Zillow reports a double dip in real estate prices in 12 American cities, while The Federal Housing Finance Agency (formerly OFHEO) has released new data showing that housing prices nationwide are going nowhere. Meanwhile, Bank of America has announced that it will begin writing down the principal on $3 billion worth of loans.
These are all good developments for many people, of course, since it means both that for-sale housing continues to become more affordable and that mortgage servicers are beginning to come to grips with reality, which will help home prices move to prices that reflect actual market demand.
It’s probably a safe bet that most of the non-performing loans being serviced by B of A were originated by Countrywide before it was acquired (viz., bailed out) by B of A. And given that the ratio of non-performing loans in general are at an all-time high, B of A and the investors who actually own the loans have probably come to the conclusion that it is best to have some revenue rather than foreclose and have zero revenue.
The B of A move with single-family is a move toward the sort of “amend, extend and pretend” strategy that is now being employed in dealing with problematic commercial loans. Although such a strategy is viewed with resignation in the industry it is probably preferable to the strategy of most single-family loan servicers which is probably best described simply as “pretend.”
The possibility of an extended double dip likely won’t be a surprise to those who’ve long wondered what would happen after the home-purchase tax credits took their course. The first credit from last fall, which provided a tax credit of $8,000 to first-time buyers set of a mild buying spree in many markets, propping up home values in the 3rd quarter of last year. Congress extended the credit beyond first-time buyers to a rate of $6,500 for repeat buyers. The second credit is scheduled to expire in April. The second credit appears to have not produced nearly the bump the first one did, and a second extension is likely to produce even less of a bump.
Yet, the credits and the frantic efforts by the Fed to keep interest rates low have produced a nationwide decline in home values of 1.2 percent. Nevada is still off by 17 percent and Arizona is off 13 percent, year over year. The feds can claim that things might have been much worse, but the fall out of this policy of subsidize and inflate has yet to be seen.
Again, from an Austrian perspective, the decline in home prices is a good development since it moves housing toward a price that reflects demand. However, the Federal government’s policy has been to prop up home prices and to produce another housing boom in the belief that this will drive job creation and economic growth.
The anemic growth in home prices nicely illustrates the limits of efforts by Congress and the Fed to produce a new boom through subsidy and monetary expansion. The feds have simply been unable to do anything about the 8.5 million American jobs lost since the peak of the boom, and without job creation, it’s difficult to see where home sellers will find legions of ready buyers no matter how low the interest rate is. Back in the boom times, Indymac and Co, may have been happy to hand out loans to people without jobs, but those days are over. At least for now.
As the Austrians predicted, the current federal strategy has done little more than drag out the recession indefinitely as home prices are prevented from finding a true bottom while resources should have been allocated elsewhere. The absurdly low interest rates that accompany such a strategy have failed to produce the desired spending, but they have successfully prevented Americans from engaging in any meaningful amounts of savings or investment.
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The Real Estate double dip does not seem to be happening in my market, but then the Kansas City market is a slow and stead market.
We have seen our urban core tank with record price declines from an $80,000 appraisal price 2 years ago to selling at $40,000 as a rental, $20,000 as a move in ready house, and $5,000 or less for anything needing work.
Our suburban first time home buyer market, really never dropped due to the FHA and the tax credit, but they seem to be still selling, however you do have to be in perfect condition and not need a single repair anywhere.
Our move up homes are hanging on with some decline in value, but not huge.
Our luxury market does not exist. Just last week we had a home that appraised at $1.7 mil in the heyday. For some reason the greedy guy tried to sell it for $1.8 then $1.7 and gradually down over the past year till it was last listed for $999,000 and then auctioned this past week to bring in with auctioneer preimums added a total of $675,000 that the seller may not take.
So while I don’t think we have a double dip, I do think we are having a very long, gradual rebound in some types of houses and no recovery at all in other markets like the all rental urban core that require investors to get loans and the luxury home market that virtually requires the buyer to have all cash.
Let’s not forget that U.S. home prices will drop further now that the Fed will no longer be buying mortgage backed securities. The resulting higher interest rates will throw more cold water on the housing market.
Thank God up here in Canada we do not follow the American way of banking and housing. Our market has levelled off and is strong and consistent with the economy and Consumer Price Index.
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