paperwork
issues are resolved, the buildup of distressed supply will only grow
over time. Perhaps less obviously, some lenders with the means to
underwrite new mortgages will remain skeptical about the underlying
value of the collateral.

With nearly half
of total bank assets backed by residential real estate, both homeowners
on the cusp of negative equity and the banking system as a whole
remain concerned amid the resumption of home price declines.[8]
This unease highlights the housing market’s fragility and suggests
there may be no pain-free path to the eventual righting of the market.
No perfect solution to the housing crisis exists. The latest price
declines will undoubtedly cause more economic dislocation. As the
crisis enters its fifth year, uncertainty is as prevalent as ever and
continues to hinder a more robust economic recovery. Given that time
has not proven beneficial in rendering pricing clarity, allowing the
market to clear may be the path of least distress.

the Author

Booth is a financial analyst and Luttrell is a research analyst in the
Research Department of the Federal Reserve Bank of Dallas.


  1. See Irrational Exuberance,
    2nd ed., by Robert J. Shiller, Princeton, N.J.: Princeton University
    Press, 2005 and 2009, as updated by author
  2. Authors’
    calculations using the Census Bureau’s new-home sales report, the
    National Association of Realtors’ existing-home sales release and
    Capital Economics’ July 13, 2010, U.S. Housing Market Monthly report.
  3. Data from LPS Applied Analytics.
  4. See
    “The Determinants of Attitudes Towards Strategic Default on Mortgages,”
    by Luigi Guiso, Paola Sapienza and Luigi Zingales, Economics Working
    Papers no. ECO2010/31, European University Institute, July 2010
    (previously circulated as “Moral and Social Constraints to Strategic
    Default on Mortgages,” NBER Working Paper no. 15145, National Bureau of
    Economic Research, July 2009). The number of strategic defaulters as a
    percentage of total defaulters rose to 35.6 percent in March 2010 from
    23.6 percent in March 2009.
  5. See
    “Foreclosure Pipeline to Govern Home Price Inflation: A Dialogue with
    Mortgage Servicers and Policy Officials,” Zelman & Associates, May
    18, 2010.
  6. See “The State of the Nation’s Housing 2010,” Joint Center for Housing Studies, Harvard University, June 2010.
  7. See
    “Housing Markets and the Financial Crisis of 2007–2009: Lessons for the
    Future,” by John V. Duca, John Muellbauer and Anthony Murphy, Journal of Financial Stability, vol. 6, no. 4, 2010, pp. 203–17.
  8. Real
    estate secures 58 percent of all U.S. bank loans, and real
    estate-backed assets account for 46 percent of total bank assets. See
    “U.S. Housing: How Bad For Banks?” BCA Research Daily Insights, Sept.
    27, 2010. CoreLogic reports that a 5 percent decline in home prices
    would result in an additional 2.5 million underwater borrowers. See
    “Housing: Stuck and Staying Stuck,” by Nick Timiraos and Sara Murray,, Sept. 24, 2010.

h/t Mike

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
gwar5's picture

Yes... we are a Banana Republic.

Yes... we still have no bananas.

Id fight Gandhi's picture

We will tell our great grand children od the days when man used to walk on the moon. How planes carried people in under three hours to Europe, how men produced goods in factories. It will take the next world war to rebalance things.

SheepDog-One's picture

Banana republic...and we dont even have the benefit of having fuking BANANAS!!

IQ 145's picture

 Hawaii; a united states state; (supposedly); I can see the bananas out my window. many, many bananas. I'm not sure if this is significant, tho.

EvlTheCat's picture

Come on SD1, we have lots of bananas.  They are all centrally located in Washington, D.C. in a place called Congress.

one useless 'banana' is a shame, two is a law firm, and three or more is Congress.

jeff montanye's picture

imo all three branches (executive, legislative and judicial) are involved.  have you forgotten about our (constitutionally mandated) checks and bananas?

101 years and counting's picture

we may not have bananas, but we are really good at committing fraud and printing inflation and exporting it around the globe.

docj's picture

Benron needs a contrarian point of view that can be laughed-at and then dismissed out of hand - so he can go before The Elected and The Media say something like "Sure, we considered all available options and decided the best bet is STEADY AS SHE GOES!!"

Looks like DiMartino-Booth and Luttrell drew the short straw this month.

Irwin Fletcher's picture

Yep, short straw successfully passed from Thomas Hoenig. DAMN THE TORPEDOES!!!

bronzie's picture

"With nearly half of total bank assets backed by residential real estate, ..."

not to mention a significant portion of the several hundred trillion dollars worth of derivatives floating around the planet right now

residential real estate underpins the whole economic system in the western world

aint no fortunate son's picture

it simply means QE3 and 4 are a lock

Beatscape's picture

The other 40% is commercial real estate, which the banks have done a fabulous job of extend and pretend.

TheGoodDoctor's picture

LOL. That was my thought. "How much is CRE then?" As Jim Lahey says, "There's a shit storm brewing Bubbles. A shit storm."

Cindy_Dies_In_The_End's picture

GoodDoctor: You score extra credit points for using Trailer Park Boys, and yup with CRE they're  takin' the shit tornado right back to Oz.


I suppose this makes us the shit hawks.

jeff montanye's picture

take a good long look at that home price chart.  reversion to the mean?  can anyone doubt it will be plumbing the second (third?) standard deviation below the mean?  

scrutinize 1893 (panic of) to 1920.  nearly three decades of relative slide (we've had four years).  followed by twenty more years in the crapper culminating in "the great depression".  approaching the remaining life time of a newly minted labor market entrant.  

telling our grandchildren of men on the moon?  tell them about when people owned real estate for "investment purposes".

Kyron95131's picture

i would expect this to continue through 2011 easy... if not grow exponentially

ghostfaceinvestah's picture

How ironic coming from the biggest Central Planning organization in the history of mankind.

Liars Poker's picture

Visit , he has a very good strategy. What do you guys think?

mark mchugh's picture

Two things:

How can anyone discuss house prices without discussing interest rates?

And let's remember the "housing crisis" is mostly a problem for the banks, how many more people could live comfortably in your residence if necessary?

Real demand for housing is going to be slack for quite a while.

Racer's picture

With the Wikileaks taskforce and now this, it really is WTF is going on with the gubbmint!

bronzie's picture

only 22 years left until the current real estate downturn bottoms according to Martin Armstong's cycle work

some factors supporting his prediction:

- Boomers downsizing into coffins and urns

- rising unemployment

- increasing duration of unemployment

- more than 8 months of for-sale inventory on MLS (anything over 8 months typically means price pressure is downward)

- millions of units of shadow for-sale inventory that will have to be cleared at some point

- clouded titles / ownership uncertainty (robo-signing, foreclosure crisis, mortgage fraud, etc)

- aftermath of real estate bubble popping - humans tend to stay away from the once-bubbly asset category for a full generation (26 years being a generation perhaps?)

stock up on popcorn - this will be a long running show ...

Logans_Run's picture

...and remember to buy the fucking dip! Sarc off

jeff montanye's picture

again, look at the home price chart 1893 to 1942.  instructive.  

Cdad's picture

You know, just how bad the US housing market is IS something I DO know about.  So I don't need any convincing that this mess is going to get A LOT MESSIER as we bravely go forward into the wildest dreams of J. Hatzius's sense of 2011.  That would be a great big duh....although I doubt J. Hatzius will feel the TRUTH of things in his bonus check this year, anyway.

However, when I read:

Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress."

I nearly came out from under my big pile of coats in the closet...[I said nearly]... on that WOWZER...considering those words belong to a Fed official. 

As for all those sweet charts about the total bumble-u-no-what in the US housing market, those charts will only prove one thing...that folk over at the Blow Horn [CNBC] will NOT BE TALKING ABOUT US HOUSING any time soon. 

One Ton Lady's picture

Look everybody. Its fuckin Cdad, the original thread cleaner. Look out and don't say anything he doesn't like or else.

velobabe's picture

I like fcking Cdad, he is german, take photographs of miss..ey in skirts, blowing up from the street man hole covers, and lives in the clothes closet. i hide in my clothes closet a lot 2.

jeff montanye's picture

thank you (!) for that link.  hubba hubba (for her mind).  brooksley born, bethany mclean, meredith whitney, dimartino booth.  impressive and ongoing, apparently.

Id fight Gandhi's picture

When this country get worse, where will you move?

What country has most prospects for a better life?

Jason T's picture

Where liberty dwells will be my country.  


I can't think of any :/

OddFieldIsStrong's picture

Seriously we don't want any more of you jumping rats. Go to Australia. It's better cultural fit for you people.

jkruffin's picture

This whole mess could have been taken care of 2 yrs ago, and we would have already been in a major recovery, if Obama and his cronies would have just listened to me, and yes, I wrote Senators, Obama, and the works about it; repeatedly.

I said the FED should have bought out all mortgages (which was @$11.3 Trillion at the time), and consider them all paid, pay the banks their crooked money, and people could come back in and tap up to 50% of the new equity to pay off cc debt and other high interest loans.  The stipulation was it had to be primary residence and living in it for 1 yr minimum to do it.  The FED and Treasury together are already working on $9 Trillion wasted and counting in 2yrs time, and this mess is far from over, and in the initial stages of a major collapse again.  I guess Benny Boy and Timmah aren't as smart as they want people to think they are.  People could have afforded a higher tax rate if done the way I suggested, yet now we just added more debt by extending tax cuts and more unemployment.  Go figure.  This death spiral will continue too. The FED is trapped. We could have already been back on our way to a balanced budget by now.

Missiondweller's picture

I think Karl Marx had a similar plan.

Cdad's picture

Well said Missiondweller. 

CD's picture

See, there you go assuming that solving the problem was the goal of the exercise in the first place...

jkruffin's picture

Obviously, I have to agree with your statement!

Deep's picture

What about all the people who had paid off their mortgages? And many other things i can't even think off right now. 

I like your posts jkruffin, but this one i dont i agree with.


jkruffin's picture

This was just a short of what I had suggested, just to touch on the bulk of the mortgage problem, and there were suggestions for those who rent and had paid off mortgages too, so they weren't seen, or feeling, as the ones "paying" for others.  It was pretty much a lump sum check.  The total of everything was about $13 Trillion for what I had figured up based on the taxpayer count then and the number of mortgages.

Even when I wrote it though, I knew there would always be tweaks needed, but it was a great foundation to get started to a boom back in the U.S.  However, the bankers obviously didn't approve of parting with their quaff. Our political leaders have been on vacation for about 8 years now as well, so I didn't expect to get far with them either.

Lucius Cornelius Sulla's picture

Off topic but I would like to know why the heck CHASE is advertising on this website! 

CD's picture

Contextual advertising placement (finance/banking topics) + attractive (self-reported) demographic of middle age/older, affluent, educated male readership --> prime targets for "premium" Chase credit cards, luxury cars [Caddy, Beamer]. Make sure to click often, and check out the "fantastic deals" they are offering - esp. JPM. I try to cycle through all of them at least a few times a day...

velobabe's picture

attractive (self-reported) demographic of middle age/older, affluent, educated male readership -->

<--------- i knew why zerohedge had me

@ on a long enough timeline, the survival rate for everyone drops to Ø

wisefool's picture

I think it has to do with the words on the page and the way web advertiser frameworks work. When we discuss a company their adds show up here. I just wish the fed would join the advertising pool. Lemme try this.

"Federal Reserve notes. Dropped out of helicopters at your house! click here! You don't have to be a primary dealer, or have an MBA or a PhD in economics. Mouse over for more details"

Lucius Cornelius Sulla's picture

I love the irony of Tyler and crew getting advertising $$$ from them :)

janchup's picture

The author of the piece has been fired for dabbling in reality.

Rainman's picture

Or maybe the author finally got the memo that 1 in 3 California mortgages are underwater. Rainman don't mean rainstorm either.


CD's picture

OT, but a fellow reader showed me this crew, and I feel obliged to share the wealth:

Thievery Corporation

The song most fitting here might be 33 degrees:

I'm the president of the shadow government
The grand governor of the federal reserve
Public enemy of the society
The one you cannot see the thirty three degree
Before you call the shot but now it's our turn
Blow up the system now and tables have turned
Your hidden knowledge you thought I'd never learn
I strike a match and make the whole place burn
I'm the real WMD
I'm your number one public enemy

velobabe's picture

i was just listening to this song this morning. on that same album, a lot of relevant lyrics, applied to this mess. they rock, HARD.