The U.S. Treasury took its boldest step to date in its efforts to stabilize the housing market by announcing on Sunday a takeover of Fannie Mae and Freddie Mac, but analysts and economic experts warn that the action will not likely lead to a real estate turnaround anytime soon.
Builder stocks rallied strongly on the news, with many in the group posting increases of nearly 20% at market opening Monday. By mid-afternoon, most had settled back to gains between 7% and 13%.
"It's good news, because the alternative would have been far worse," said Bert Ely, a financial and monetary policy expert who runs Ely & Co. based in Alexandria, Va. "We maintain the status quo, but we still have very serious problems to work through."
The alternative, said Ely, would have been to let both government-sponsored entities fail, which would likely have completely collapsed the already moribund market for mortgage backed securities that ultimately provide the funding for home loans.
"The broad belief is that it's going to help bring [mortgage rates] down a bit," said Ely. But, he added, "I don't think it will be a magnitude of even 1%."
The impact of the takeover will not be felt throughout the overall housing market, he said. "Your stronger borrowers are going to be able to get cheaper money, but this does not mean your weaker borrowers are going to have it any easier getting credit than they did before."
Brian Bethune, chief U.S. financial economist for Global Insight, believes the takeover will have the effect of shaving 30 to 40 basis points off mortgage interest rates by the end of October. "Definitely we're going to see some relief on mortgage rates," he said. "We could see rates by the end of the year dip below 6%. That's the best news in the whole equation here."
Bethune added, however, that the implicit government backing of Fannie and Freddie should help ease the credit crunch. "On net, it should have a slight positive effect on availability of capital," he said. "I think some of these mortgage backed securities will get a lift. But it's not going to be a cure."
Michael Rehaut, home building analyst at J.P. Morgan, was more skeptical. The GSE takeover, he wrote in a research note, "will have a fairly minimal effect on current mortgage rates, and hence the present dynamics of the housing market."
Those dynamics, according to Ely, are driven by several factors that are outside the purview of the financial markets: the tightening of credit standards to pre-bubble levels and an overall decline in the pool of home buyers owing to creditworthiness, reduction in net household wealth due to home price declines (which he estimates at $1 trillion in aggregate) and changing preferences regarding size, styl,e and location of existing housing stock.
"As I said to the builders at last year's Big Builder conference, there's really got to be a significant slowdown in housing not only in units being built, but in what people pay for them. What I see is a slow recovery for home building, and as the recovery takes place, possibly significant changes in the mix of what is being built."
The takeover generated a mostly positive response from home builders.
Said R. Chad Dreier, president and CEO of The Ryland Group, "We are encouraged by the possibility that the government's takeover of Fannie Mae and Freddie Mac may drive down mortgage rates and create some renewed demand for new homes among qualified buyers. Also, the government's effort to help restore confidence in the financial markets is a good thing for both the housing market and overall economy."
"Now with the tax credit in play, and this recapitalization commitment by the government, the necessity to clear the market of re-sales--both people who are living in their homes and want to sell them and the supply of foreclosure properties--and the overhang of new-home properties now has the beginning of a solution," said Larry Mizel, CEO of M.D.C. Holdings. "A cure has started, substantially, and that we'll now be able to begin to clarify the baseline for new-home demand. I feel confident that we'll find that the lines between new-home supply and demand will cross again, and we'll need to work to meet demand again. It may take a couple of years."
"The takeover by the government, which many people have been waiting to happen for some time, confirms the guarantee that the GSEs have been backed by the government, which should restore some confidence in their ultimate viability," said Fred Cooper, senior vice president for finance and investor relations at Toll Brothers. "It removes a cloud of doubt about their ability to survive their crisis, and will hopefully bring mortgage spreads down and improve liquidity."
The National Association of Home Builders put out a statement from CEO Jerry Howard on Sunday that said, "While it is unfortunate that we have reached this point, we are hopeful that the government's action on Fannie Mae and Freddie Mac will help to increase liquidity in the nation's mortgage markets and restore confidence in the global financial markets. At this critical turning point, it is essential that government regulators and all parties involved in the nation's housing finance system work together to rebuild the nation's secondary mortgage market--a move that is absolutely vital to provide affordable mortgages for America's home buyers and to help spur an economic recovery."
For Alan Shapiro, president of Bethesda, Md.-based Winchester Homes, the takeover's biggest benefit is keeping mortgage money in place.
"We can ill afford to have an illiquid mortgage market right now," he said. But he said he did not think the federal action will have an immediate impact on the market.
"It'll be--if nothing else--something that keeps us in neutral," said Shapiro. "The fundamental problems are still there. Inventory still needs to come down. ... So, I don't see it as a great help, but I see it as a good step to keep us on the path for recovery."
While recovery seems like wishful thinking in some hard-hit markets, Shapiro said that in the past four to six weeks he's seen some stabilization around Washington, D.C. He said most of the improvement had been in the local Virginia markets, with sales higher than during the spring selling season. And if the government strategy keeps interest rates low, that trend could gain momentum.
Because Winchester is a move-up builder, Shapiro said that he tracks the resale market very closely; his buyers most often have a house to sell before they can buy a new one. Low interest rates could help get more entry-level buyers to purchase homes; many, of course, choosing existing homes. When resale inventory begins to clear, it frees up opportunity for the move-up tranche of the housing market.
"We believe this market won't be back until resales get healthy," Shapiro explained. "If this helps the entry-level market, we're all for it."
Dave Borreson, CEO of Atlanta-based Peachtree Residential, said the government action can't be anything but positive.
"The fact that the government stepped in and said, 'We have the keys to the front door,' that is a good thing. ... Warren Buffet thinks that it's a good thing for the long term," Borreson noted, adding that the move should prevent the negative effect on interest rates that losing the GSEs would have had.
"The fact that they are still in business and, hopefully, their window is open has got to go a long way towards keeping interest rates more manageable," he said.
In addition to the establishment of a secondary market for mortgages and an expected gradual decline in interest rates, for former mortgage industry executive and current CEO of Florida-based Holiday Builders Kim Shelpman, the pluses of the government also include the standardization of lending guidelines. Shelpman said that the mortgage pendulum has swung so far from the fast-and-loose lending of the boom times to where it's "practically impossible" to get a mortgage today. She said she expected the government takeover to provide some consistency on the lending side, returning "lending to the pre-boom time when decisions were made prudently on a consistent basis and everyone understood the guidelines."
However, some industry stakeholders like Shelpman are a little wary of the increased government role in the GSEs. Shelpman said that the government bailout of the private entities will be difficult if not impossible to reverse when the industry recovers, although she said she thought it was a necessary action.
"I'm a little split on the decision," Shelpman said. "But I do think it's a step in the right direction."
But that critical step comes at a hefty price.
"Let's face it, we know who's paying for this," Shelpman said. "It's going to affect everyone in the U.S.--and then some."
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