Are We There Yet?

Are we there yet? Children ask that question endlessly on a long car trip. Federal Reserve officials are asking it about their drive to curb inflation.

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Bidding wars.  There’s a phrase that hasn’t been heard (other than during card games) for several years.  But real estate agents in several markets are reporting increasing competition among prospective buyers for a limited supply of homes for sale. 

The phenomenon isn’t widespread; it is limited, at least for now, to markets in which the economic recovery has been faster, and the job market, consequently stronger, than the national average. But that this trend is surfacing anywhere marks a dramatic change in a housing market that has been crawling on the bottom, even as the economy has begun to recover.

Existing home inventories have fallen to the lowest level since 2005, with available listings declining by nearly 50 percent in Miami, Phoenix, and Oakland – among the markets in which bidding wars are being reported.  The dearth of new construction has also pushed new home inventories below six months – the level generally viewed as balanced between buyers and sellers. 

Agents responding to a survey by Redfin, an on-line real estate brokerage, reported multiple bids on half the offers in Seattle, Boston, and Washington, D.C. and on nearly three-quarters of the offers in the San Francisco area.   

Foreclosure sales, accelerating now that the ‘robo-signing’ logjam has been broken, will boost inventories and continue to depress home prices, analysts agree. But markets in which the economies are strengthening should be able to absorb that increase, according to Mark Zandi, chief economist for Moody’s Analytics Inc. “The housing crash is finally giving way to recovery in an increasing number of markets across the country,” Zandi told Bloomberg News.   

Rising rents are making home buying more cost-effective than renting in many markets and reports of increasing sales are leading many prospective buyers who had been reluctant to enter a declining market to conclude that the tide may be shifting.

“The decline in unsold listings and vacant homes and the increase in rents presage better times ahead for single-family housing,” Zandi said.   


Pressure has been building to force Fannie Mae and Freddie Mac to allow principal reductions on the loans of some underwater buyers, to help them avoid foreclosure, and there are indications that the two companies, and their primary regulator (the Federal Housing Finance Agency) may be about to bend.

Charles Haldeman, CEO of Freddie Mac, said recently that incentives added to the Obama Administration’s HAMP program may make principal reductions more viable for the GSEs.  

“Treasury sweetened the program and tremendously increased the incentive payments in their offer to us," Hardeman said at a recent housing symposium sponsored by HousingWire.  “We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50% of what you could write down — it may be in our economic self-interest to participate in that," he added.

This would represent a major shift in position for the GSEs, which have contended principal reductions would be too costly and would create “moral hazard,” by encouraging owners capable of repaying their mortgages to default so they, too, could have their outstanding balances reduced. 

Haldeman said the GSEs are reviewing their calculations to see if the new HAMP incentives will alter the conclusion that the negatives outweigh the advantages of principal reductions. 

Edward DeMarco, who heads the FHFA, has not sounded in recent interviews like someone who has reached that conclusion.  His refusal to consider principal reductions has led to calls for his removal from critics who say he is impeding the housing recovery by putting the financial interests of the GSEs ahead of the need to help the housing market (and struggling homeowners) by reducing the foreclosure rate.

His arguments drew a rare sympathetic response from New York Times columnist Gretchen Morgenson, who suggested in a recent article that DeMarco’s concerns are worth considering.

“Stabilizing the housing market is a noble and desired goal, of course. And legions of borrowers hurt by the bust genuinely need help,” she wrote.  “But what the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. The fact is, principal reductions by Fannie and Freddie are not the panacea that they may seem.”

With only 2.5 percent of the GSEs’ mortgages seriously delinquent (compared to 7.2 percent for financial institutions), principal reductions wouldn’t help very many borrowers Morgenson noted, but they would represent a “direct and sizable gift from taxpayers to the largest banks.”  The reason:   Reducing the principal on the first mortgage would increase the likelihood that the second liens, in place on many of those properties, would be repaid. Absent a principal reduction, Morgenson explained, the lenders holding those second liens would have to write them off, incurring considerable losses.  “As such,” Morgenson said, “principal write-downs are another backdoor bailout for the banks that brought you the mortgage crisis.”

The clamor for principal reductions also ignores another important point, Morgenson noted.  The loan modifications Fannie and Freddie have approved, without principal reductions, are performing better overall, with lower re-default rates than on privately-held loans.  “[So] the next time you hear someone advocating vast principal reductions on Fannie and Freddie loans,” Morgenson suggested, “remind them that it would be another stealth bank bailout, courtesy of taxpayers. Banks’ unwillingness to share the pain has been a central feature of this crisis,” she added.  It’s time to put an end to this dysfunctional dynamic.” 


As home prices continue to fall, median rents are rising, and those trends are shifting the dynamics in many housing markets.  Buying has become more affordable than renting in 98 out of the nation's 100 largest metropolitan areas — even in New York, Los Angeles and Boston, according to a rent vs. buy index compiled by Trulia.

This should boost home sales, in theory, as renters recognize that it would be more cost-effective for them to own their own home.  But rising rents are making it more difficult for many prospective buyers to amass the down payment they need, forcing them to continue renting and increasing the demand for rental housing, which is putting more upward pressure on rents. 

A recent report by Zillow documents the rising rent trend, finding that rents increased by 3 percent between January 2011 and January 2012, while home values declined by 4.6 percent during the same period.  But Zillow’s chief economist, Stan Humphries, sees this as a net positive for the housing market. 

“While it seems that rents are rising at the expense of home values, the opposite is true,” Humphries said in a press statement.  “A thriving rental market will stimulate home sales as investors snap up low-priced inventory to convert to rentals,” he added, noting, “the flourishing rental market is the silver lining to the nation’s housing downturn.”  

With that prospect in mind, Fannie Mae has begun to sell some of its REO properties in blocks to investors, for conversion to rental units, putting the first of those packages on the market in February. 

The National Association of Realtors, meanwhile, reports that investor purchases of single-family homes increased by nearly 65 percent last year to 1.23 million units compared with 749,000 the year before. Investment sales represented 27percent of 2011 transactions, compared to 17 percent in 2010, according to the NAR.   “During the past year, investors have been swooping into the market to take advantage of bargain home prices," Lawrence Yun, the NAR’s chief economist said. Investors were also attracted by rising rental income, which, Yun noted, “easily beat cash sitting in banks.”