Coming back from a conference on housing finance, I was reminded of this post from a while back.
A critical channel out of the mess we’re in is through low interest rates generating more investment activity. The Fed’s done its part re lowering rates but especially in housing, the market is still crawling along and the lowest mortgage rates in decades are not driving levels of either refis or sales you’d see in more normal times.
A big factor here is home prices, which are down over 30% since the bubble burst. And they’re unlikely to turn around until we get on the downslope of the mountain in the figure below.
Sale prices are a weighted average of distressed sales—foreclosures and short sales—and non-distressed sales. One slice of good news in this debate is that according to data from CoreLogic, non-distressed sales prices have held up pretty well. Weak overall home prices are thus a function of the growing weight and falling or flat prices of the distressed side of the market (even if distressed prices rise, if their weight—sales share—grows too quickly, we can still end up with overall falling home prices).
Which means that we should be hitting hard on policies to get to the other side of the mountain of distressed sales (see figure). Here’s a link to my presentation, including a slide on policy ideas we should pursue, but a key pressure point is loan modifications, including principal writedowns and refis. Mark Zandi has good ideas about how to get the gov’t’s HARP refi program working better, but it will be hard to achieve traction on mods without Fannie and Freddie in the mix (the agencies hold, insure, and originate most mortgages now so they’re major gatekeepers to this process).
How to get them in the game? Stay tuned.