Policy and housing: someone’s gotta give!

Angry Bear:

Housing demand is being propped up by government subsidies and low mortgage rates, and the level of supply is held back by low prices. Right now, the housing market is a complicated hodgepodge of policy, foreclosures, and very weary potential home-buyers.

Home sales are stabilizing; home building is stabilizing; and home prices (might be) stabilizing - the chart to the left illustrates a positive trend in sales away from distressed and first-time home-buyers, the targets of policy, according to the NAR. But what would the housing market look like if the massive policy expired this year? Not good, and it will.
Some points on the housing market:

1. Subsidies are set to expire. If the Fed continues to buy its average of $105 billion in GSE-backed MBS per month (see the NY Fed’s website for weekly updates), it will max out the announced $1.25 trillion in four months. The $8,000 tax credit for first-time home-buyers expires at the end of this year. The Fed’s Treasury buyback program will run its course by October.
2. There are several home price indices out there, each painting a slightly different picture of the level and trend in aggregate home values (see AB post).
3. The foreclosure modifications program is holding off some foreclosures; but the program is no match for market forces.
4. There is a large shadow inventory out there - potential sellers that are reluctant or unwilling (TIME calls some of these sellers “accidental landlords”) to relinquish home ownership at current prices. However, if home values continue to take baby steps forward, shadow sellers (new supply) will emerge.
5. There is a bimodal distribution of sales across the high-end and low-end housing markets. Low-end sales are hot, while the upper end is not.

The housing market still has a long, long way to go before unsubsidized demand equals supply at a price that doesn’t exacerbate foreclosures – strategic or otherwise. With virtually all of the subsidies expiring within four months, it’s hard to believe that policymakers won’t give.

So who’s gonna cry uncle? My bet’s on the Fed, as it lacks
does not require Congressional approval. Some Fed officials even tout that the MBS program should be scaled back; that’s ridiculous, given points 1. through 5. above. I agree with Daniel Indiviglio at the Atlantic: the Fed is more likely to increase its MBS purchase program, rather than to curtail or even adhere to the current limit.

By the way, the Fed and the Treasury have successfully dropped mortgage spreads to 2006 levels, even lower on the 30-yr; but it took an accumulation of $1 trillion in MBS to date to do that.

Debt Fueled Economic Growth

EconomPic:

Ignoring the massive spike in government related debt (Federal, State, AND Local) for the time being and focusing instead on household liabilities as a percent of the national income, we see mortgage debt is now at 70% of GDP (more than double the level seen in the 1980's and 50% more than that seen at the beginning of this decade) and consumer debt is now at 18% of GDP.

The importance of all this is of course that all that debt that has been added over the years has been a huge contributor to that GDP. The fear is that the debt has just pulled a lot of consumption forward rather than infrastructure or other long term investments that will provide future growth opportunities.

Who is this debt owed to?  I presume most of it is just owed to other Americans.  The current account deficit represents the additional debt that is owed abroad.  Nevertheless, increasing credit tends to increase GDP and if that credit was spent on productive investment that makes the country more productive, then it will be easy to unwind the increase in debt.  If not, well...
The mortgage debt is a far bigger deal than the other debt because it is on a much bigger scale.  They should be graphed on the same scale and then it would be clearer.

What We’ve Learned: Ugly Truths About Housing - Economix Blog - NYTimes.com

What We’ve Learned: Ugly Truths About Housing - Economix Blog - NYTimes.com:
Glaeser is a libertarian economist who is one of the biggest experts on urban economics. Libertarians tend to blame government policies for problems and he is correct that they distort the housing market. I agree with him that these policies are bad, but I do not think they created the housing bubble. These policies have been around for decades without causing any problems. The question is what caused the bubble now and not some other time and there are other factors that seem more directly responsible.

"American housing policy has been monumentally foolish. We have used public resources to encourage ordinary Americans to bet all they could on highly risky housing markets. Fannie Mae and Freddie Mac, the home mortgage interest deduction, even the willingness to bail out financial firms that had lost too much on mortgages, can all be seen as policies that encourage ordinary people to risk it all on real estate.

I had once thought that these policies were misguided, but not terrible. We now know that encouraging buyers and lenders to bet on housing can impose vast costs on the country."

Less libertarian economists like Robert Schiller argue that free markets got out of control because of debt securitization and market failure in rating risk and that government regulation could help prevent this sort of problem. I think monetary policy also carries some blame (In hindsight, it looks like Greenspan kept interest rates too low).

Calculated Risk: Bankruptcy Filings and Mortgage Delinquencies by State

Calculated Risk: Bankruptcy Filings and Mortgage Delinquencies by State: "Here is a graph of bankruptcy filings vs. mortgage delinquencies (including homes in foreclosure process) by state for Q2 2009."

One look at this tells me that this recession may be tamed, but it is not going away any time soon.

Calculated Risk: House Prices: Real Prices, Price-to-Rent, and Price-to-Income

Calculated Risk: House Prices: Real Prices, Price-to-Rent, and Price-to-Income: "Here are three key measures of house prices: Price-to-Rent, Price-to-Income and real prices based on the Case-Shiller quarterly national home price index."

Argues that housing prices are still too high!