It seems as though the whole country has its eyes glued on the housing industry in the hope that this mighty economic engine can perform its usual duty of pulling the economy out of the doldrums. This is the role that the housing industry traditionally plays.
Back in the day, mortgage rates would rise, choke off financing, shut down home building, and send the economy into a tailspin. Then, once the economy slowed and rates fell, builders would bring in the earth-moving equipment, raise some walls, and lift the entire economy out of despair.
If only it were so easy this time around. In order for builders to do their job, several important things need to happen that seem beyond the control of federal policy makers, much less home builders. The most important is that house prices need to stop falling. Until that happens, it’s hard to imagine demand for housing increasing. And mortgage lenders are likely to remain reluctant to lend.
Existing-home prices have already tumbled 20 percent, and economists predict another 10 percent decline as more foreclosures work their way through the system. Banks are on a pace to foreclose on more than 1 million homes this year alone, according to foreclosures.com. Plus, one in six homeowners now owe more on their mortgage than their house is worth. Their ranks will grow as home values decline, leading to even more foreclosures. Surveys by the Mortgage Brokers Association of America indicate that roughly 3 million mortgages are delinquent (at least one payment is past due) and at risk of foreclosure.
Foreclosure sales, which account for 25 percent to 40 percent of total housing sales in many markets, are exerting tremendous downward pressure on new-home prices. They often sell for 20 percent less than comparable new homes, and they are driving down new-home appraisals.
Will Government Efforts Work?
So far, government efforts to stem the rising tide of foreclosures haven’t had much impact on the market; though, to be fair, they are just being rolled out. HUD recently initiated the foreclosure assistance program contained in this summer’s housing rescue bill designed to provide relief for up to 400,000 households.
The program is targeted at homeowners who have monthly payments exceeding 31 percent of their income. Banks would write down mortgages to 90 percent of a home’s current value, and a new 30-year fixed-rate loan would be insured by the FHA.
The financial system rescue bill signed into law last month expands on this program, but it’s not clear how many more households will receive assistance. The bill instructs the Treasury, when it buys troubled mortgage assets, to direct mortgage servicing companies to renegotiate the loans along the lines of the HUD program.
Even if the government were able to slow foreclosures, builders need access to credit to build. Right now, with the credit markets shut down and builders throughout the country out or nearly out of cash, there isn’t much money to finance operations. The industry has been brutally compromised by the downturn, especially when you add in what’s going on right now over AD&C loans.
The Bottom Line
The government’s attempt this summer to stimulate demand by creating a new $7,500 tax credit for first-time homeowners didn’t work. In fact, the housing rescue package may have done more harm than good, from a strictly economic perspective, by eliminating the seller-provided down-payment assistance that many builders used as a crutch to make sales.
The bottom line is that unless the federal government can somehow stop home prices from declining and stem the foreclosure tide, there’s little hope that home builders can get in gear and do their national duty. And unless that happens, it’s unlikely that the economy as a whole can be stopped from sliding deeper into recession.