Apr 03, 2012 at 12:08 pm
The housing market is taking a very long time to “correct.”
I’ve often described current conditions there as “bouncing along the bottom.” But while that’s the case in some parts of the country, in others, it’s a bit too flattering a diagnosis. Here are some of the discouraging signs:
–Prices haven’t quite bottomed: Yesterday’s Case-Shiller’s report showed home prices down 2% in the fourth quarter of 2011, and 4% over the past year. The long-term view is below—the massive housing price bubble is obvious, but as you see, the end of the figure continues to dribble down.
–CoreLogic data are helpful in that they highlight the role of “distressed” sales—short sales (where the lender agrees to a sale price below the amount owed on the mortgage) and foreclosed properties (called “REO” in the figure—real estate owned). Data from this morning show that for the last few months, the sale price of non-distressed homes has actually been going up slightly, while that of the distressed sales continues to fall.
A key variable here is the share of total sales that are distressed. As the figure below shows, that share was falling a few months ago, but it’s started growing again, and as long as a) it’s growing and b) the price of distressed sales is falling, the national price will continue to fall and we’ll be doing slightly worse than bumping along the bottom.
So what, if anything, should be done?
At least two things, one of which is well underway. A couple of articles have pointed out recent REO-to-rental initiatives, mostly by private investors, though Fan and Fred are in the game a bit as well. The idea here is to sell foreclosed properties to investors who then turn them into rentals. This helps get the distressed properties off the market and cuts the residential overhang.
Nothing’s perfect, of course, and there are worries here too. These investors’ groups will be absentee landlords—they’ll outsource the maintenance—which doesn’t necessary bode ill but hasn’t always worked out. Second, there’s something bubbly in this—you’ve got PE funds lending to investors’ groups who are buying thousands of properties. Forgive me if I’m nervous about where that ultimately lands.
The second policy piece here is principal write-downs. I’ve written about this here, focusing on the role Fan and Fred, who hold or insure half the nation’s mortgages, must play, and word is they’ll let us know in a few weeks (though there’s absolutely no reason for them to drag this decision out like this).
There was a time when the housing market tanked the economy. That’s no longer happening. But investment in homes, the wealth effect you get from increased home equity, refi’s taking advantage of low rates–all of these are ways in which recoveries traditionally get some juice. And right now, we’re a bit juiceless on that front.
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