With the fullness of time, housing prices are due to revert to something approximating the mean of their historical relationship to rental prices and incomes, albeit with an overshoot probable. But how quickly we reach that level will be very much a function of how quickly foreclosures take place and real estate is disposed of.
A Wall Street Journal story. “Banks’ Plans for Foreclosed Homes Will Drive Market,” is framed in a somewhat misleading fashion, since the government has been influencing the pace of resolution. For instance, Treasury has been selling the idea that the unsuccessful HAMP program nevertheless was useful, in that it served to delay foreclosures when the housing market was fragile. Analysts are repeating this idea:
The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a “closet moratorium” on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management.
The result: The share of distressed sales fell by November to 25% of home sales, and prices stabilized. After rising in the winter, the distressed share fell to 22% in June, before bouncing to 30% in July.
Yves here. So the Administration has been able to sell a bug as a feature.
The story acknowledges extensive efforts to boost demand for housing:
Even though mortgage defaults kept mounting, housing markets began to stabilize early last year as low prices and government interventions broke the downward spiral. Policy makers spurred demand for homes by holding down mortgage rates, offering tax credits for buyers, and extending low-down-payment loans through the Federal Housing Administration.
In addition, the story oddly misses a bit of an elephant in the room, namely, that Freddie and Fannie are pressuring servicers to pick up the pace on foreclosures, which will lead to faster real estate disposals.
It nevertheless otherwise gives a decent overview:
The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans’ appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future…
The upshot is that, the more homes being sold by lenders, the faster prices tend to fall. That pattern was clear over the past two years: Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital….
“We see the perfect storm brewing with rising supply and falling demand,” said Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago. She estimated that distressed sales could account for half of the market by year-end if traditional sales didn’t rebound…..
Analysts at Barclays Capital estimate that some four million loans are in some stage of foreclosure or are at least 90 days past due, down slightly from a January peak.
Ouch.
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Perhaps the most insane detail of all is how even with this massive unsellable backlog which has to be somehow kept off the market to help the doomed attempt to prevent bubble deflation, builders and speculators are still at work (at least according to MSM anecdotes, which I take to be anti-walkaway propaganda: “Don’t walk away now, because this proves prices are ready to shoot right back up! Otherwise how could they still be building?”) and municipalities and states are still mired in the building-as-necessary-to-grow-ratables craziness.
Here in NJ we enacted the Highlands Act, to protect the already impossibly-strained water supply from rampant sprawl, at the height of the bubble. A few proponents including me tried to counteract the inevitable libertarian “takings” propaganda by pointing out how any depressant effect on property prices was actually the reality-based correction of a market error.
Well, you can guess what’s happening nowadays. Although rigorous enforcement of the Act was always dubious, they’re now basically gutting it anywhere they can. I haven’t yet heard of calls for formal repeal, but I imagine they’re coming.
Maybe no bailout is more absurd than the crackpot notion that society needs to prop up builders, surely not just a zombie and not just a dinosaur but a zombie dinosaur, if there ever was one. There’s obviously no future at all.
Take all the construction workers and put them to work retrofitting the structures which already exist for the energy-constrained world coming on fast. Lots of work to be done installing better insulation and revamping for passive solar heating, for example.