Housing Sector Fragility

At the Business Law Prof blog, Josh Fersee opines that "It's Time to Trust the Housing Market Again."

A major, and continuing, part of the financial crisis relates to the struggling housing market. According to the National Association of Realtors, housing inventories are up slightly, possibly driven by those seeking to “trade up” in the “down market.” This could help signal (and fuel) a turn around in the housing market. However, credit remains difficult to obtain, and just as important (and unfortunate), home buyers (and sellers) are facing a difficult appraisal market, too. An interesting aside: All-cash sales are a remarkable 27% of all sales (10% is the more typical number), another indicator that banks aren’t fueling a recovery in the market. All-cash sales, of course, skip the need for mortgage approval (and appraisal).

Count me as a skeptic. It's pretty clear that government bailouts aren't working very well in this sector:

The $75 billion Home Affordable Modification Program, which originally sought to help three million to four million homeowners facing foreclosure, has resulted in only 168,708 permanent loan modifications in a year. That prompted, Friday, an expanded foreclosure-prevention effort, including wider efforts to forgive mortgage principal. ...

Keep in mind, the latest rescue plan follows unprecedented efforts to support housing. Besides the modification program, the government also has taken over Fannie Mae and Freddie Mac; created and prolonged a first-time home buyers' tax credit; and increased the role of the Federal Housing Administration, which in 2009 insured nearly 30% of single-family mortgages.

At the same time, the Federal Reserve has kept interest rates near zero while purchasing $1.25 trillion of mortgage-backed securities, bringing mortgage rates to historic lows.

For all this, the housing market still is badly wounded, even if prices have stabilized in some areas. Mortgage delinquencies have worsened for seven consecutive quarters, according to the Office of the Comptroller of the Currency, while delinquencies more than 90 days past due among prime borrowers increased 16.5% in the fourth quarter of 2009.

As the WSJ also reported last week, Data Show Housing's Fragility:

The latest data on the housing market underscored its fragility as the overall economy recovers and showed that a glut of homes for sale and a wave of foreclosures and fire sales are holding down housing prices.

Sales of existing homes fell 0.6% in February from a month earlier to a seasonally adjusted annual rate of 5.02 million, the National Association of Realtors said. Severe winter weather hurt sales in February. In December and January, sales suffered from a surge in sales in the autumn as buyers moved to take advantage of an expiring tax credit, that since has been extended. ... A separate report Tuesday from Federal Housing Finance Agency showed that house prices fell 0.6% in January and December's numbers were softer than previously reported. The FHFA index -- which tracks the prices of the same houses over time, but only those sold to or guaranteed by Fannie Mae, Freddie Mac or the Federal Home Loan Banks -- is 13.2% below its April 2007 peak.

As for the uptick in all cash purchases, there are two possible explanations that come to mind. One is that a deal typically is counted as a cash transaction where there is no publicly available evidence of a mortgage. So purchasers could be getting alternate financing. But the other possibility is that real estate speculators are buying up foreclosed properties in expectation of future price rises. If so, however, there's a problem:

Purchasing properties with the intention of keeping them unoccupied delays recovery, because empty and unproductive properties suppress the value of adjacent properties. And a heavy concentration of empty properties increases the cost of policing and fire services, because they are an enticing target for scavengers searching for wiring, pipes or fixtures, and for vandals and squatters. Even if property tax is paid on an empty property, it still burdens the city and the neighborhood it is in.

As I say, count me a skeptic.