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


"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


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?” 

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?