Economics
The bust's second act
May 25th 2010, 15:12 by R.A. | WASHINGTON
FOR a brief moment last fall, it looked as though the American housing sector might not be the persistent economic drag economists had feared. Home prices and sales leveled off and began climbing. Construction did the same. In the third and fourth quarter of last year, residential investment was a minor but positive contributor to American output growth. Buoyed by a generous homebuyer tax credit and mortgage rates held down by Federal Reserve purchases, housing markets seem poised for stability, if not a new boom in activity.
But the good times haven't lasted. Construction and builder confidence have weakened once again. The latest data on existing home sales show a spike in activity and the best April performance since 2006. But this was almost certainly due to the looming end of the federal tax credit. Sales also rose and spiked before and immediately after the previous deadline, last fall, only to decline again through the winter. More worrying still, the previous spike in sales coincided with a decline in housing inventory. This time, inventories have risen dramatically. Even as the end of government incentive programmes lead buyers to exit the market, the number of homes for sale will have grown significantly.
And so it's not surprising that prices have also been falling again. According to the Federal Housing Finance Agency, home prices declined 1.9% from the fourth quarter of 2009 to the first quarter of 2010. Prices were up 0.3% in March, according to the FHFA data, but the general trend is not encouraging. The latest Case-Shiller home price figures are similarly disappointing. Both of the Case-Shiller national indexes had declined for six consecutive months, through March. Only two of the individual markets, San Diego and San Francisco, saw a rise in home values in the first quarter. Total declines from last fall's price peak haven't been catastrophic. But they are troubling. Nearly a quarter of all mortgage borrowers remain underwater on their home loans. In the first quarter, the share of prime loans that were delinquent or in foreclosure rose sharply. That's bad for housing inventory, bad for home prices, and bad for the residential investment outlook.
These trends are the more worrisome given the end of the homebuyer tax credit and of Fed purchases of mortgage-backed securities. Just this week, the head of the Federal Housing Administration declared that, "This is a market purely on life support, sustained by the federal government...having FHA do this much volume is a sign of a very sick system." The federal government may come to regret its decision to focus on measures aimed at encouraging sales, rather than on efforts to deal with negative homeowner equity. The latter issue has made for a steady-stream of foreclosed-upon housing inventory, too substantial to be absorbed by new buyers. And so with government measures winding down, the housing bust is free to carry on as before.
It is unlikely (though not impossible) that prices will plummet once more; price declines are likely to be small relative to those experienced in 2008 and 2009. But small declines are enough to do damage. Four years after the housing boom reached its apex and the bust began, and end to the mess remains just out of reach.
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The sad priorities of California; that bubble mentality is sure hard to break. While California has the only two markets on the Case-Shiller index to increase, it still felt the need to issue its own $10,000 tax credit to homebuyers. This during a time when it is discussing the complete elimination of healthcare programs for children below the poverty line. Oh, and there was still enough political will to pass through $2 billion in corporate tax breaks.
We need to refinance people who bought during the bubble. Adding insult to injury, people who overpaid 30-50% are stuck paying 50% above the market rate for their credit rating on that debt. That a huge amount of money that isn't shoring up balance sheets, being invested, or being spent.
Another alternative is having a moratorium on interst for those mortgages. Have the interest be applied to the principal for a while. Banks balance sheets improve, homeowners balance sheets improve, bank cashflows remain the same, banks pay less in taxes and can't pay big bonuses because they don't show profits.
This may be one reason for collapsing housing:
"Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds."
"At the same time, government-provided benefits "” from Social Security, unemployment insurance, food stamps and other programs "” rose to a record high during the first three months of 2010."
"Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs."
"The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says."
OneA, policians may be fools the world aroun but our legislature is special, isn't it?
Oh, and the lost tax revenue would likely be more than made up for recovery of value on some of the toxic assets the fed is holding. I imagine many of the securities created were based on the continued prepayment of principal from people flipping houses.
liquidate, liquidate, liquidate
There is no point in being impatient. National indices include the disaster areas, and they may take decades to recover fully. The more typical areas that went through a boom will probably be ok within a couple of years. And there are places that never got caught up in the craziness. People can't buy houses if they don't have jobs, and they are not likely to think about it if they are still worried about losing one they have. That worry has subsided, but it's not gone.
Remember J.P. Morgan's immortal words when asked what the market would do: "It will fluctuate."
In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts.
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