So we have yet another plan to help save homeowners in trouble, the latest in a long string of proposals. Are they enough to solve the housing market's problems? Is this a game changer? There's plenty of skeptics who think the answer is an outright no.
Ivy Zellman, who has been a homebuilding analyst for all 18 years I have been at CNBC, put out a note to her clients this morning saying the Senate proposals were "More Talk Than Substance." While her concerns are primarily with the homebuilding industry, her point is that there are still significant headwinds ahead for the industry before it burns through old land and begins creating economic value.
The biggest problem right now, she and others point out, is that homeowners don't have available funds for downpayments (which have increased), underwriting standards have become much more stringent, and buyers are understandably hesitant to purchase a home that may fall in value.
The plan under discussion does not address this central problem, so it will be difficult to have an impact on demand short-term. What will matter? Lower interest rates, for a start, which will help the reset problem, but that is not something that can be legislated.
These problems will continue to put pressure on pricing (even more than we have seen). The good news is that banks are now all over the builders, so they have begun selling at significant discounts. Centex , for example, was selling some assets at 16 cents on the dollar. This is painful, but part of the bottoming process. And there are buyers sniffing around: Blackstone this week raised a record $10.9 billion to invest in property in the U.S.
There's also a question of whether the plan would really accomplish much. It seems like a lot of action, but it may not amount to much. The plan would:
--Give local governments $4 billion in grants to buy and refurbish foreclosed properties (concern: not clear how much of a difference this will make. Estimates are that this will allow them to buy 20,000 homes, assuming a $200,000 average price, but Moodys.com estimates that 870,000 homes were lost to foreclosure in 2007, another 1.3 million will be lost in 2008;
--Give a $7,000 tax credit for people buying new homes or properties in foreclosure (concern: doubtful if this is large enough to make a significant impact on demand);
--Permanently increase the FHA loan limit to a maximum of $550,000 in high cost areas, but would also increase the down payment requirement from buyers seeking FHA mortgages to 3.5 percent from 3.0 percent (concern: there were discussions involving reducing the down payment, and while raising the downpayment requirement may be prudent as a policy move, the lack of cash for downpayment is a major problem, and this only exacerbates that. There is also significant debate among traders that the FHA is now becoming the new subprime product, but backed by the U.S. government, leaving significant exposure to taxpayers. Oddly, the much-discussed idea to have the FHA guarantee about $400 b of refinanced loans is not included in the plan).
One things' for sure: all this talk of incentives for home owners in foreclosure has at least put a floor under the home building stocks, which are among the better performers in recent weeks (up about 25 percent vs. a 6 percent gain for the S&P 500 in the last three weeks).
What it hasn't done is improve any of the fundamentals, at least not yet. Zellman's conclusion: "Given the recent strength in the group, we would recommend investors take profits at these levels."
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