Barry Glassman: QE2 Will Not Fix the Housing Crisis
Despite the Fed announcing QE2, there are still huge headwinds facing the real estate sector. Many hope the lower interest rates will help the limping market, but others suspect QE2 just another crutch designed to keep the market artificially afloat for a few more months.
Sometimes it seems instead of just ripping the band-aid off and letting the raw wound heal another band aid is put on top. Banks are already sitting on a trillion dollars. Many CEOs like Wilbur Ross are skeptical the additional cash will entice banks to lend.
I decided to sit down and speak with Barry Glassman, of Glassman Wealth Services. Barry called the ARM Tsunami before it hit the real estate market. I asked him what is needed to solve the housing problem once and for all.
BG: There are a number of things that need to happen and we are facing a lot of roadblocks to accomplish that. Number one is affordability. Prices and mortgage rates have gone down and there is a lot of cash on the sidelines. However the deal structure and the foreclosure mess is causing a huge headwind in lending.
The second part of that is the down payment. Because homeowners lost a lot of their equity, they don't have the down payment to upgrade their homes. And if people were invested in stocks they might not have the equity and also the income. Even if people are employed their income is way down so they might not qualify for a loan.
The line that was once wrapped around the corner for someone to buy a home is now far shorter because people don't qualify, don't have the down payment and banks don't want to take the risk.
LL: Will QE2 help the housing mess?
BG: QE2 is helpful to a degree but its like fixing a broken leg with antibiotics. It may help the infection but not fix the broken bone. What has happened here is Bernanke has achieved the Greenspan head fake factor. By talking about QE2, a lot of QE2 is already priced in without spending a dime. You keep the interest rates already low and what good will it do for the economy and the housing mess?
You can't fix unemployment and the housing mess with interest rates alone. If we are going to use interest rates to try and solve this problem, more people need access to that interest rate. Current homeowners currently underwater, or not, need to have access to that interest rate as well as homebuyers who can afford the home but don't have the down payment or stellar credit should also have access to the low interest rates as well.
LL: But that means banks have to start lending.
BG: Banks need to either have to start lending or allow people to access lower rates without going through the full underwriting process. The securitization market isn't willing to lend money without additional underwriting and making sure their loans are in tack and there really is no incentive for the banks to do so.
LL: Then how do we incentivize the banks (and to me the word "incentivize" should be the word of the year here)- How do you incentivize banks to lend?
BG: The tool at the government's disposal right now is interest rates and legislation on banks really isn't going to do the job. Its just not. See, the challenge right now for homeowners is that the future looks so uncertain. The future of interest rates, the future of home prices, and the future for the value of that loan to those who securitize them.
LL: But we haven't really hit a true bottom yet. When the Fed intervened, which they had to, put a false bottom in this market. Will QE2 prolong the process of the housing market to hit a bottom? What is needed to for the real estate market to truly bottom?
BG: When we're talking about a bottom I think home prices need to fall to be a bottom. How much they fall depends on the local market and interest rate. Real estate has been a shell game of using equity and low interest rates to upgrade. If we see higher mortgage rates that hits home ownership. The town home owner wants a home, the smaller home owner wants to move to a bigger home. Its a huge headwind when we look out five years.
LL: How would you characterize the health of the housing economy right now?
BG: Fragile. Very fragile.
LL: Are we at a risk to dip down again?
BG: The good news is that lending standards have increased where people have to put money down in terms of a down payment. People are saving more now and many more can handle a five or ten percent decrease in the equity of their home and still walk away or break even. That's a good thing.
The challenge is really going to be is home prices. I don't see home prices increasing in the next several years. But as prices increase you'll see a flood of people that have investment property try and sell their property.
There is huge pressure against rising home prices right now. Do I think home prices will plummet? I don't think so. The thing that would have home prices to go down in value is if QE2 is not effective or we finish QE2 and interest rates are just far higher. The creditors of the United States could demand more.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."