The federal government’s takeover of Fannie Mae and Freddie Mac dominated the financial news this month. The action was unprecedented, to be sure, and, depending upon whose analysis you accept, either unavoidable or unnecessary. The impacts are still being assessed.
Long term, the key questions, as yet unanswered are: How will Fannie Mae and Freddie Mac be structured going forward, and what role will they play in the nation’s housing market? In the near term, the questions are narrower and more immediate: How will the takeover affect the housing and financial markets? Will the government action calm nervous investors and put a floor under the housing market’s decline, as policy-makers hope? But the answers are far from definitive, entailing a lot of “maybes” sandwiched between assertions of progress and warnings of more problems to come.
The government’s open-ended commitment to purchase mortgage-backed securities from Fannie and Freddie and to guarantee payment to their bond-holders will keep money flowing in the secondary mortgage market, most analysts agree. Mortgage rates have already declined and are expected to fall further, possibly spurring some home buying and refinancing activity.
But the major impediments to a housing recovery — bulging inventories of unsold homes, soaring foreclosure rates, a weak economy and the consumer uncertainty it is creating — are still in place. Whatever its beneficial effects on mortgage rates, a New York Times analysis concluded, the takeover of the GSEs “will probably do little to stop home prices from falling further and foreclosures are almost certain to rise.”
Hints of Sunlight
Recent statistics suggest that the economic skies remain overcast, with a few hints of weak sunlight discernible behind the clouds. The Federal Reserve’s latest “Beige Book” report describes housing markets coast-to-coast as “weakened” or “still soft.” More than 75 percent of the lending officers responding to the agency’s monthly survey in June said their institutions had tightened credit standard. That’s up from 60 percent in May and explains in part why falling home prices and lower interest rates haven’t yet opened the home buying spigots and aren’t likely to do so any time soon.
You can find the hints of sunlight we mentioned in recent housing reports, offering their first positive data in months. Sales of existing homes increased by 3.1 percent in July over the prior month, beating the 2.6 percent decline analysts had predicted with the strongest sales pace in the past five months. New homes sales also increased by an unexpected 2.4 percent in July, as buyers apparently responded to aggressive cost-cutting by builders determined to reduce the supply of unsold homes.
Some analysts quickly dumped cold water on those positive reports, however, noting that the new home sales looked good in comparison with June only because the June figure was revised downward to the lowest level since 1991. These analysts also pointed out that more than one-third of the existing sales involved foreclosed homes that lenders were selling at rock-bottom prices or “desperation sales” by owners trying to avoid foreclosure.
Ups and Downs
The inventory of new homes fell to a 10.1 month’s supply in July from 10.7 months in June — definitely evidence that builders are chipping away at the surplus, but still far from the 5 to 6 months defined as a “balanced” market. The inventory of existing homes increased again from 11.1 months in June to 11.2 months in July, representing 4.67 million dwellings with for-sale signs in their front yards. Those numbers aren’t likely to improve significantly in the near term; The National Association of Realtors (NAR) reports that pending sales for July fell by 3.2 percent after an encouraging revised 5.8 percent gain in June.
Home prices, meanwhile, continue to slide. The median sale price of existing homes in July was 7.1 percent below the year-ago figure, according to the NAR. The closely-watched Standard & Poor’s Case-Shiller index, tracking prices in 20 metropolitan areas, recorded a 15.9 percent year-over-year decline in June – the largest drop ever in this barometer.
But even these dismal numbers contain a hint of better things to come: The rate of decline in the Case-Shiller index slowed in June to 0.6 percent, compared with monthly drops of 2 percent to 2.5 percent in prior months, indicating to some analysts that the market may be finding a bottom. “While there is no national turnaround in real estate prices, it is possible we are seeing some regions struggling to come back,” David Blitzer, chairman of the S&P Index Committee, told the Wall Street Journal.
In another positive indicator, Global Insight, Inc., the Waltham, MA research firm, reports that “extreme over-valuation” in home prices, a hallmark of the housing bubble, is “essentially nonexistent” in the current statistics, indicating, the company says, that “the bubble has popped” and prices now reflect “a healthy balance in relation to long-term fundamentals.”
That’s not to suggest that an immediate recovery is at hand, however. Foreclosures continue to put downward pressure on prices, keeping potential buyers on the sidelines, waiting for further declines. RealtyTrac reports that the rate of increase in foreclosures slowed dramatically in August, from an annual increase of more than 50 percent to 27 percent. But the 303,879 foreclosures tallied for the month — one for every 416 households — represents the highest total since RealtyTrac began publishing this data in January 2005.
James Saccacio, RealtyTrac’s CEO, credits efforts by state governments and loan servicers with slashing the foreclosure rate. “The question now is whether these measures will actually reduce foreclosures or simply cause a temporary lull in foreclosure activity,” he told the Wall Street Journal.
Other analysts see another foreclosure wave coming over the next two years in the form of interest-only and payment option adjustable rate mortgages to “prime” borrowers, now facing scheduled resets that will push their outstanding balances above the value of many of the underlying homes. Delinquency rates on these Alt-A loans have already increased to 12 percent – double the rate two years ago – according to Fitch Ratings, which estimates that coming adjustments will increase payments on nearly $100 billion of these loans by as much as 60 percent. “Subprime was just the tip of the iceberg,” Thomas Attleberg, president of First Pacific, predicted in a recent WSJ report.
Resetting loans aren’t the only lingering clouds in the housing sky. The hardest-hit markets forming the core of the housing bubble continue to experience price declines “as expected,” Jeannine Catalder, senior economist and manager of Global Insight’s Regional Real Estate Service, notes in a recent analysis. But other markets, largely unscathed by the housing bubble, are also reporting price declines because of weak economic conditions. Most analysts agree that the economy will have to show more signs of strength before buyers return to the housing market, and, Catalder adds, “The market has a lot of inventory to work out before prices will change course.”
If you think of the housing recovery as a journey, the vehicle in which we’re riding is starting to point in the right direction, which is good news. But it is heading into powerful headwinds, making forward progress slow and uncertain and the ETA impossible to predict. We’ll get there eventually – there being a full-throated, unambiguous housing recovery. But we’re not there yet.