With the fullness of time, housing prices are due to revert to something approximating the mean of their historical relationship to rental prices and incomes, albeit with an overshoot probable. But how quickly we reach that level will be very much a function of how quickly foreclosures take place and real estate is disposed of.
A Wall Street Journal story. “Banks’ Plans for Foreclosed Homes Will Drive Market,” is framed in a somewhat misleading fashion, since the government has been influencing the pace of resolution. For instance, Treasury has been selling the idea that the unsuccessful HAMP program nevertheless was useful, in that it served to delay foreclosures when the housing market was fragile. Analysts are repeating this idea:
The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a “closet moratorium” on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management.
The result: The share of distressed sales fell by November to 25% of home sales, and prices stabilized. After rising in the winter, the distressed share fell to 22% in June, before bouncing to 30% in July.
Yves here. So the Administration has been able to sell a bug as a feature.
The story acknowledges extensive efforts to boost demand for housing:
Even though mortgage defaults kept mounting, housing markets began to stabilize early last year as low prices and government interventions broke the downward spiral. Policy makers spurred demand for homes by holding down mortgage rates, offering tax credits for buyers, and extending low-down-payment loans through the Federal Housing Administration.
The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans’ appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future…The upshot is that, the more homes being sold by lenders, the faster prices tend to fall. That pattern was clear over the past two years: Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital….
“We see the perfect storm brewing with rising supply and falling demand,” said Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago. She estimated that distressed sales could account for half of the market by year-end if traditional sales didn’t rebound…..
Analysts at Barclays Capital estimate that some four million loans are in some stage of foreclosure or are at least 90 days past due, down slightly from a January peak.
Ouch.
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Perhaps the most insane detail of all is how even with this massive unsellable backlog which has to be somehow kept off the market to help the doomed attempt to prevent bubble deflation, builders and speculators are still at work (at least according to MSM anecdotes, which I take to be anti-walkaway propaganda: “Don’t walk away now, because this proves prices are ready to shoot right back up! Otherwise how could they still be building?”) and municipalities and states are still mired in the building-as-necessary-to-grow-ratables craziness.
Here in NJ we enacted the Highlands Act, to protect the already impossibly-strained water supply from rampant sprawl, at the height of the bubble. A few proponents including me tried to counteract the inevitable libertarian “takings” propaganda by pointing out how any depressant effect on property prices was actually the reality-based correction of a market error.
Well, you can guess what’s happening nowadays. Although rigorous enforcement of the Act was always dubious, they’re now basically gutting it anywhere they can. I haven’t yet heard of calls for formal repeal, but I imagine they’re coming.
Maybe no bailout is more absurd than the crackpot notion that society needs to prop up builders, surely not just a zombie and not just a dinosaur but a zombie dinosaur, if there ever was one. There’s obviously no future at all.
Take all the construction workers and put them to work retrofitting the structures which already exist for the energy-constrained world coming on fast. Lots of work to be done installing better insulation and revamping for passive solar heating, for example.
No one is willing to cut to the heart of the problem, which is that the massive loss of equity for millions upon millions of homeowners makes it all but impossible for them to move up, down, or even sideways because they cannot scrape together a new down payment, their credit has been dinged (if not destroyed), and they are reluctant or unable to rent out their current home which they cannot hope to sell.
We need to stop talking so much about how to keep people in their unaffordable houses and start looking for ways to help them transition to more affordable ones. If you wanted to get really creative, you could offer an “implied equity” that could be transferred based on some formula based on your down payment, perhaps what you put into your house (in renovations, etc.) and your sound payment history.
What it would amount to, really, is a house swap program. It would likely need some government oversight, but the bulk of the process would need to be guided by the banks that created the problem and are now hamstrung by it.
I’m sure Elizabeth Warren could find a way to make it work.
Few people understand the extent to which our so called real economy is dependent upon real estate transactions. What government has done by extend and pretend is to slow down such transactions to a trickle, maintain the hopes of land owners and destroy construction. The result is like playing monopoly while only throwing the dice once every twenty minutes. Can this go on and on and on? We may get a clue in the next election.
Most of those savers being vaporized by ZIRP are elderly. How many will be voting Democratic this time?
In the end, more realistic prices for homes are essential. We still live in a fake reality where average income is well below the ability to buy homes in a reasonable distance to workplaces. The management of foreclosed properties is bizarre to say the least. When you have neighborhoods in places such as Las Vegas where most properties are abandoned is cruel to homeowners and useless to banks. (My son calls such place Somalia.)
Obama, as usual, failed to infuse logic and consideration into the foreclosure process. What we see now is neighborhoods that may never recover and if they will, it’ll take decades, a market full of fire sale valued properties and a long and unjustified very long road back to normalcy.
We should also take into consideration the fact that we not only have an oversupply of houses that the majority of people cannot afford, but we have an oversupply of the wrong kind of houses.
Of the millions of stick framed palaces built to satisfy the bubble mentality, only a handfull were designed with an energy constrained future in mind. Sizes are twice as large as function would dictate, energy draw three times what a well-designed home requires, and distance from jobs (assuming such a thing exists) lock owners into mind-numbing automobile commutes and the attendant expense.
Many of those surburban dreams need the gentle touch of a bulldozer, the newly cleared land used for intensive small scale agriculture, and the remaining structures divided into duplex and tri-plex living units that are upgraded to energy standards closer to future needs.
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selling the idea that the unsuccessful HAMP program nevertheless was useful, in that it served to delay foreclosures
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But what is the effect of such delay? It postpones the bottom-bouncing thus deepens the bottom. Are present White Houssian Proposals now advocating a six year infrastructure renewal? Do the Whitehousese expect six more years of deflation, deflation that requires abnormal stimulants until 2016? Activate your parachutes!
“Yves here. So the Administration has been able to sell a bug as a feature.”
Or more likely, it was a design virus by the hopemonger’s bankster posse. What was dangled as hope was cynically engineered to prolong the torture of homeowners for the benefit of banksters. Does not Basel III now further delay the inevitable by allowing banks to extend their pretend valuations indefinitely?
Ouch indeed.
I have researched the houses for sale within a 8 block area, when I started it was 12, now 22. I have seen two purchases [with cash], which were converted to rentals immediately. Those two had been completely…and I mean completely remodeled. So there are purchases by folks looking skim the cream and take premium properties and turn them into rundown rentals…ooh, love those “market forces”
In my neighborhood all the home sales around me are from loss of income. Most houses are 850-1350 sq ft. For almost all Americans income = job. There is no moral failing among these people, no indication of excess spending. These filthy lies are to calm the cattle waiting in the holding pen.
There are people with cash making bank on the slaughter of hardworking Americans. People who comment gleefully about how it has to go lower because [xyz] without pointing out that most would not sell unless forced through from un-employment probably would enjoy watching the activities on a killing floor.
The moral depravity here lies with those comfortably inured to the suffering of the unemployed…which is…if we didn’t lie about that also, about 20% of the working population.
Home forfeitures — foreclosures sales, short sales, and deeds-in-lieu — have been rising steadily since the beginning of 2009. So it is not really a mystery what banks are deciding to do with the distressed properties. For graphs see http://www.clearonmoney.com/dw/doku.php?id=public:us_home_forfeitures.
Its all about housing or stock market prices no meaningful discussion or interest in getting Americans back into productive work so the financial fairy tale that asset prices increases is the cure for our economic ills continues; getting to be very boring theme but the political class keeps beating the same financial drum including the never ending tale about those scary Afghan insurgents. I wonder how many years I will be hearing this same story line.
It’s much worse than it sounds. Thanks to the nightmare induced by the illegal bankster scheme to evade mortgage recording taxes known as MERS, no house which has a MERS-related mortgage will have clear title until ‘quiet title’ actions are taken in court.
Who wants to buy into *that* mess? More and more people are becoming aware of this.
This tangle will slow down home purchases for *decades*.