Housing Price Snap Back - Temporary?

The WSJ is reporting a significant rise in home prices last month. Shrinking inventories and rising demand is fueling the rise. But here is what I found significant:

Inventories are low for a handful of reasons. Investors who are scooping up homes have been converting them into rentals rather than flipping them, keeping the properties off the market. Banks have slowed their foreclosure processes in the past two years after they were found to be rushing through incomplete paperwork to repossess homes.

New-home construction has been at depressed levels for years, as builders have had to fend off competition from bank-owned foreclosures. That lack of new construction "has set the foundation for a snapback in pricing," said Michael Sklarz, president of Collateral Analytics, a Honolulu-based research firm.

Many traditional sellers are sitting on the sidelines because they are unable or unwilling to sell.

A couple of salient facts. First, housing prices fell enough to entice investors into the market. This has reversed the slide in prices. If the prices pick up a bit more then, other sellers who are sitting on the sidelines can enter the market to which the last paragraph alludes. Had the Obama administration allowed this process to work through more quickly; allowing prices to hit market clearing prices, the whole economy might be recovering by now. As it is, this burst might be short lived.

Foreign buyers may be leaving the market, which would depress demand. There are hints of late that foreign buyers, particularly Europeans in search of bargains, could be poised to pull back from the U.S. housing market.

Trulia, which provides online real-estate listings, reported recently that foreign searches to its site for U.S. homes declined 9% during the last year. In the second quarter of this year, foreign searches accounted for 4.1%, down from 4.5% in the same period in 2011.

. . .

Foreign buyers have played a major role in the U.S. housing market of late. For the past year ending in March, international home buyers accounted for 4.8% of total U.S. sales, according to the National Association of Realtors. That’s a total sales volume of roughly $82.5 billion, up from an estimated $66.4 billion in the prior year.

I also think that depressed interest rates are causing the run up in prices. Rental unit profits are sensitive to mortgage rates, because they can make the difference between profit and loss. For example, a 30 year mortgage on a $250,000 loan has a monthly payment of $1342.05, but a 3% loan rate yields a payment of $1054.01 per month. That could mean the difference between profit and loss.

The question is whether prices will rise enough to bring builders back or allow those who are underwater to be able to sell. With the market seemingly so sensitive due to low inventories, and bank foreclosures only temporarily in decline, I think this will be a short lived bump, unfortunately, but certainly instructive.

This is a Common Labor Market?

ZeroHedge provides the following graph that illustrates the perils of monetary union when language and culture inhibit labor mobility:



In the Unites States workers tend to move from state to state in search of jobs. In Europe, this apparently isn't happening; so Spain continues to suffer high unemployment and rising interest rates on its sovereign debt, even though theoretically its unemployed could find work in Germany. American work force mobility provides for a more robust economy because local conditions in North Dakota, for example, provide high levels of employment that can sop up unemployed workers from other parts of the country. However, I believe that the housing crisis uniquely harmed the U.S. economy because it interfered with this key corrective. Under more normal circumstances, people are able to sell their homes at only slight losses to move to other locales to take jobs. With the collapse of the housing bubble, many people are holding out, perhaps irrationally for a recovery of their home prices, before they make a move.

The administration's policies have contributed to the prolonged recession in two ways. First, by intervening in the housing market, and propping it up, the administration prevented the market from hitting bottom and perhaps recovering. I believe, though with only anecdotal evidence, that people are clinging to their homes, not wanting to sell. This is inhibiting labor mobility as people stay put. Second, by prolonging unemployment benefits, people are encouraged to try to hang on longer in their perhaps underwater homes; waiting for a recovery.

SHOCK? Overcounting Home Sales

The Drudge headline says SHOCK: Realtors: We've Overcounted Home Sales for Five Years... I guess someone is shocked that the very people who stand to benefit from painting a rosy picture on housing have been providing inflated numbers? Count me shocked as well, like Captain Renault.




Supposedly the revised numbers won't affect home prices, but how do those guys know? They're in shock. This blog has consistently said that home prices still have a ways to fall. We still haven't changed our mind.

Housing Prices Continue to Decline

As predicted here and here, housing prices continue to fall, because the administration has not allowed this bubble to burst and housing is still overvalued when compared to rental values. Zero hedge has the news.

I need to find the update to this chart, which shows that the correction isn't quite complete.

Romney Quote on Mortgages

I earlier posted about Mitt Romney taking heat for getting it right on mortgages. I neglected to include his quote. He is responding to the question of what should be done about housing and foreclosures.

"One is, don't try and stop the foreclosure process. Let it run its course and hit the bottom. Allow investors to buy homes, put renters in them, fix the homes up. Let it turn around and come back up. The Obama Administration has slow-walked the foreclosure processes that have long existed, and as a result we still have a foreclosure overhang."

Anyone who doesn't think that is the swiftest way for the market to recover should demand their tuition back for their economics classes at Columbia and Harvard. If they took economics, because we don't know; there is no transcript available.

Romney Gets One Right

Supposedly, Mitt Romney gave a "political opening" to Obama when he suggested that the housing mortgage crisis should be allowed to run its course. I don't see how. As is typical, the White House obfuscates on this issue and makes a spurious argument. Here is Jay Carney:

What we firmly do not believe is that the answer is not to simply let the housing market bottom out and let investors come in and fix the problem. That’s not a solution. That’s a solution that basically says to middle-class Americans who have been responsibly paying their mortgage and who, through no fault of their own, have seen their economic situation get quite desperate because of the prices in the housing market that you’re on your own — tough luck, I’m not going to help you. That’s not this President’s approach.

The problem isn't the people who responsibly paying their mortgages. That sets up a straw man that doesn't exist to make it sound like homes are being seized illegally. The mortgage industry certainly bears investigation for certain practices, but for the most part, homes being foreclosed are in arrears. Whether the mortgage holder such as a bank, thinks it would be better to foreclose or renegotiate should be decided on a case by case basis. When a house is "underwater" the mortgage holder is going to take a haircut either way, so I don't see how they are not sharing in the losses.

The other issue is purely economic. Here is what the administration proposes.

The key to the new approach, hashed out by Housing and Urban Development Secretary Shaun Donovan in recent weeks: allowing homeowners to refinance at lower rates regardless of how far their home values have fallen, while reducing or eliminating prohibitive refinancing fees.

Sounds great, but the economic incentives don't add up for most homeowners who are underwater and behind. If someone has a mortgage on a home with a loan amount of $500,000 against a home valued at $350,000; it doesn't matter if the mortgage interest rate is 7% or 4.5%, there is little incentive to pay back the loan. Plus, many of these people can't repay, even if on favorable terms.

We have commented on this situation and our message remains the same, the sooner housing prices fall to market clearing prices to attract investors, the sooner we will start an economic recovery. Mitt Romney is essentially saying the same thing.

In an interview published Tuesday ahead of presidential debate, Romney told Las Vegas Review Journal's editorial board that solving the foreclosure crisis would require letting banks proceed against homeowners who have defaulted on their mortgages. New investors could then rent out the homes until markets adjusted.

"As to what to do for the housing industry specifically and are there things that you can do to encourage housing: One is, don't try to stop the foreclosure process. Let it run its course and hit the bottom," Romney said.

I like his competent understanding of the economy.

Grocery Workers Voting on Contract

I would urge any grocery workers who may read my blog to vote in favor of the deal reached between the union leaders and the grocery chains that operate Ralphs, Vons and Albertsons. The contract preserves their own health care fund, although I am not sure how affordable it will remain under Obamacare. Although there might never be a good time for a strike, the following U-T headline indicates that striking now would be especially unfortunate:

Poverty rate in county hits 30-year high

More county residents faced financial hardship last year than at any other time in the past three decades, a record reflected in the poverty rate’s sharp rise and stagnating median household incomes, according to new data from the U.S. Census Bureau.

I am also afraid that the housing market will also remain down until the government stops intervening, as predicted in today's Wall Street Journal.

Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery.
Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Shiller 20-city index.

Our current problems starting with the mess in the secondary mortgage markets, partly the result, partly the cause of an overheated housing market. Continued efforts by government to prop up the market will cause more economic weakness which will in turn continue to push people into poverty. Somehow, keeping home prices high is compassionate.

Exit question, does a double dip in housing prices forecast a double dip recession?