Re the Economic Recovery: Housing Market Hasn’t Gotten the Memo

April 3rd, 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.

Source: S&P/Case-Shiller

–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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4 comments in reply to "Re the Economic Recovery: Housing Market Hasn’t Gotten the Memo"

  1. Michael says:

    Obviously what we should do is excuse industrial fraud and let the houses sit on the banks’ books until we can gin up another housing bubble, then let them unload them on Fannie and Freddie, socializing another couple trillion in losses.

    Or, at least, that’s what we’re going to do.

  2. Christopher C. says:

    There was an article in yesterday’s NYT about investors buying up thousands of distressed properties as an investment and for rentals.

    Coupled with a Krugman blog post about zero wage growth and your post today, I can only think the agenda is…

    Let the serfdom-ification of the middle class continue apace!

  3. comma1 says:

    I”m not sure if the banks want to sell these houses. Go look at zillow and see the thousands of foreclosures that have one aerial photo. The banks may not be able to show chain of title. Furthermore, houses that have sat are being sold “as is”, and once copper plumbing has been cut the house is no longer habitable and therefore can only be purchased with cash. Similarly so, if there is a septic system that has failed, you are unlikely to be able to get conventional financing. Furthermore, many of these houses have been “winterized” and to inspect such a house requires assuming the risk of any damage caused by turning on the various systems. (So even if the copper is not cut, when you go to inspect the house, if there is a leak in the existing plumbing you would be liable for damage caused to the property when you inspect it). Who has a spare 70 thousand — cash — to put toward something like this… nobody. Certainly nobody on main st. So why are the banks mismanaging this property like they mismanaged the property’s debt instruments?

  4. Procopius says:

    Dean Baker, at CEPR (Beat the Press Blog) points out regularly that over the last hundred years or so house prices tracked inflation pretty well until the bubble (where the line starts curving up in an exponential curve about 2000-2002). Just eyballing the curve it looks like it’s got a couple more percentage points to go until it’s back to trend. Aside from that, we have problems with serious widespread fraud at the banks and mortgage brokers (many of whom are already out of business), and especially at the “servicers” who frequently add fraudulent charges, delay posting payments received so they can add on late charges, add charges for “forced placed insurance” which costs twenty or thirty times as much as normal, etc. Chain of title has been broken in tens of thousands of cases, it not tens of millions. The refusal of the government to investigate, much less prosecute means nobody can have confidence in the system. The regulators are still following Geithner’s orders to “save the banks at all costs.” I don’t have any suggestions at this point, and I can’t imagine what people expect from the housing market. Do we really want to re-inflate the bubble?