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Experts fear that the already-battered U.S. housing market is getting ready to stall again, leaving the Obama administration to decide what – if anything – it should do next.
Standard & Poor's Case-Shiller Home Price Indices reported last week that home prices rose 3.6% in the second quarter from a year earlier – but the boost came from the first-time homebuyer tax credit that expired in April. And that doesn't bode well for the housing market's near-term outlook.
"The numbers were inflated by the homebuyer tax credit," David Sloan, a senior economist at 4Cast Inc. in New York, told Bloomberg. "The numbers will be going down in the coming months. We could see some significant declines."
Prices rose a seasonally adjusted 0.3% in June from the month before, but then plunged in July and are expected to keep falling. The National Association of Realtors said that existing home sales in July plunged 27% from the month before – a record decline that dropped home sales to their slowest pace in a decade.
The housing market is typically viewed as a vehicle that can pull the economy out of a recession, because the interest rates that are lowered to help jump-start the economy also encourage housing purchases. This time around, however, that scenario failed to play out: High unemployment and continued uncertainty about the broader economy has undermined the economy.
Other housing-related reports are just as gloomy, and are helping to nurture the uncertainty that's hamstrung economic growth.
RealtyTrac Inc. reported that 269,962 homes were taken from delinquent owners in the second quarter – putting the country on pace to have 1 million homes be seized by the end of the year.
The U.S. Labor Department reported that 61,000 construction jobs were lost from May to July, and another 56,000 positions were trimmed in related areas like furniture, financial services for property, and building supplies. Job creation in housing-related-employment areas slowed to 51,000 a month in the May-to-July period from 153,000 a month in the February – April period, according to a Financial Times report.
Without housing stability, it will be tough for the administration to engineer a successful economic recovery – especially since U.S. consumers are already worried about a "double-dip" recession.
To reverse the painful housing decline, the government last Sunday announced more efforts to help financially strapped homeowners stay afloat. It will launch a Federal Housing Authority program to help borrowers who are struggling to pay their mortgages refinance their loans. It will also start an emergency homeowners' loan program for unemployed borrowers so they can stay in their homes, according to Housing and Urban Development Secretary Shaun Donovan.
There's even talk of another tax credit – something not all construction companies and economists are supporting. But the government is ready to intervene – the question is if it can find something that will actually help.
"All I can tell you is that we are watching very carefully," Donovan said. "We're going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers."
This prompted last week's installment of the Money Morning "Question of the Week:" Should the U.S. government implement more programs to help stabilize the housing market? Have the programs they have used helped or done more harm than good? Do we just need to let the housing market adjust itself and wait for a return to "normalcy," or will the domino effect of more mortgage defaults and housing price declines hurt the rest of the economic recovery too much to ignore?
Here is what readers had to say about the government's programs and their affects on U.S. housing market instability.
Enough With the Government Intervention
The government should not be subsidizing the housing market. All they are doing is distorting the market that eventually will have to correct. The more the government subsidizes the markets, the more pronounced and painful the eventual correction will be.
It appears that this Keynesian approach has created an economy that can no longer bear to function as a free market due to massive distortions of the government-sponsored enterprises (GSEs) and the Fed. This will not end well as eventually other markets will provide a better return and the dollar will become a carry trade. The Fed and central banks will be the sole buyers of U.S. debt and that will eventually have to come back to the taxpayers. Taxes will stifle economic prosperity and our economy will collapse under hyperinflation.
I guess at that point, all those inflated home loans will finally true up…but it will cost you $150 to get to work if you're lucky enough to have a job.
Let It Be
It seems obvious to me that the instability in the housing market is a consequence of exceedingly low interest rates over the past ten years (created by the government), subsidies to Fannie and Freddie to encourage everyone to own a home, (again, the government), the mortgage-interest deduction on income taxes (a government incentive), very creative mortgage structures that are now blowing up (Congressional pressure on Fannie and Freddie again), and most recently, the purchaser's tax credit that pulled demand forward, contributing to the severe decline in sales last month (again a government incentive).
Thus, it appears that virtually all the distortions in the housing market that we might wish were stabilized are a consequence of government actions. Yet, we are now to believe that further government action will stabilize the housing market, rather than distorting it even further?
I understand that there are millions of Americans who are struggling with mortgages that are larger than the current value of their homes, many of whom have adjustable-rate mortgages that are about to reset much higher, if they have not already done so. However, if the government intercedes to bail them out in some fashion, then the cost will be borne by those of us who were prudent and careful and avoided funny mortgages, and did not treat our homes as a ready source of extra cash. And even worse, the result will almost certainly not be a stable, healthy housing market, but rather one with greater distortions and instability.
We are learning again the truth, known since ancient times, that debt is a form of bondage, and having borrowed ourselves into bondage, working ourselves free again is a long and painful process. We may wish that someone else would pay the price to redeem us from our foolish and shortsighted choices, and it seems that politicians are always willing to make the attempt, but I think such efforts are doomed to failure, even as they make the situation worse.
So I would say no! Don't do anything to try to stabilize the market, or keep home prices higher than market forces would naturally dictate. Let prices rise and fall in keeping with natural supply and demand, and let the chips fall where they may. I doubt that this will be allowed to happen, but in the long run I think we would all be better off if it did.
– Gordon F.
Time to Follow Canada's Lead
When the whole subprime mess first came out in the open, home ownership in the United States was about 68.6%. At the same time, in Canada the corresponding rate was 1/10 of a percentage point higher. Canada does without Fannie, Freddie, and Goldman Sachs. The bank, credit union or trust company that first grants a mortgage keeps it until maturity so they only lend money to people who can and will pay them back. Another detail is that in Canada there is no easy way to deduct mortgage interest or property taxes on income tax.
The other major difference is that in Canada a mortgage usually has a 25-year amortization and a 5-year or shorter term. In the U.S. at the moment banks are borrowing from the Fed at an overnight rate of about 1/2 of one percent and lending for 30 years amortization and 30-year term. This is going to cause the same thing that happened in the 1980s, when it became clear that borrowing short and lending long caused bank distress when short-term rates went up.
What should be done now is to announce that Fannie, Freddie and all the others are only going to track mortgages that have been guaranteed now. The only new ones that they should insure are those where the payments are maximum 40% of the purchaser's pretax income, not 60% as at present.
– David H.
Help Means Backing Off
Yes they should help. And the biggest help they can offer is to allow the system to work. By taking tax dollars from the rest of us, they are undermining the stability of a huge financial system. We are already taxed to extinction without paying our neighbors mortgage, too. Besides, if people can't meet some common sense guidelines when applying for a home loan, they can rent awhile longer. It's not the end of their world.
Let It Crash
In answer to the question it must be no. Markets should regulate themselves. I certainly won't invest any savings in a property market that is artificially propped up. I simply don't want to be exposed to the downside risk. Let the market bottom out, banks should foreclose on all bad mortgages and people should be held responsible for declaring themselves bankrupt. When that takes place watch how people with cash invest.
Time to Make a New Cycle
There is no question that the tax incentives given in the past worked to prop up home sales for short time. But it didn't really change the longer term housing markets, i.e. home prices, the amount of available and shadow inventory, the availability of re-priced land for builders to continue to build with at new, low market prices, or the increasing costs of materials. In addition, it did nothing for unemployment, the availability of credit to purchase or refinance homes or to help consumer confidence.
For a longer-term look I think the Obama administration should look into setting up the Resolution Trust Corporation (RTC) again, or something similar. This worked to help save the savings & loans, it re-priced large amounts of land that builders and developers could buy and compete at the new prices and the public got affordable prices. Force the banks to sell to the RTC their under and non-performing assets, cleaning up and monetizing their balance sheets. As the banks get healthy, credit will become available to purchase the homes built on the re-priced land purchased from the RTC by builders, and the builders can provide jobs in the process.
Without a job, you can't buy a house. If your employer is doing poorly and/or you feel like your job might go away you won't buy a house. Without a loan, you can't buy a house. If you can't sell the house you already own, you won't buy another one – pretty simple stuff.
– Mike G.
Let's Call a Renter a Renter
Low interest rates and easy-qualify loans, combined with generous tax-write-offs for mortgage and real estate payments made home ownership desirable and profitable for decades. For the most part it was a good thing – for most of us.
But even good things can be destructive when carried to extremes. When they started pressuring banks and savings & loans to loan to folks who were not ready and able to carry out their end of the bargain, and when some genius decided these loans could be sliced into "investments" that would be sold all over the world, the entire structure crashed.
Now it's clear that not everyone is a qualified homebuyer. Many of us are actually renters.
[Editor's Note: Thanks to all who responded to last week's installment of our "Question of the Week" regarding the U.S. housing market. Be sure to answer next week's question: How do you feel about the U.S. government's proposals to boost hiring? Do you like the proposed transportation plan? Which measures are the most likely to fall short of the government's promises and which do you think can succeed? What else would you like to see the government do to lower the unemployment rate?
Send your answers to firstname.lastname@example.org.!
Is there a topic you want to see covered as a Question of the Week feature? Then let us know by e-mailing Money Morning at email@example.com. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
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