Bitter feelings over the downward spiral of the U.S. housing market are encouraging economists to promote unconventional ideas, including getting the federal government to bail out underwater homeowners instead of bailing out banks. Critics argue that unfairness to those who can pay their mortgages would be mitigated by the overall rise in home values while also keeping homes out of the hands out of the government, which now owns the majority of distressed properties in the country. This idea is the product of a growing belief that the U.S. housing market is entering into a prolonged Depression and that aggressive action will be needed to turn it around. For more on this continue reading the following article from The Street.
The stock market, as measured by the S&P 500, rose almost 3% yesterday, perhaps pleasantly surprised that the Northeast doesn’t resemble the Gulf Coast — Katrina-cable-TV hype notwithstanding.
So as traders picked their way across tree limbs and flooded roads on their way to work Monday, perhaps they overlooked a commonplace sight that was even more prevalent than clogged waterways: for-sale signs on lawns, sometimes with the nauseating come-on “auction today.”
We’re in the middle of a real-estate depression, folks, and it’s not getting any better. Perhaps it’s good news that the financial markets have gotten used to the bad news out of the housing market, because the bad news keeps coming strong. But if the housing-market woes are an indication of the direction of the economy, we’re in sorry shape. And as with a number of questions I’ve explored recently, it comes down to this: What, if anything, is the Obama administration going to do about it?
Yesterday, it was reported that foreclosures comprised 31% of housing sales in the second quarter, less than the 37% recorded at the peak two years ago, but still six times what you see in a healthy housing market, according to foreclosure-tracking firm RealtyTrac. The silver lining, if you can call it that, is that the percentage declined a bit from the previous quarter.
But, meanwhile, another bad housing number got worse. The percentage of “short sales” — homes sold for less than what’s owed on them — climbed to 12% in the second quarter. And Bloomberg reported the other day that a third of the country’s 800,000 foreclosed properties are owned by Fannie Mae, Freddie Mac and the Federal Housing Administration. In other words, Uncle Sam is now the biggest owner of misery-bedecked real state in the nation.
All these numbers have a kind of numbing effect on people. It’s a bit like what motorists were seeing in upstate New York yesterday, as hundreds of miles of the New York State Thruway were closed because of not-quite-Hurricane Irene. You curse, and then you get out a map and plot out a detour, and then pull out your map again when the detour is blocked by downed power lines and flooding.
Forces greater than oneself are like that. But the housing crisis isn’t exactly a force of nature, and that’s what’s frustrating about the Great Housing Depression of 2008-20??. It’s understandable for you or I to be numbed by these horrendous housing numbers. But sometimes it seems as if Timothy Geithner and his colleagues in the Obama administration are like motorists driving around the fallen tree limbs but seem helpless to do anything about it.
The sorry fact is that record-low interest rates just aren’t sufficient, in themselves, to bring people into the market. The horrid numbers we are seeing are evidence enough of that. So what’s the answer? Well, one idea that seems reasonable enough is to extend to under-water property owners the same largesse that two consecutive administrations have bestowed upon the big banks. There’s a plan reportedly under consideration that would push Fannie Mae and Freddie Mac to loosen their refinancing guidelines. That way, homeowners would be able to refinance even if their homes wouldn’t otherwise qualify.
Oh, yes, I realize that a lot of people say that such an idea would screw mortgage-security bondholders and would be “unfair” to homeowners who were able to refinance without help, it is argued. I think that’s baloney. A small-fry bailout — imagine that, non-billionaires and non-bankers being bailed out! — would not be unfair to a soul. It would pump dollars directly into the economy and serve a broader public purpose: to keep properties from going into foreclosure, or having to be sold short. That would inure to the benefit of everybody, including homeowners who didn’t need government help to refinance and might be feeling a tad resentful.
They shouldn’t be. We’re in the middle of a Great Real Estate Depression, and that homeowner who managed to refinance through normal means may want to sell his house next month or next year. Right now he’s facing the prospect of taking a shellacking. That’s why the refinancing plan being weighed by the Obama administration not only makes sense, but is fair for everybody — the direct beneficiaries, their neighbors, and for Fannie, Freddie and their bondholders. It’s fair because something other than pushing rates lower needs to be done to revive the housing market. A refinancing-bailout would derail a vicious circle that is plaguing U.S. real estate.
Foreclosures and short sales are pulling prices down at markets throughout the country. That hurts both sellers and homeowners seeking to refinance. That’s because a homeowner needs to get his or her property appraised in order to refinance, and lenders won’t allow refinancing if the appraisal doesn’t support it. That screws buyers who bought their properties during the housing mania. Since they can’t refinance, they may just walk away from their houses. More foreclosures. More price declines. That’s where the small-homeowner bailout comes in, putting an end to this vicious circle.
Will Obama do it? Or will he or Geithner find an excuse not to engage in this sensible action? I’m not holding my breath. I think that they’re reasonably happy that the market seems to be holding up for the time being, and that we’re all numb to the bad news from the housing market. Obama is not going to jeopardize his Wall Street contributions by taking such a dramatic action. He’ll recognize, like the smart Chicago pol that he is, that people dissatisfied with his policies haven’t much choice next year. So the Great Housing Depression of 2008-20?? will continue — unless Obama thinks that feeling of overwhelming numbness might derail his chances for reelection. Not likely, but we have a right to hope.
This article was republished with permission from The Street.