With mortgage rates at the lowest levels of the year and loan activity showing a modest improvement, the housing market may be primed for a long-awaited recovery. But the market will need further help from government rescue measures, which remain unlikely until a new president takes office.
Though Fed Chairman Ben Bernanke's recent plan to buy mortgage-backed securities has sparked an enormous decline in mortgage rates, neither he nor Treasury Secretary Henry Paulson have yet to follow through on other measures to lower mortgage rates further and stimulate lending.
Paulson and the Congress appear deadlocked over use of the $700 billion TARP fund, which is creating enormous uncertainty about how the unspent money will be used.
“The TARP isn't working the way it was supposed to do,” says former ten-term Republican Congressman Bill Frenzel, now at the Brookings Institution. “Congress needs to help rather than belabor the Treasury Secretary with that."
Meanwhile, analysts and economists say there may be no better time than now to help the housing market—which some say may be in recovery mode by mid year.
“Until we think in a comprehensive way we can’t think of solutions making a difference," the new chairman of Congress’ TARP oversight committee, Elizabeth Warren, told the House Financial Services Committee last week.
Mortgages—Rates Down, Looking Up
Recent government moves have made some difference. For the first time this year, rates on 30-year mortgages are pushing 5 percent, having bounced around 6 percent, despite repeated and significant interest rate cuts by the Fed.
Now that he mortgage market is showing signs of life, it may be able to feed into other parts of the housing sector.
“We've made a lot of progress,” says Melissa Cohn, CEO of The Manhattan Mortgage Company in New York City. “Volume has definitely picked up.”
That assessment was seconded by Mark Savitt, president of the National Association Of Mortgage Brokers and a broker in the panhandle of West Virginia.
“I think rates are on the way down,” he says. “Even if they stay where they are now, its still a very positive range.”
Indeed, at slightly over 5 percent in some cases, 30-year fixed mortgages are near historic lows and at levels not seen since brief periods during he spring of 2003.
Mortgage application volume increased in two of the past three weeks, according to the Mortgage Bankers Association, or MBA. That includes a 100-plus percent jump in the week following the Fed’s announcement that it would purchase up to $600 billion in mortgage-backed securities and other debt. Even with the most recent weekly decline, activity was up two percent from a year ago on an unadjusted basis.
“Five and a half percent and zero points,” says Savitt. "That's wonderful—especially if you marry that with low home prices and sellers willing to make concessions.”
Housing—Mixed To Miserable
Even before the recent decline in mortgage rates, the National Association of Realtors’ housing affordability index was at a high for the year.
Signs of improvement in other areas are evident, if not bold or definitive.
Though sales of existing homes are down sharply from their 2005 peak of 7-million plus, the annualized sales rate this year has steadied somewhat, ranging between 4.85-5.14 million units a month, according to the NAR. October’s reading of 4.98 million was just 1.6 percent less than a year ago. Inventory has dropped to a 10.2-month supply, versus a high of 11.2 in April.
Prices, however, have continued to decline sharply. At $183,3000 in October, the media price is 11.3 percent lower than a year ago, partly because of what the NAR calls "a large number of distress sales at discounted prices.”
The foreclosures situation leaves little, if any, room for positive interpretation.
Though they fell 11.3 in November, foreclosures were still up 28 percent from a year ago, according to Realty Track, which warned “there are several indications, however, that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months.”
Against that backdrop, its possible to think of the housing market as a four-legged stool—prices and sales, construction, foreclosures and rates—which require separate action plans.
“There’s lots of proposals,” says economist Dean Baker, co-founder of the Center for Economic Policy And Research. “With rapidly falling house prices and people losing their homes, it’s not clear the same policy would deal with both.”
Though there’s little government can do to directly prop up prices, analysts and industry professionals say measures that lower borrowing rates and stem foreclosures will help home sales and thus prices.
“You can only stabilize prices by stemming the foreclosure rate,” says Cohn.
“What's going to get us out of this mess is the first-time home buyers or those who don't have a home to sell coming into the market,” adds Savitt. “That, in turn, will free up sellers to go out and purchase their next homes.”
Thus far, the mortgage market is the only one benefiting from government measures—actual or possible.
Paulson’s point man on the TARP, Interim Assistant Secretary Neel Kashkari, told a Congressional panel this week that Treasury was looking "very seriously" at a plan to issue 30-year fixed rate mortgages at 4.5 percent.
That proposal has been warmly embraced in many quarters of the real estate business, since first floated three weeks ago.
“To really have a meaningful impact, rates have to go below 5 percent,” says Lawrence Yun, chief economist at NAR, who says home prices are at “equilibrium values" but "pessimism can push them down further.”
Yun estimates a drop from 6 percent to 4.50 percent will result in 750,000 additional home purchases, helping to solve the inventory problem. On a $200,000 house, bought with a 10-percent down payment, the difference in monthly payments is $912 vs. $1079.
That’s a powerful incentive and it has not gone unnoticed by consumers.
“People are still waiting for 4 1/2 percent,” says Cohn, who wants the Treasury to act now. “I can't tell you how many people have mentioned it.”
Implementation of such a Treasury plan as well as a possible Fed measure to buy long-term securities to push down short-term rates will have a powerful effect, say analysts.
“Mortgage applications have gone up, so we know were eating up some inventories,” says money manager Scott Rothbort, who’s also a professor at Seton Hall University's Stillman School of Business. “Now we have to create the demand.”
Even still, questions and concerns remain. For one, it’s unclear what the two mortgage-market based measures would cost, but some say the money could conceivably come out of the TARP program.
The mortgage bankers group prefers the Fed measure because it would affect rates in a less "overt fashion", says VP and chief lobbyist Francis Creighton.
Though the mechanics of the Treasury plan are not known, the MBA has a number of concerns, including its potential to negatively affect loans servicers or encourage people to buy a bigger house and borrow more than they originally intended, says Creighton.
Foreclosures-The Final Frontier
On the foreclosures front, Rep. Maxine Waters (D.-Calif.) introduced legislation this week based on a plan by FDIC Chairman Sheila Bair, who’s had some success in the area with the failed thrift IndyMac.
The Systematic Foreclosure Prevention and Mortgage Modification Act of 2008, to be paid for with TARP money, would commit $24.4 billion to modify half of the 4.4 million non-GSE loans expected to become problems in 2009. Based on a 33-percent re-default rate, 1.5 million homeowners would be spared foreclosure. Currently, here are some 55 million mortgages.
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Under the plan, the government would pay companies that service the mortgages $1,000 for each modification and share up to 50 percent of any loss if a modified loan re-defaults.
“I think she feels this is a very significant step,” says Michael Levin, Waters' press officer. “It would go a long way to stopping and preventing foreclosures.”
Washington's previous foreclosure effort—the Hope for Homeowners program signed no last summer—has largely been a failure, despite its $300 billion price tag.
Economists and industry players say stemming foreclosures is a key factor, especially if the government plans to spend billions subsidizing the cost of bringing new homeowners into the market. New buyers might be spared a significant drop in property prices and inventories would decrease as more owners stayed in their homes, which would feed back into prices.
Such optimism may be supported by conventional market behavior, but skeptics say Washington policymaking is less predictable.
Rep. Water's foreclosure legislation is unlikely to go to a vote before the new Congress convenes in January, while the Treasury and Fed measures aren't even on the official agenda yet.