The Housing Fix

[hugo]

Housing Fix

By Robert Samuelson

 

"Decline in Home Prices Accelerates" -- Page One headline, The Wall Street Journal, Feb. 27

 

WASHINGTON -- Gloom. Doom. Calamity. Home prices are tumbling. We're bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.

 

It's elementary economics. Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don't sell. We can either keep the price at $1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.

 

Even many economists -- who should know better -- describe the present situation as an oversupply of unsold homes. True, there is about 10 months' supply of existing homes as opposed to four a few years ago. But the real problem is insufficient demand. There aren't more homes than there are Americans who want homes; that would be a true surplus. There's so much supply because many prospective customers can't buy at today's prices.

 

By definition, the "housing bubble" meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.

 

Look at some numbers from the National Association of Realtors. From 2000 to 2006, median family income rose almost 14 percent to $57,612. Over the same period, the median-priced existing home increased about 50 percent to $221,900. By other indicators, the increase was even greater.

 

But home prices could not rise faster than incomes forever. Inevitably, the bust arrived. Credit standards have now been tightened, and the (false) hope of perpetually rising home prices -- along with the possibility of always selling at a profit -- has evaporated. For many potential buyers, prices have to drop for housing to become affordable.

 

How much? No one really knows. There is no national housing market. Prices and family incomes vary by state, city and neighborhood. Prices rose faster in some areas (Los Angeles, Miami, Phoenix) than in others (Dallas, Detroit, Minneapolis). Some economists now expect an average national decline of about 20 percent. The Federal Reserve estimates that owner-occupied real estate is worth almost $21 trillion. A 20 percent reduction implies losses of about $4 trillion.

 

The largest part would be paper losses for homeowners: Values that rose spectacularly will now fall less spectacularly -- back to roughly 2004 levels; that's still 30 percent or so higher than in 2000. But hundreds of billions of dollars of other losses are already being suffered by builders (from the lower value of land and home inventories), mortgage lenders (from defaulting loans), speculators and homeowners (from lost homes). Mark Zandi of Moody's Economy.com estimates that mortgage defaults this year will exceed 2 million, up from 893,000 in 2006.

 

To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where the mortgage exceeds the value. Losses to banks and other lenders rise, and they curb lending further. Particularly vulnerable would be Fannie Mae and Freddie Mac, the two government-sponsored housing lenders (their vulnerability emphasizes the need for Congress to pass legislation strengthening regulation of Fannie and Freddie).

 

Up to a point, there's a case for providing relief to some mortgage borrowers. In many cases, everyone would gain if lenders and borrowers renegotiated loan terms to reduce monthly payments. Losses to both would be less than if their homes went into foreclosure and were sold. The Treasury has organized voluntary efforts. Some measures being considered by Congress (for example: overhauling the Federal Housing Administration) might help. But other proposals -- particularly empowering bankruptcy judges to reduce mortgages unilaterally -- would perversely hurt the housing market by raising the cost of mortgage credit. Lenders would increase interest rates or down payments to compensate for the risk that a court might modify or nullify their loans.

 

The understandable impulse to minimize foreclosures should not serve as a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalizes tomorrow's homeowners. An unstoppable free-fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices.

 

Copyright 2008, Washington Post Writers Group

[Old Salt]

Housing Fix

By Robert Samuelson

 

"Decline in Home Prices Accelerates" -- Page One headline, The Wall Street Journal, Feb. 27

 

WASHINGTON -- Gloom. Doom. Calamity. Home prices are tumbling. We're bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.

 

It's elementary economics. Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don't sell. We can either keep the price at $1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.

 

Even many economists -- who should know better -- describe the present situation as an oversupply of unsold homes. True, there is about 10 months' supply of existing homes as opposed to four a few years ago. But the real problem is insufficient demand. There aren't more homes than there are Americans who want homes; that would be a true surplus. There's so much supply because many prospective customers can't buy at today's prices.

 

By definition, the "housing bubble" meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.

 

Look at some numbers from the National Association of Realtors. From 2000 to 2006, median family income rose almost 14 percent to $57,612. Over the same period, the median-priced existing home increased about 50 percent to $221,900. By other indicators, the increase was even greater.

 

But home prices could not rise faster than incomes forever. Inevitably, the bust arrived. Credit standards have now been tightened, and the (false) hope of perpetually rising home prices -- along with the possibility of always selling at a profit -- has evaporated. For many potential buyers, prices have to drop for housing to become affordable.

 

How much? No one really knows. There is no national housing market. Prices and family incomes vary by state, city and neighborhood. Prices rose faster in some areas (Los Angeles, Miami, Phoenix) than in others (Dallas, Detroit, Minneapolis). Some economists now expect an average national decline of about 20 percent. The Federal Reserve estimates that owner-occupied real estate is worth almost $21 trillion. A 20 percent reduction implies losses of about $4 trillion.

 

The largest part would be paper losses for homeowners: Values that rose spectacularly will now fall less spectacularly -- back to roughly 2004 levels; that's still 30 percent or so higher than in 2000. But hundreds of billions of dollars of other losses are already being suffered by builders (from the lower value of land and home inventories), mortgage lenders (from defaulting loans), speculators and homeowners (from lost homes). Mark Zandi of Moody's Economy.com estimates that mortgage defaults this year will exceed 2 million, up from 893,000 in 2006.

 

To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where the mortgage exceeds the value. Losses to banks and other lenders rise, and they curb lending further. Particularly vulnerable would be Fannie Mae and Freddie Mac, the two government-sponsored housing lenders (their vulnerability emphasizes the need for Congress to pass legislation strengthening regulation of Fannie and Freddie).

 

Up to a point, there's a case for providing relief to some mortgage borrowers. In many cases, everyone would gain if lenders and borrowers renegotiated loan terms to reduce monthly payments. Losses to both would be less than if their homes went into foreclosure and were sold. The Treasury has organized voluntary efforts. Some measures being considered by Congress (for example: overhauling the Federal Housing Administration) might help. But other proposals -- particularly empowering bankruptcy judges to reduce mortgages unilaterally -- would perversely hurt the housing market by raising the cost of mortgage credit. Lenders would increase interest rates or down payments to compensate for the risk that a court might modify or nullify their loans.

 

The understandable impulse to minimize foreclosures should not serve as a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalizes tomorrow's homeowners. An unstoppable free-fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices.

 

Copyright 2008, Washington Post Writers Group

Excellent article. I think that in a lot of cases, renegotiation would be beneficial to slow the mortgage crisis. However, most lenders don't keep the paper - they sell it on. This is where the problem comes in. How can a borrower in Smalltown, Kansas renegotiate with a mortgage holder in Berlin, Germany? Lenders should be required to keep the note for the first half of the life of the mortgage. This would ensure that lenders make loans only to qualified buyers (IMHO).

[timesjoke]

Great article.

 

The only thing It did not directly talk about was how forclosures also depress home sales.

 

 

By the time the note holder gets the home available for resale, they are very motivated to unload that home well below what they have into it. This puts a relatively new home on the market at a very low price compared to most spec homes where the builder has to make a profit over cost.

 

 

As long as there are a lot of forclosures happening, the new homes will be very difficult to move even in a strong economy.

 

 

Forced negotiation on the trems may be an option but I agree with the writer and believe the best thing to do is let what is failing to finish failing to bring everything back into reality.

[snafu]

Excellent article. I think that in a lot of cases, renegotiation would be beneficial to slow the mortgage crisis. However, most lenders don't keep the paper - they sell it on. This is where the problem comes in. How can a borrower in Smalltown, Kansas renegotiate with a mortgage holder in Berlin, Germany? Lenders should be required to keep the note for the first half of the life of the mortgage. This would ensure that lenders make loans only to qualified buyers (IMHO).

 

Yeah this is insane. And yeah they sell the loan so fast it isn't funny. Sometimes the same week you get it. The ink isn't even dry. Same thing for all loans.

[wez]

Another excellent article as usual teach.. Might look at buying one of them apples for cash in a few years..

[hugo]

Yeah this is insane. And yeah they sell the loan so fast it isn't funny. Sometimes the same week you get it. The ink isn't even dry. Same thing for all loans.

 

There are mortgae brokers and mortgage bankers. I believe most loans are by mortgage brokers who do not service any loans. This is why there is so much corruption in the lending business.

[ImWithStupid]

The Federal government is doing pretty much the exact opposite of what is right for the economy. I agree with this article that they need to just let the housing market hit bottom as fast as possible, they need to quit reducing the prime rate and actually increase it back to where it was a year ago and They need to quit printing money. IMO, all that Bernanky is doing is trying to prop up the economy, under G.W.'s direction, until he leaves office. If they keep up this practice, it will be a worse crash for the next administration and is just making it longer for a relapse, just like the New Deal did under FDR.

[wez]

The Federal government is doing pretty much the exact opposite of what is right for the economy. I agree with this article that they need to just let the housing market hit bottom as fast as possible, they need to quit reducing the prime rate and actually increase it back to where it was a year ago and They need to quit printing money. IMO, all that Bernanky is doing is trying to prop up the economy, under G.W.'s direction, until he leaves office. If they keep up this practice, it will be a worse crash for the next administration and is just making it longer for a relapse, just like the New Deal did under FDR.

 

 

Here here.. no amount of coddling stupidity is gonna help anyone. They had several of the hundred million dollar CEO's of some of these mortgage companies in front of congress the other day too.. For what, not sure..