Why the Growth Slowdown—It’s Housing, Stupid

Popular Economics Weekly

Dean Baker, a noted economist with the Center for Economic Policy and Research (NEPR), has probably given the best and most understandable reason for the Great Recession and ultra-slow recovery—it’s the lousy housing market. The economy is growing at slightly over 2 percent, when we would expect 3 percent growth 5 years after the end of the Great Recession.

“The basic story of the Great Recession is about as simple as they come,” says Baker. “The economy was being driven by a housing bubble and the bubble burst. The combination of the loss of housing construction, due to the enormous overbuilding of the bubble years, and the loss of the consumption that had been driven by bubble generated housing wealth, created a gap in annual demand of more than $1 trillion. That's all simple and easy.”

So the weak housing market, even with the Fed doing all it can do to keep interest rates at rock bottom, hasn’t boosted US growth sufficiently to approach full employment. Why? The housing market would be recovering sooner if government was allowed to do more, because of austerity policies prevalent both here and in Europe. And the results are easy to see in this Paul Krugman graph.

Graph: Paul Krugman

Those countries with the lowest growth rates have the most stringent austerity measures—i.e., most drastic budget cuts and highest interest rates when government should be keeping interest rates as low as possible. And they are the United Kingdom, Spain, Portugal and Greece, of course. But the US isn’t far behind, in line with France that is having its own budget problems.

What should be done? We know the government has to help, either with mortgage relief (buy up the bad mortgages and hold them until the market improves), or buying the underwater housing as was done during the Great Depression, and selling them back when conditions improved.

The Home Owners’ Loan Corporation was set up in 1933 under the New Deal. It made more than one million loans to homeowners, sometimes bought the underwater homes, and otherwise supported homeowners who were behind on their payments. Sound familiar?

Graph: FHFA

The HARP and HAMP loan programs were current attempts to do the same and they have refinanced 3 million of the 16 million homes guaranteed by Fannie Mae and Freddie, according to The Housing Wire and FHFA, the Federal Housing Finance Authority that supervises Fannie and Freddie.

“…what did economists think would fill a trillion dollar gap in annual spending?” laments Baker. “Of course the government could do it with more spending and/or tax cuts, but since we have a religious cult in Washington that says it is better to keep millions out of work than to run deficits, this was a political impossibility.”

So 8 million more homes are eligible, according to the FHFA, and the White House has done little to promote HARP 3.0, a newer version that would loosen qualification standards to increase eligibility for those behind on their payments, which would allow more homes to be refinanced. It doesn’t look like another New Deal for housing is in the offing.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

California Foreclosures Plunging, Sales Rising

The Mortgage Corner

The number of California homeowners entering the foreclosure process plunged to the lowest level in more than seven years last quarter, reports DataQuick. The unusually sharp drop in the number of mortgage default notices filed by lenders stems mainly from rising home values, a strengthening economy and government efforts to reduce foreclosures, says DQ.

No wonder, as the median price paid for a California home last quarter was $297,000, up 22.7 percent from a year ago, according to DataQuick. During first-quarter 2013 lenders recorded 18,567 Notices of Default (NODs) on California houses and condos. That was down 51.4 percent from 38,212 during the prior three months, and down 67.0 percent from 56,258 in first-quarter 2012.

Graph: Econoday

Most of the loans going into default are still from the 2005-2007 period, per DQ. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than three years, indicating that weak underwriting standards peaked then. The most active creditors in the formal foreclosure process last quarter were Wells Fargo (5,546), JP Morgan Chase (3,863) and Bank of America (2,565).

And Calculated Risk’s Bill McBride has become very sanguine about real estate’s role in boosting economic growth. He maintains that new home sales will pick up due to unfilled demand, due to the big jump in household formation—to 1.3 million new households last year and the prediction this level will be maintained over the next decade. He sees the so-called existing-to-new home sales ratio trending back down to its historical average of 6 to 1 from its current heightened ratio, in this very interesting graph. It was the “flood’ of depressed sales from foreclosures that depressed new home sales because of the plunge in housing prices brought on by the foreclosures.

Graph: Econoday

According to the Census Bureau, there were 104 thousand new homes sold in Q1 2013, up about 19.5 percent from the 87 thousand sold in Q1 2012. That is a solid increase in sales, and this was the highest sales for Q1 since 2008, per Calculated Risk.

“Although there has been a large increase in the sales rate, sales are still near the lows for previous recessions” said McBride. “This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years. Also housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.”

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Don’t Blame Fannie and Freddie…

The Mortgage Corner

Please don’t blame Fannie Mae and Freddie Mac, guarantors of most of the housing market’s conventional mortgages and reason the housing market continues to function at all, for the housing bust. The bust was caused by the oversupply of housing built during the bubble, and aggravated by almost all commercial banks and hedge funds cooking up every kind of ‘liar’ loan they could think of to sell to Wall Street securitizers—including to themselves.

Sure, Fannie/Freddie had to be taken over by the federal government and are being subsidized with approximately $167 billion to date, but that is because banks and other commercial lenders then withdrew from financing the housing market, leaving government to clean up the mess. So the government subsidy is a very cheap price to pay to keep housing from collapsing completely.

Credit was too cheap in early 2000, as Fed Chairman Alan Greenspan’s Federal Reserve kept short term interest rates below the inflation rate to pay for the Bush tax cuts and wars. I.e., when short term interest rates were 1-2 percent and inflation in the 3 percent range at the time, it was borrowers who actually profited since inflation deflated the value of the debt. This meant it was interest free money!

Economists have estimated that below inflation interest rates were probably also responsible for the double digit housing price rises during the height of the bubble. Don’t take my word for it. Almost everyone, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, have rejected the argument of conservative think tanks such as the American Enterprise Institute that it was federal affordable housing policies designed to make housing available to a broader public, that created so many high risk loans.

Fannie and Freddie created and have always maintained the gold standard of mortgage qualification standards, with the highest income, credit, and ability to pay requirements. As a mortgage banker/broker for 30 years, I have never originated or underwritten a conforming mortgage that didn’t meet those standards.

So why do conservatives hate Fannie and Freddie so much? Because of their ties to the Democratic Party, mainly. As Gretchen Morgenson and Joshua Rosner detail in their book, Reckless Endangerment, Fannie Mae and Freddie Mac grew hugely under Democratic Administrations eager to encourage more affordable housing. And they did buy subprime mortgages from Countrywide Financial that were not underwritten to their conforming underwriting standards, thus fattening their portfolios in a bid to play catchup to the issuers of so-called ‘private label’ mortgages. But the subprime purchases were a drop in the bucket; just $60.8 billion for Freddie Mac, according to David Min of the Center for American Progress, with borrowers who had FICO scores under 620, a common definition of subprime mortgages.

In fact, current delinquency and foreclosure rates of Fannie and Freddie, guarantors of Agency Prime mortgages, are close to the historical norm. Fannie Mae reported that the serious delinquency rate decreased to 4.27 percent in March, close to the long term historical average. This is down from 5.47 percent in March 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent. Freddie Mac reported that the serious delinquency rate decreased to 3.57 percent in April. (Note: Fannie reports a month behind Freddie). This is down from 4.06 percent in March 2010 and Freddie's serious delinquency rate also peaked in February 2010 at 4.20 percent.

And their foreclosure rates are approaching the 1 percent historical average of all conventional loans. The Calculated Risk graph shows the latest foreclosure rates for all mortgage categories. It may not be surprising that Option ARMs (those with negative amortization that caused the principal loan balance to increased substantially in many cases) have the highest foreclosure rates, even above the Subprimes.

Sadly, Lender Processing Services, Inc. (NYSE: LPS) Mortgage Monitor report shows the number of mortgages 90 or more days delinquent, combined with the foreclosure inventory at the end of June, still totaled 4,073,00 down very slightly from its May 4,084,557 total. It looks like without additional government help, which doesn’t seem likely (see Renae Merle at Washington Post: Obama administration not planning another big housing program), most of those units will be added to the existing home inventory over the next 2 years.

So why doesn’t the Obama Administration spend more of the reportedly $11 billion set aside for the HAMP loan modification program? It may be because Timothy Geithner’s Treasury Department isn’t requiring banks holding the delinquent loans to get them off their books more quickly. And that means not much upside potential for housing prices until when, maybe 2014?

Harlan Green © 2011

The 2011 Mortgage Mess—Part II

The Mortgage Corner

Has the traditional spring selling season already begun—in winter? Pending home sales have been rising of late, in spite of the huge inventory of unsold homes, falling overall prices, and loan servicers reluctant to modify their mortgages to cash-strapped homeowners.

The Pending Sale Home Index, a forward-looking indicator for existing homes, rose 3.5 percent to 92.2 based on contracts signed in November, while existing-home sales rose 5.5 percent. Pending sales reflect contracts and not closings, which normally occur with a lag time of one or two months.

Loan modifications are another matter. The Congressional Oversight Panel, set up in 2008 to monitor financial markets and their regulators, reports that the Treasury’s Home Affordable Modification Program (HAMP) may have been able to modify only 700,000 of the 3 to 4 million it originally projected. Why? The New York Times’ Gretchen Morgenson writes recently that loan servicers can profit significantly by pushing borrowers into foreclosure. “It gives the servicers more opportunities to keep charging lucrative fees and little incentive to see a modification,” she said.

NAR chief economist Lawrence Yun said historically high housing affordability is boosting sales activity. “In addition to exceptional affordability conditions, steady improvements in the economy are helping bring buyers into the market,” he said. “But further gains are needed to reach normal levels of sales activity.”

“If we add 2 million jobs as expected in 2011, and mortgage rates rise only moderately, we should see existing-home sales rise to a higher, sustainable volume,” Yun said. “Credit remains tight, but if lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy.” The West seems to be reviving first, where the index jumped 18.2 percent to 123.3 and is already 0.4 percent above a year ago.

The reason is obvious. Employment is growing at the same time that affordability is at a record level. The NAR’s Housing Affordability Index has risen to 184.5 percent, meaning that a family with median annual household income (of $61,819) can now afford a home that is more than 184.5 percent of the national median existing-home price of $171,300.

In the week ending Dec. 25, the advance figure for seasonally adjusted initial unemployment claims was 388,000, a huge decrease of 34,000 from the previous week's revised figure of 422,000. The 4-week moving average was 414,000, a decrease of 12,500 from the previous week's revised average of 426,500. The weekly claims are the best predictor of future job growth.

Housing affordability is at its record level because home prices continue to fall, per the Case-Shiller Housing Price Index, while mortgage rates remain low. In October, only the 10-City Composite and four MSAs – Los Angeles, San Diego, San Francisco and Washington DC – showed year-over-year gains. While the composite housing prices are still above their spring 2009 lows, six markets – Atlanta, Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007, meaning that average home prices in those markets have fallen beyond the recent lows seen in most other markets in the spring of 2009.

The 30-year conforming fixed rate is hovering between 4.5-4.75 percent of late, for a 1 percent origination fee, and is still 0.75 percent below its 2009 rate. There is no guarantee such rates will hold throughout 2011, however, if economic growth kicks up to 4 percent, as is now being predicted. So housing will need all the help it can get to show recovery in 2011.

It also turns out that many of the loan servicers are subsidiaries of banks who own the mortgages, which makes for a possible conflict of interest. Banks don’t like to write down the principal of their loans and so will offer lower interest rates, but then tack on penalty fees that have accrued during the foreclosure—which just add to the original principal. So that means the U.S. Treasury and bank regulators such as the FDIC and Federal Reserve will have to put more pressure on banks to modify more of their troubled loans.

Harlan Green © 2010

When Will Real Estate Recover?

The Mortgage Corner

The real estate market looks to be in limbo, but there is optimism that growing pent up demand will prevail as the jobs market improves. Although new-home construction has been stagnant, it hasn’t fallen substantially, while commercial property values are beginning to recover.

Single-family housing starts were virtually unchanged from the previous month at a seasonally adjusted annual rate of 454,000 units in June. Meanwhile, a 21.5 percent decline on the more volatile multifamily side weighed down the overall housing production number, which fell 5 percent to a 549,000-unit rate.

"As our most recent member surveys have indicated, builders remain very cautious in light of the sluggish pace of the economic recovery and the hesitancy they are seeing among potential home buyers," noted Bob Jones, chairman of the National Association of Home Builders (NAHB). "However, today's report is actually somewhat encouraging, because it indicates that single-family production is stabilizing following an expected lull that occurred with the end of the home buyer tax credit program."

Commercial real estate is also showing improvement, according to Moody’s, reaching its low point in January 2010. The Moody’s commercial same-property index has mirrored the Case-Shiller Home price Index improvement, which began its rise in March ‘09, but began its price rise 9 months later, in other words.

U.S. commercial real estate prices increased 3.6 percent in May, the second consecutive monthly increase, as measured by Moody’s/REAL Commercial Property Price Indices CPPI. Commercial real estate prices in April rose 1.7 percent.

“We expect commercial real estate prices to remain choppy in the coming months,” said Moody’s Managing Director Nick Levidy in a release Monday. “The positive news of increasing prices over the past two months is tempered by low transaction volumes, forecasts for slowing macroeconomic growth and the rising risk of a double dip recession.”

Existing-home sales are also stagnant, and may have already experienced a minor double dip. Its future depends on the number of foreclosures still to happen, as a recent study said that in fact banks are selling more homes via REO sales than builders at the moment. Stats show that nationwide, in late 2006 new homes accounted for nearly 20 percent of all transactions, but in early 2009 the new home share was down to 14 percent, and starting in that month there were more REO sales in the preceding 12 month period than new homes sold. So for the last year and a half, banks have sold more houses than home builders, according to Calculated Risk.

Existing-home sales were at a seasonally adjusted annual rate of 5.66 million units in May, down 2.2 percent from an upwardly revised surge of 5.79 million units in April. May closings are 19.2 percent above the 4.75 million-unit level in May 2009, so sales are still positive year-over-year.

The Obama’s Administration’s Comprehensive Housing Initiative has been helping to keep homes out of foreclosure. Its July joint report by HUD and the U.S. Treasury said record low rates have helped more than 7.2 million homeowners to refinance since April of 2009, “resulting in more stable home prices and $12.9 billion in total borrower savings”.

And, HAMP (the Home Affordable Modification Program) has helped over twice as many homeowners compared to foreclosure completions: Nearly three million borrowers have received restructured mortgages since April 2009, outpacing the 1.24 million foreclosure completions for the same period. As more families are able to remain in their homes, household assets continue to rise with $1.1 trillion in home equity gained since April 2009, said the report. A continuation of commercial real estate improvement will be a signal that businesses are recovering, as will job creation, which then will give a boost to residential sales as well.

Harlan Green © 2010