Housing: Still ARMed, Less Dangerous
Hope hangs on cutting a massive oversupply of homes for sale.
It was two years ago this month that I wrote “Housing: ARMed and Dangerous,” about what was at the time only a flicker of a crisis. I’ve since written a lot about the bursting of the housing bubble and the attendant credit crisis, and most recently, about some glimmers of hope appearing on the horizon. Today, there are more.
Beyond Fannie and Freddie
The latest housing news to capture the headlines is, of course, the federal rescue of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. By moving them into “conservatorship” (a form of nationalization that puts the regulators in control), Treasury Secretary Henry Paulson is betting that giving these companies fresh capital will help lower mortgage rates, spur demand, and stem the tide of foreclosures and house price deflation. I think it’s a good bet.
The liabilities facing both companies as a result of soaring mortgage defaults could ultimately cost taxpayers, but Paulson stressed that the financial impacts would have been far more serious if the two companies had been allowed to fail. A collapse of the GSEs would have exacerbated the downward spiral by virtually freezing the mortgage market. The federal government obviously did not feel that way about Lehman Brothers, which was allowed to fail this week.
The GSE rescue’s big initial impact has been lower mortgage rates. Treasury plans to buy Fannie- and Freddie-issued mortgage-backed securities to help reduce the historically wide spread between their yields (which impact mortgage rates) and relatively low U.S. Treasury yields. Maybe the Fannie-Freddie rescue isn’t a cure-all for what ails real estate—notably home price deflation and rising home foreclosures—but it goes a long way to restoring confidence to the financial system
But finally there’s a ray of hope
The primary place we’re seeing improvement is in the month-over-month pace of decline in house prices. Although the year-over-year reading continues to fall, the monthly readings have become decidedly less severe over the past six months, as you can see in “Monthly Home Price Declines Much Less Severe.”
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Let’s dig a little deeper into the numbers. National home prices fell a record 15.4% from a year ago, to the lowest level in four years, according to the S&P/Case-Shiller Index. The 10-city and 20-city composites (the latter is shown above) fell 0.6% and 0.5% respectively in June, much less than the 2.0% to 2.5% drops seen earlier this year. Nine of the 20 cities saw price appreciation in June. Nevertheless, all 20 markets’ home prices remain below their year-ago levels, with seven experiencing drops of more than 20%, led by Las Vegas.
Why the recent improvement? It may reflect that lenders already dumped their lowest-quality foreclosed homes earlier in the year, so the downward price pressure is easing. But the inventory overhang remains, so we have to caution against getting overly excited about this improving month-to-month change. Most of the improvement is concentrated in the new-home market, which represents only 15% of the residential real estate market (vs. 85% for existing homes).