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Reality Check: Is the US Housing Market Really Recovering? Part II

rcwhalen's picture




 

 

"Looking at an REO-to-rental strategy, and while a rental strategy is very important, we decided it wasn't the best solution for the FHA, servicers, borrowers and their communities."

Carol Galante

Federal Housing Administration Acting Commissioner 

Housing Wire

http://www.housingwire.com/news/galante-fha-will-not-participate-reo-ren...

 

This week in The Institutional Risk Analyst newsletter, we featured a comment on the housing sector, “Reality Check: Is the US Housing Market Really Recovering?”

http://us1.irabankratings.com/pub/IRAStory.asp?tag=550 

Below is a cross-post on Zero Hedge of some additional comments that need to be made given the amazing reports and opinions we keep seeing in the Big Media about the “housing recovery.”  As Paul Jackson, CEO at Housing Wire, said to me last night: “Just because we are all tired of the housing crisis does not mean that it is going away.”  

Hold that thought, especially given the dearth of discussion of housing in the presidential campaign.

The first point to make is that there are literally millions of homes in process of foreclosure that are not available for sale.  This is why the market seems “tight” in many areas.  The complaints from real estate agents about a dearth of supply are real, but these are not a positive indicator.  This situation reminds me of the transition period between new and old models of computer memory chips.  For a while, supply is tight.  Then comes a flood of product. 

“There are 2 million plus foreclosed awaiting movement to sales category,” notes Professor Anthony Sanders at George Mason University.  “But there are still millions of borrowers who can no longer qualify. Count the number who went through foreclosures and add some percentage for people who avoided foreclosure, but went late.”  

What many observers in the Big Media fail to appreciate is that the banks and the US government itself have deliberately create a supply squeeze in residential housing by slowing the foreclosure process.  By dragging their feet on foreclosure, banks delay the day of loss recognition and also keep supply off the market.  This is good for prices in the short-term, but does not solve the supply problem.  

This is why, for example, that the FHA has refused to get into the REO-to rental market.  FHA also has strict limits on the number of vacant homes it will put on the market in a given neighborhood.  No more than 50% of the REO properties purchased from FHA, for example, can be put on the market for sale as a vacant foreclosure, FHA Acting Commissioner Galante said last month.  Instead, the buyer needs to put in place another solution, such as leaving the homeowner as a renter of the home.

The second factor is buy-to-rent, a strategy that some banks and investors are using to divert foreclosed homes from involuntary sales.  The US government has also been moving foreclosed homes into the rental column, though is relatively small amounts.  Between the FDIC, FHA and the housing agencies such as Fannie Mae, Freddie Mac and other GSEs, there are literally millions more homes waiting to hit the market.  The only question is when.  

While the rental boom is much discussed in investment circles, the reality is that there is only so much demand for rental housing.  The soft economy is the key factor here.  As Professor Sanders noted in an email today:  “Look at M2 Money Velocity. It kind of says it all.”

 

Bloomberg M2 Chart

Thanks to Tony Sanders & Bloomberg

The sharp decline in M2 nicely illustrates the contraction of credit that continues unabated in the US.  While the Fed believes that zero rates and purchases of agency RMBS are helping the economy, I respectfully disagree.  Zero rates are taking income out of the consumer economy in order to subsidize the biggest banks and levered investors.  

And the Fed's reckless Fed market operations are eroding investor confidence, especially institutional investors unaccustomed to taking first loss risk on fixed income securities.  Professionals understand concepts like duration and interest rate risk, Chairman Bernanke.

The Fed is actually driving deflation, not recovery, with zero rate policy.  The politics of this are particularly interesting, one reason why Mitt Romney should be more aggressive in criticizing the Obama Administration’s do nothing policy on housing as well as the Fed.  Consider the political geography of housing from the perspective of the American home owner.

The Blue states tend to have high house prices, meaning that the dearth of non-jumbo financing hurts Democratic congressional districts most.  In most states, the urban congressional districts (mostly Blue) have the highest housing prices.  Lefties like Nancy Pelosi (D-CA), Henry Waxman (D-CA) and Maxine Waters (D-CA) should support issues like retaining the mortgage interest deduction and expanding the cap on conforming loans.

Republicans like John Boehner (R-OH), Eric Cantor (R-VA), Paul Ryan (R-WI) and Kevin McCarthy (R-CA) should be opposed to the mortgage interest deduction.  Their constituents tend not to itemize on their taxes and get no benefit from the mortgage interest deduction.  They represent borrowers who are always performing borrowers and have not gotten refis due to the machinations of the GSE-bank cartel.  These borrowers live in the cheaper, Red districts, BTW.  Somebody remind Mitt Romney of that fact. 

The final factor that most of us still do not yet grasp is the impact on home sales of the decline in prices, especially on consumer behavior.  Chris Mayer, Paul Milstein Professor of Real Estate and Finance and Economics at Columbia Business School, observes that the dynamics of the housing market supply and demand are more complex than most people imagine:

“Part is foreclosures, but much of this is very tight credit and challenges in the trade up market. In a normal market we would have 5 million or more sales without distressed sales or purchases of new homes.  So from my perspective, the decline in home prices from peak and the mortgage market tightness are driving down sales from a normal market.”

He adds:  "Obviously unemployment and poor labor market conditions also play a role, but the bulk of homeowners still have a job and have not seen their incomes appreciably decline in the crisis."

So if you keep hearing the Big Media touting the recovery of the housing market, just remember that for every home listed for sale in your area there as many as two or more comparable homes waiting in the wings to come onto the market over the next several years.  This is both good news and bad.  

Just remember that the net, net effect may be for prices to simply stabilize at current levels.  Or to put in another way, by Christmas we may very well see Case-Shiller and other indicators of home prices headed back down, erasing the gains made in housing during 1H 2012.  

To read my earlier comment, go to:

IRA Analyst - Reality Check: Is the US Housing Market Really Recovering? http://us1.irabankratings.com/pub/IRAStory.asp?tag=550

 

 

 

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Mon, 10/22/2012 - 22:55 | 2911625 cgagw
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Mon, 10/22/2012 - 21:55 | 2911450 imbrbing
imbrbing's picture

I had the bank raise my payments by $400 a month via "escrow" on a 30 year fixed rate FHA loan. Payments went from $1700 to $2100 a month

after paying $1700 for 8 YEARS. Called them and tried to fix it, they tell me since I make {X}$$$ I can pay $3200 a month to now "catch up" because I stopped paying

when it was bumped like that. I let them have the house.

 

 

Mon, 10/22/2012 - 21:07 | 2911348 orangegeek
orangegeek's picture

All bus driver, cops, fireman, teachers and unionized lazy slobs should be paid $1M per year salary.

 

Paid these fuckers like pro athletes and let's tank this shit fucking economy for good.

 

Cntrl-Alt-Del for the planet.

Mon, 10/22/2012 - 20:36 | 2911275 MikeMcGspot
MikeMcGspot's picture

So much opportunity.

So few who see it.

There is the rub.

Time to hump.

Mon, 10/22/2012 - 20:04 | 2911203 otto skorzeny
otto skorzeny's picture

the only houses being built and bought around here are going to cops/firemen/people with govt lackey jobs

Mon, 10/22/2012 - 21:47 | 2911432 jim249
jim249's picture

I have a goverment job as a mailman. Been sucking on the taxpayers tit for 18 years now. But you know something, when the economy was good nobody wanted these jobs. Now with the economy in the toilet, anyone making more than $10 per hour and working for the government is overpaid! Get a life!

Mon, 10/22/2012 - 20:35 | 2911271 Treason Season
Treason Season's picture

AA

American Apparatchiks

Mon, 10/22/2012 - 19:34 | 2911147 New American Re...
New American Revolution's picture

Another idiot who ignores the lack of new job creation.   The housing crisis is built on the lack of stability in the markets causing everyone with money to sit on capital because they don't want to risk it in such an environment.   Plus, there is less surplus capital each year because government debt contitues to line the pockets of a few well healed oligarch's a little bit more each year.   It's not rocket science, it's the total lack of investment capital that creates NO NEW JOBS, jobs, jobs.   There are no young people stepping up for homeownership because they have no jobs, so yesterdays youth who purchased a home can't move up to a better house because there are NO FUCKING JOBS for the next generation behind them.   Do you hear this RC?   No jobs, no upward mobility, and no buyers.   For all essential purposes, it doesn't matter the number of back logged homes if there are no jobs and no buyers.   Take a look at your study, did you figure everyone under 27 who can't even buy a car into your equation?  I guess not!   Do you want to know what they're doing, they're living in Mom and Dad's basement working a Mickey D's and buying I-pods.  That is their world inside the world that we've destroyed for them.   Your micro argument carries micro weight in the macro world and you've missed the boat, or in this case, the house boat.  Liberty is the only way out, see electanewcongress.com

SERFS UP AMERICA!

Mon, 10/22/2012 - 20:28 | 2911254 Sabibaby
Sabibaby's picture

Great, so everybody has a job yet the prices remain inflated? 

You suggest that if we just give everyone a job we can keep the housing market inflated. Please start using your brain. Corruption and greed are at the center of our recovery problems. What good is a recovery when corruption isn't addressed?

Mon, 10/22/2012 - 19:33 | 2911139 Heyoka Bianco
Heyoka Bianco's picture

Hey Tylers, ever considered renaming this site to the CASSANDRA FILES? There's always great stuff here, but I might as well be barking like as an Alsatian as trying to get anyone I know to grasp the most basic facts of our fuckedness. The despair hardly seems worth the I told ya so's when shit gets real.

Mon, 10/22/2012 - 18:57 | 2911070 rosethorn
rosethorn's picture

Thank you for telling it like it is.

Mon, 10/22/2012 - 18:09 | 2910964 adr
adr's picture

I have an 800 credit score and a steady job, but no bank will rush to refinance my mortgage. Since I pay on time, why let me take a litle more money home.

Mon, 10/22/2012 - 19:49 | 2911174 Richard Chesler
Richard Chesler's picture

An Obanana Republic is a country operated as a commercial enterprise for private profit, effected by the collusion between the State and a criminal banking cartel, whereby the profits derived from private exploitation of debt-money are bankster property, and the debts incurred are public responsibility. Such an imbalanced economy reduces the national currency to devalued paper-money. Kleptocracy features influential government employees exploiting their posts for personal gain (embezzlement, fraud, bribery, etc.), with the resultant government budget deficit repaid by the native working people who earn money, rather than make money. Because of banker manipulation, the kleptocratic government is unaccountable to its nation, the country's private sector–public sector corruption operates the Obanana republic, thus, the national legislature is for sale, and function mostly as ceremonial government.

 

Mon, 10/22/2012 - 21:32 | 2911401 Bruin4
Bruin4's picture

Brilliant, brilliant. well said sir

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