Markets

Weekly Review: Solutions to Stabilize Housing Market?

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This week, the Federal Housing Finance Agency (FHFA), the U.S. Department of the Treasury and Department of Housing and Urban Development (HUD), has requested ideas for selling single-family real estate owned (REO) properties held by Fannie Mae, Freddie Mac , and the Federal Housing Administration (FHA).

“While the Enterprises will continue to market individual REO properties for sale, FHFA and the Enterprises seek input on possible pooling of REO properties in situations where such pooling, combined with private management, may reduce Enterprise credit losses and help stabilize neighborhoods and home values,” said FHFA Acting Director Edward J. DeMarco. “Partnerships involving Enterprise properties may reduce taxpayer losses and meet the Enterprises’ responsibility to bring stability and liquidity to housing markets. We seek input on these important questions.”
The objective is to help address current and future REO inventory. It will explore alternatives for maximizing value to taxpayers and increasing private investment in the housing market, including approaches that support rental and affordable housing needs.

In Econintersect's view, housing is one of the major pillars of the economy which requires reorganization for the New Normal. The New Normal in the USA is a shift of economic dynamics caused by the baby boomers moving from a peak driving economic force to an economic drag with reduced spending and getting income from entitlements.

The net result is too many large homes and too many vacation homes. Changes in employment, as well as retirements, have created too many houses in the wrong location. How many homes involved is unprovable by any pundit. I suspect the number is around 10% of all USA housing, considering REO inventories, mortgage delinquencies, unused second homes, and unemployed or retirees who want to move to another location in the country (aka shadow inventory).

My solution is to start destroying inventory starting with the vacant REO's in high unemployment areas until prices stabilize. The distressed market is clearly a drag on home prices. A quote from Mark Fleming, chief economist for CoreLogic:

While there is a consistent and sustained seasonal improvement in prices over the last three months, prices are lower than a year ago due to the decline in prices after the expiration of the tax credit last year. The difference between the overall Home Price Index (HPI) and our index excluding distressed sales indicates that the price declines are more concentrated in the distressed sales market.

Destroying real inventory (and shadow inventory) removes supply. I personally suspect that not too many homes need to be destroyed (clearly well under the 10% mentioned earlier) before a temporary floor is created. As prices stabilize, more inventory likely will come on the market - and the home destruction process might need repeating.

My concept fails to met all objectives of the government which called for approaches that achieve the following objectives:

  • reduce the REO portfolios of the Enterprises and FHA in a cost-effective manner;
  • reduce average loan loss severities to the Enterprises and FHA relative to individual distressed property sales;
  • address property repair and rehabilitation needs;
  • respond to economic and real estate conditions in specific geographies;
  • assist in neighborhood and home price stabilization efforts; and
  • suggest analytic approaches to determine the appropriate disposition strategy for individual properties, whether sale, rental, or, in certain instances, demolition.

Clearly no approach to date has worked. Hopefully the appeal can come up with better ideas how to solve the deteriorating housing price situation.

Economic News this Week:

The Econintersect economic forecast for August 2011 indicated the soft patch will continue - and there will be little growth. All elements of the Econintersect Economic Index as falling, with key indicators at contraction's door.

This week the Weekly Leading Index (WLI) from ECRI slipped back from 2.1% back to 1.7%. This level implies the business conditions six months from now will be approximately the same compared to today. This index has been eroding and in a three month overall downtrend. However, this index was been holding in a tight pattern between 1.6% and 2.1% since the end of June 2011.

Initial unemployment claims dropped 7,000 (from an upwardly revised 402,000) to 395,000. Historically, claims exceeding 400,000 per week usually occurs when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. However, this "400,000" is not necessarily magical - and the equilibrium point can occur anywhere between 350,000 and 400,000. The reason is that labor market forces (terminations and hiring) work in concert, and there have been periods of high layoffs and high hiring.

The real gauge – the 4 week moving average – fell 3,250 to 405,000. Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge.

WIUC 8-11-2011

The data released this week confirms the economic soft spot is continuing - except for wholesale sales which is living on another planet. The decline in rail traffic is troubling.

Bankruptcy this Week: Palm Harbor Homes

Click here for interactive version of the following table with active hyperlinks.

Weekly Table 8-12-11

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.