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David Weidner's Writing on the Wall
Aug. 17, 2010, 3:30 a.m. EDT · Recommend (7) · Post:
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By David Weidner, MarketWatch
NEW YORK (MarketWatch) -- What happens when you have 20 years of price appreciation in the housing market in just five years?
Your house goes from personal piggy bank to the pigs at the bank.
That's the unsavory reality lawmakers and a panel of experts will grapple with Tuesday in a Washington summit to discuss the future of Fannie Mae and Freddie Mac, the government-sponsored mortgage lending giants.
Bloomberg Lewis Ranieri, chairman of Ranieri Partners LLC
Though bond guru Bill Gross, co-founder of mortgage-backed securities Lewis Ranieri, and bank executives may be asked about the role of government in the mortgage market, it's the bubble that's still the problem, even with the steep price declines and foreclosures of the last two years.
It's also why Wall Street, having been burned by housing, isn't interested in financing the market. Nine out of every 10 mortgages are backed by Fannie and Freddie. Private money has exited.
Wall Street and banks aren't willing to take the risk of further declines. They'd rather leave that to taxpayers who have no choice. Moreover, private investors are effectively priced out of the sale of mortgage assets since the government isn't paying the risk premium private investors would demand.
Adjusted for inflation, the price of the median U.S. home was about $125,000 in 1970 and rose to about $150,000 in 1999. In other words, over 29 years, the price of the median U.S. home rose about 2%, according to date from the National Association of Realtors.
Then, with U.S. interest rates artificially low, the boom in mortgage-backed securities and additional aid from the U.S. government including a generous tax exemption passed under the Clinton administration, housing prices began to sky rocket.
Nick Timiraos discusses what to expect at Tuesday's summit that is planned to address some of the problems at Fannie Mae and Freddie Mac.
By 2002, the median U.S. home cost $175,000. By 2004, it was $225,000. The price peaked in 2006 at more than $250,000.
The fall happened faster. The median U.S. home now sells for just under $175,000.
Though the fall has put today's housing prices close to the historical norm, prices are roughly 1.5% higher than they should be using trend line of the last 40 years. Moreover, that five-year period of extraordinary price inflation didn't happen in a vacuum, it coincided with one of the biggest home-buying binges in U.S. history -- home ownership jumped 6% in 10 years to 69% at the end of 2005, according to the Census Department.
In other words, millions of Americans are sitting on homes they overpaid for in the bubble. The government is backing most of those mortgages. And even if they're not underwater -- in that owners still have some equity stake -- many homeowners are struggling to make their housing payments in a down economy, or at least feeling a lot poorer knowing that their biggest investment was a bust.
We all know the pain that shift has entailed: foreclosures, a financial crisis, 10% unemployment. A study by Redfin Corp., a Seattle-based brokerage, found that in seven major U.S. markets, less than half of attempted home sales were successful. So, there's no easy way out. Read WSJ blog post on Redfin survey.
You can't blame Wall Street for not wanting to invest heavily, given this state of affairs, but the housing market needs private investment. And that's precisely what Gross, Ranieri and your good representatives need to figure out.
They really should look north for the answer. Canada's housing market is doing just fine, thank you. Homeownership is about 68%. Delinquencies are about 5% of the U.S. rate. The reason? The government doesn't meddle.
There's no interest deduction for mortgage interest. Mortgages must be remade every five years. Subprime loans are few, less than 5% of the market.
In other words, Canada makes it hard to buy a home, and no one seems to find that a problem. To top it off, Canadian banks take on most of the risk. There seems to be ample credit without the government. Read related commentary on the Canadian housing market.
Could the Canadian model work here? Probably, but we'll never know. For decades U.S. politicians have equated homeownership with moms, apple pie and SUVs: everyone should have one.
Finally there's the nature of Fannie and Freddie. Combined they have $5.56 trillion in assets. That's not something that can be unwound in a flash. Also, they have tremendous influence in Congress having contributed $18.1 million in the last 11 national elections, though they've donated less than $40,000 this cycle, according to the Center for Responsive Politics.
That's a lot of power and influence built up over decades. Not even Bill Gross and Lew Ranieri can undo that -- especially in a half day of hearings.
David Weidner covers Wall Street for MarketWatch.
David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones. He writes the Writing on the Wall column which appears Tuesday on MarketWatch and Thursdays on WSJ.com. He also is a regular contributor to the News Hub.
The world's largest retailer, which found many new friends in the thick of the recession, seems to be having trouble holding on to its gains.
1:00 p.m. Today1:00 p.m. Aug. 17, 2010 | Comments: 36
- Dasher | 11:17 p.m. Aug. 16, 2010
"RT @GregMitch: RT @bbedway Poll shows 34% say TARP enacted by Bush; 47% TARP passed under Obama. 19% dunno http://bit.ly/cgMSnI" 9:34 a.m. EDT, Aug. 17, 2010 from davidweidner
"RT @LaurenLaCapra This has turned into a Bill Gross vs. everyone else smackdown. Guess which one has most skin in the govt-guarantee game?" 9:30 a.m. EDT, Aug. 17, 2010 from davidweidner
"Great post from Barry Ritholtz on me, the Blinder-Zandi report and more. http://bit.ly/bkjZ9n And my original column. http://bit.ly/9n4sH4" 7:16 a.m. EDT, Aug. 17, 2010 from davidweidner
"Can't blame Wall Street for staying out of the housing market now. http://bit.ly/dlFoKn" 6:57 a.m. EDT, Aug. 17, 2010 from davidweidner
"Douthat's a bit of a drip. But he makes a good point about the Ground Zero mosque. http://nyti.ms/aHvTwa" 6:54 a.m. EDT, Aug. 17, 2010 from davidweidner
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