The Home Market is Broken
Posted by Michael A. Kamperman on August 24, 2010
Existing Home Sales plunged 27% in July to the lowest level since 1995. True, demand was borrowed from the future by the tax credits. But in 1995 mortgages rates were on the way up, not down. Not down to the lowest level in my adult lifetime and most likely your adult lifetime too. And let’s not forget home prices are back to early 2000 levels. Lower prices and lower interest rates cannot stimulate macro demand for housing. The reason is simple. We built enough single family homes for 70% of the population, yet only about 64% of the population is traditionally positioned for home ownership. Young people in their 20′s looking to build a career with a resume are better off mobile than tied down. People whose finances are poor don’t need the added costs of home ownership. Now, combine overbuilding market inventory with high unemployment, tight mortgage credit despite the heroic efforts of the FHA, and the deflationary psychology that prices could continue l0wer rather than higher and you have a broken market for homes.
The Obama Economic Team has failed to come up with a strategy to revive the housing market. The market has become addicted to tax credits. The mortgage modification efforts have been a woeful failure with almost half of the participants re-defaulting, and most inquirers failing to qualify. If your current on your mortgage you get no help. It is time for out-of-the-box-solutions. To change the direction of housing the Obama Administration needs a plan that addresses supply, credit, and psychology.
To rebalance supply we need to demolsish houses. We should end the cash for caulkers program and offer people who live in run down houses a chance to upgrade to a beautiful foreclosure on favorable terms. Then we should demolish the homes they left behind. If a bank is sitting on a run down foreclosure, then it should demolish it. The solution is not to talk people who shouldn’t own a home into one, that will only push more problems down the road. The solution is to lower the vacany rate and rebalance supply and demand. Credit is easy. Simply offer to refinance every current mortgage for 4% without an appraisal, a new title policy, or income verification. If their current they are getting the cash from somewhere to pay and we would be lowring their payments. Salvage the salvagable rather than trying to salvage those who simply cannot afford the house. Everyone marvels at the Chinese economy, yet over half of the apartments in Beijing and Shanghai are vacant and owned by investors who believe in real estate. In China they are building all sorts of things they don’t currently need. Psychology will return in America when we see more people bidding for homes than homes available for sale, and when their are no more foreclosures or short sales in the neighborhood dragging pricing down. Â
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name said,
July to August a
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Badtux said,
I completely and utterly disagree. Yes, there was overbuilding of certain kinds of homes in some bubble markets, such as condos in Las Vegas and coastal Florida. But in many bubble markets where the housing market is *still* broken, the problem isn’t too many homes — many of these places like the San Francisco Bay area have shortages of single-family homes and always will, due to location and geography that renders it impractical to sprawl beyond certain boundaries. The problem is instead one of supply — there simply is not enough properties available for sale at market prices at the lower end of the market in these areas because they’re all either bank-owned or have been in pre-forclosure/short-sale hell for two years or more.
For example, I was looking for a single-family starter home in west San Jose a few months back. EVERY SINGLE HOME listed was a short-sale. Most of them had been listed as a short sale for AT LEAST one year. And *NONE* of the banks that owned these homes was willing to approve selling the house at pre-bubble market prices (adjusted for inflation). None. *ALL* of the banks that held the mortgages on these homes insisted upon receiving a significant premium above pre-bubble prices for the “privilege” of being allowed to buy the home.
Then there was another issue: On those rare occasions where homes *were* selling at market prices — such as a nice three-bedroom ranch in Milpitas selling for a nice price — you couldn’t make them appraise. You couldn’t make them appraise because banks who *did* foreclose were selling off their REO’s only to cash investors, who were buying at a discount under market prices because banks preferred cash in hand to issuing a new mortgage to a new buyer, and thereby making it possible to finance the home. You had to have at least 10% down to even get a lender willing to make an FHA loan to you, because it was assumed that the appraisal would come in at least 5% under the bid price for the home.
The end result is this: a) The homes aren’t on the market, and b) you can’t get a mortgage for those that *are* on the market because they won’t appraise. Until you fix these two issues, all the nonsense about “too many homes” simply makes no sense, especially in bubble markets like the San Francisco Bay area where there has *never* been “too many homes”…
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Michael A. Kamperman said,
I agree appraisals and downpayments are problems. However I simply lumped them together along with other stuff as different parts of tight credit conditions.
San Francisco, along with Manhatten, are special circumstance markets and not applicable to most of the country. For example, just drive aways out to Stockcton and you will see the over-supply.
The macro issue is we built single family housing for 70% of the population and the natural rate of home-ownership is around 64%, in normal economic times. Throw in the jobs crisis and forgetaboutit.
It is a good point though that real estate remains a local market affected by local factors.