Credit markets shrugged off news of 3.5 percent gross domestic product growth in the third quarter, and the 10-year T-note has repeatedly held tests of 3.5 percent (3.41 percent now), mortgages 5.125 percent or better.
The GDP news intermittently ignited the stock market and caused new speculation that the Fed will soon make noises preliminary to tightening credit. (Razzing from the skeptical side: If the Fed tightened credit, how could anyone tell?)
Stripped of "Cash for Clunkers" and weird inventory adjustment, GDP really grew only about 1.5 percent, and that was mostly due to other government stimulus.
Other data have dampened the stock fire. Personal income was flat in September, and spending shrank by 0.5 percent. The Conference Board measure of consumer confidence crashed to 47.7 in October versus expectations for holding summertime improvement at 53.3 (the reading at the bottom of the last recession was 81).
Sales of new homes failed to meet the 2.5 percent forecast for September, and instead fell 3.6 percent to 404,000 annualized. New claims for unemployment insurance were expected to fall, but rose last week to 530,000. One happy item: Orders for durable goods gained 0.7 percent in September.
Housing seems central to the evident paralysis among consumers, and equal immobility in the administration. Some say that job creation is the key to decent recovery, but I think it will be hard to get anything going until housing moves.
In the Great Depression we allowed half of U.S. banks to close, taking deposits with them. Since then, homes have become the primary store of family savings, easily made liquid.
Here in the pit of the Great Recession a lot of those savings have been lost, even turned into net liabilities in the miracle of the upside-down house, and those with little actual loss are fearful, watching neighbors unable to borrow or sell, or watching them walk away.
The administration has pursed loan mitigation, threatening to punish lenders who foreclose instead of rewrite. The failure of this foolish hopefulness has become more clear with each month’s delinquency data, and ahead is the ultimate bursting of foreclosures through feeble dams of intimidation and self-deception.
A better hope among regulators and financial people: Housing markets would fall to "clearing prices" and then begin to function again. Clearing theory holds that as prices fall, fewer sellers come to market and more buyers arrive; once a modest excess of buyers is restored, liquidity will return, excess inventory will work off, and prices can again rise. …CONTINUED
This process works well in global markets for uniform stocks and bonds. Not in housing. Perhaps it works in normal, prior, regional cycles … but not now.
The drop in value in many places in the last three years has crashed right through clearing prices and created all-distress markets.
Instead of fewer sellers there are more — a constant oversupply (led by the perhaps 10-20 million underwater households) and fewer buyers, held back by fear of the oversupply and further price declines. Their numbers are diminished by the credit shortage. An all-distressed market cannot clear by itself.
Home prices in nine states are lower than they were five years ago (down 21 percent in California: worse than Michigan). In the last year alone, 10 states lost 5 percent to 10 percent of value; five states more than 10 percent; and two states lost more than 20 percent (all second-quarter data from www.fhfa.gov). In the last year the weighted-average U.S. home (Florida counts rather more than North Dakota, for example) lost 6.1 percent of value.
The Fannie-Freddie portfolio is the highest quality of all (true), with 75 percent loan-to-value at origination, and as of July this year more than 1.4 million loans were 60 or more days delinquent. That aggregate is rising 70,000 monthly despite monthly subtractions of 25,000 foreclosure sales and another 25,000 modifications (50 percent to 75 percent will redefault).
The economy cannot recover in these conditions.
An extension of the first-time buyer credit will help a little, but most of that demand has already been attracted (really, robbed from the future). There is only one way to stop the spreading abandonment of homes, and that is rising prices — certainly not a "re-bubble," just rising.
And there is only one way to get that done: As hammered here for two years, restore a reasonable supply of mortgage credit.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
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