Can Housing Be "Rescued?"
First, a quick data check of Existing Home Sales:
• Unit sales dropped 8% in September; this is the lowest level in eight years;
• Sales of existing homes were down 19.1% year over year;
• Sales of existing homes fell to a seasonally adjusted annual rate of 5.04 million;
• Inventories of single-family rose to a 20-year high;
• Sales fell in all four regions.
• Median sales price for homes and condos was $211,700, down 4.2% in the past year.
• Median sales prices have fallen in 13 of the past 14 months, pressured by a decline in jumbo mortgage lending (> $417,000).
Here's a chart worth looking at closely:
Courtesy of Calculated Risk
The always interesting Rex Nutting Marketwatch column had quite few interesting quotes:
-The deepening subprime crisis is threatening a recession, said Peter Morici, a business professor at the University of Maryland.
-Lehman Bros. now expects the Federal Reserve to cut its overnight lending rate by a full percentage to 3.75% by the middle of 2008, including a rate cut next week.
-"The housing crunch is accelerating; the Fed can't stand by and watch," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics.
I am continually surprised by some of the more absurd commentaries I've read on the housing situation, and what we need to do to "rescue" it.
Here's some tough love for economists, real estate agents, and especially those people in Washington on both sides of the aisle: fuhgedaboutit.
The problem in the housing market is really, quite simple: Over the past 5 years, 100s of 1,000s people -- perhaps a million buyers or more -- were creatively financed into homes that THEY CANNOT AFFORD.
Combine this with a still over-priced homes, and the ongoing inventory build, and that's a recipe for a prolonged, multi-year slump in Hosuing.
This may not be what people want to hear, but it is unfortunately true: Forget the 2/28 ARMS, the teaser rates, the Interest only loans -- if we were to magically reset every one of those problem mortgages at a 6.25% fixed rate 30 year mortgage, it would not "fix" the housing problem. A huge swath of them, perhaps a majority, would eventually default anyway.
I have yet to hear anyone in Washington acknowledge this simple reality. The problem is not one of a credit crunch -- although that is what uncovered the issue to the broader public; rather, it is the cost of housing relative to income ratio.
I don't want to appear cold, but this is a simple economic reality: many, many current homeowners are likely to be ex-home-owners unless they find more income or a random chunk of non-loan cash.
The issue isn't credit availability --its affordability . . .
Here's a wild idea: All you alleged believers in the free markets: Why don't you let the market do its job, via defaults, foreclosures and auctions -- and process the problem? Its either that, or "gift" a few billion dollars -- $100k at a time -- to those people who over-leveraged themselves.
Mortgage Availability Improving But Hampered September Existing-Home Sales
Shits & Giggles, October 24, 2007 http://www.realtor.org/press_room/news_releases/2007/ehs_sept07_mortgage_hampered_sales.html
Home sales crater on credit squeeze
Sales of single-family homes at 10-year low; inventories highest in 20 years
MarketWatch, 11:15 AM ET Oct 24, 2007
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You may be correct on what should be done, but political pressure will enter, especially given the upcoming election. Also, I'm guessing that Ben doesn't want to be tagged as doing nothing as the economy weakens substantially. IMHO the Fed showed its bias when it reduced rates 50 bps in August. Over the next year I'm betting that inflation management takes a back seat to economic growth management, in Fed actions if not in their words.
Posted by: DonB | Oct 25, 2007 7:22:16 AM
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