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"I'M FROM THE GOVERNMENT and I'm here to help you" ranks right up there with "the check's in the mail" and assorted other lies. Yet the turnaround at General Motors and the apparently successful initial public offering of its shares (ticker: GM) has given government intervention newfound respectability.
The same can't be said for the government's myriad efforts to turn around housing. Even record-low mortgage interest rates and two rounds of tax credits have failed to produce any sustained response increase in home construction or sales. Of course, some sales were brought forward to take advantage of the government giveaways; but they only affected their timing, not their magnitude.
That was painfully evident in the Commerce Department's housing starts data for October, which showed a much-sharper-than-expected 11.7% decline to an annual rate of 519,000, the weakest pace since April 2009. Moreover, the ever-alert John Williams of Shadow Government Statistics points out last month's drop came on top of downwardly revised September decline of 4.2%, which originally was estimated at a 0.3% gain.
Beyond these monthly perturbations, housing starts have been bouncing along the cellar floor around these levels since early 2009 after the bubble burst with peak activity in early 2006 at a 2 million-plus unit annual rate.
And that's with 30-year fixed-rate mortgages in the 4% range and home prices marked way down in most parts of the country. Even though the $8,000 tax credits for first-time and some other buyers have gone, housing affordability is vastly improved from the bubble years. It's a far cry from when I was trying to buy for the first time in the 1980s with mortgages still in double digits and 20% down de rigueur.
Yet, the housing market languishes at depression levels. This isn't surprising, contends Gabriel Stein of Lombard Street Research in London.
"The main causes of the housing market weakness are the continued high debt burden of householdsâ??meaning that they are both unable and most likely unwilling to take on new debtâ??and the continued threat form a large overhang of foreclosures. The latter has temporarily been staved off due to the scandals surrounding banks' foreclosing procedures, but remains like a Sword of Damocles suspended over the housing market by a thread of hair.
"But household debt is the main problem, not least the fact thatâ??according to [Federal Reserve Chairman Ben] Bernankeâ??some 20% of households have negative equity, while another 33% have less than 10% equity in their homes," he continues. "These are powerful forces stopping them from attempting to change houses. They also meanâ??at least in the case of the one-fifth of households that are in negative equityâ??that they cannot take advantage of any lower interest rates engendered by the Fed through QE2 to remortgage their homes."
Which makes Stein wonder why the Fed didn't simply ease household debts in QE2 instead of buying Treasuries, say purchase 5% of the $10 trillion mortgage debt outstanding. That would come to $500 billion, less than the $600 billion of Treasuries the Fed is slated to buy. Then, Stein says, the Fed could write off those purchases, thereby lightening the burden on the balance sheets of strapped consumers.
An eminently efficient economic solution, but a political non-starter. If buying $600 billion of U.S. government obligation has aroused a big controversy, consider what would happen if the Fed took deadbeat debtors off the hook to tune to of a half-trillion bucks.
And so, millions of Americans can't get out of houses in which they're in; they're underwater, owing more than their properties are worth. That means they can't sell without taking a loss they can't affordâ??even to move to get a job elsewhere. Neither can they refinance to take advantage of record-low interest rates.
In the classic Marx Brothers comedy, The Cocoanutsâ??which revolved around a real-estate bubble of another era, Florida's boom and bust in the 1920sâ??Groucho, a real-estate promoter, extolled the decor of the houses he was hawking. "You can even get stucco. Oh, how you can get stuck-o!"
With millions of Americans "stuck-o" as a result of their malinvestments in houses from the bubble era, residential real estate will be a drag on the economy for years to come.
LSR's Stein thinks that, based on past cycles, U.S. home prices are unlikely to recover to pre-bust levels until 2016. "But the difference between this and previous housing busts means that that is probably too optimistic a view," he concludes.
Stuck-o, indeed.
Comments? E-mail: randall.forsyth@barrons.com
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