MLM Counties News. Notices. Need-to-know Information.
It has been almost six years since the air started to leak, then gush, out of the U.S. housing market, and the best one can say is that residential real estate is bouncing along the bottom.
Almost every housing indicator, from starts to sales to prices, has been flat-lining for three years. Various government initiatives, including a first-time-homebuyer tax credit, gave home sales a temporary boost in 2009 and 2010. But just as water seeks its own level, home prices are still seeking theirs.
They’ve had lots of impediments along the way, well- intentioned though they may have been. (The counterargument, that things would have been worse without intervention, can’t be proven.) From the Federal Reserve’s purchase of $1.25 trillion of agency mortgage-backed securities in 2009-2010 as part of its first round of quantitative easing to renewed talk of additional MBS purchases to temporary tax credits to mortgage modification and forgiveness programs, housing has been the center of government attention and ministration — at least until President Barack Obama pivoted to jobs last summer.
Even now it’s very much in the administration’s cross hairs. Earlier attempts to facilitate mortgage modifications via programs with abbreviations like HAMP and HARP all fell short of expectations. Fewer than 900,000 homeowners have refinanced their mortgages through the Home Affordable Refinance Program compared with the 4 million to 5 million touted by Obama when he introduced the program in 2009.
So last month, the president said he was revamping HARP, waiving fees and the 125 percent loan-to-value ceiling so that borrowers with no equity in their homes will now qualify for a refinancing. (For every borrower who sees his mortgage payment reduced there’s an offsetting saver who receives less interest income from his MBS. In some circles this would be considered a wash.)
Why is so much energy being directed, or misdirected, at housing? Wouldn’t those efforts be better spent charting a sound course for the overall economy rather than targeting a specific sector?
For starters, housing’s footprint is larger than its current 2.4 percent share of gross domestic product. Even at its recent peak in 2005, residential investment, as it’s known in the GDP accounts, made up only 6 percent of GDP, the highest since the 1970s when inflation was driving demand for real assets.
For most Americans, their home is their major store of wealth. The value of household real estate peaked in the fourth quarter of 2006 at $25 trillion, falling to $16.2 trillion in the second three months of this year, according to the Fed’s latest Flow of Funds report. A reverse wealth effect is depressing consumer sentiment and spending.
It’s also limiting mobility. Unemployed homeowners who owe more on their mortgages than their homes are worth can’t pick up and move to areas of the country where labor is in demand.
Finally, home purchases beget spending on big-ticket items, such as refrigerators, washing machines and furniture.
Between 1997 — when home-price appreciation started to outpace the consumer-price index — and the peak in 2006, the average price of an existing home rose about 125 percent, according to the S&P/Case-Shiller U.S. Home Price Index. It was arguably the biggest real-estate bubble in history. I know of no law of nature, or finance, that allows for the reflating of a burst bubble. (Another asset class, yes; the same one, no.)
Not that politicians aren’t trying. Complaints about lending standards being too tight — from the same folks who pressured lenders to lower their standards — would be funny if they weren’t so sad.
“Underwriting standards are too tight?” asks Michael Carliner, an economic consultant specializing in housing. “Relative to six years ago, they are. And they should be.”
Housing is still the most tax-advantaged asset, which contributes to its appeal. Mortgage interest and real-estate taxes are tax-deductible. In 1997, the tax laws on capital gains were relaxed. Instead of a one-time exclusion of $125,000, the first $250,000 of capital gains ($500,000 for a married couple) is exempt from taxation provided the owner lived there for two years. What a coincidence that home prices took off just about that time.
All the discussion about closing tax loopholes to raise revenue tiptoes around the mortgage deduction. Why? Because it’s a bad time to remove an incentive for home purchases.
It’s always a bad time, but good times won’t return to the real-estate market until prices are allowed to fall so they can perform their traditional role of allocating supply.
There are still plenty of reasons to own a home, but the deductibility of mortgage interest isn’t one of them. For the last two decades, the nation’s housing policy was designed to convert as many Americans as possible into homeowners. It was aided and abetted by Fannie Mae and Freddie Mac, which lowered the standards on mortgages they guaranteed; lax lenders; fraudulent loans, with borrowers and lenders often in cahoots; bankers that securitized and sold the mortgages; credit-rating companies that thought enough collateralized junk was worthy of a AAA; and, yes, a public eager for a free lunch.
The 11 million homeowners currently upside down on their mortgages probably wonder about the wisdom of such a policy, which succeeded beyond anyone’s wildest imagination. The homeownership rate rose to 69.2 percent in 2004 from 63.8 percent a decade earlier before slipping back to 66.3 percent now.
The rest of us can only imagine what other calamities (think ethanol) lie in store, courtesy of a tax code that encourages what the government deems to be “good” behavior at the time. Good can turn bad without warning.
Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.
