Historically, the two main driving forces for the economy have been the housing and auto industries. Whether the problems were rising interest rates that affected their sales, or bursting bubbles that scared consumers, economic slowdowns usually began with problems in the housing and auto industries, and the first signs of recovery were usually seen in the same two industries. The historical pattern has continued this time around.
The government program of $8,000 rebates to first-time homebuyers worked well last year to ignite home sales, while the ‘cash for clunkers’ program sparked the recovery in auto sales, the two combining to launch the current economic recovery.
There was some concern that both programs would only work for the short term and be a drag at some point due to possibly stealing sales from future quarters. That may now be happening in the housing industry since home sales have been declining sharply again in recent months. The most disappointing reports were that the inventory of unsold homes jumped 9.2% in February and is back to its level of last September, even though new home construction fell 5.9% in February, now at a level of activity not seen since 1963.
On Friday the government announced a new program, this one aimed at preventing foreclosures. Its aim is to keep more people in their homes, another way of tackling the troubling level of unsold homes that keeps the real estate market depressed.
The statistics are dismal. Roughly 30% of homeowners with mortgages are ‘underwater’. That is, they owe more on their mortgages than their homes are now worth - and home values continue to decline. Meanwhile, not only have foreclosures continued to rise even as the economy recovers, but there is a large backlog of pending foreclosures in the pipeline, backed up due to the paperwork logjam at banks.
The new housing rescue plan announced Friday looks feeble in contrast to the size of the problem it’s tackling.
The new plan would allow lenders to provide ‘qualified’ homeowners who owe more on their mortgages than their homes are worth, and who are in default on their mortgage, with a new loan insured by the Federal Housing Authority, removing the lender’s risk. However, the lender would have to take certain upfront losses, like cutting the principle amount owed on the mortgage to compensate for the decline in home values. The ‘rescue’ will not be available for homeowners who are underwater on their home values but are still making their payments.
The new program will also provide assistance to homeowners who are unemployed, in the form of having their monthly mortgage payments cut to just 31% of their monthly unemployment benefits for a period of three to six months.
The reasons the program can have only limited success are quite obvious.
For one thing, for more than a year the government has been putting pressure on lenders to modify ‘underwater’ and defaulting mortgages to help homeowners remain in their homes. Banks have been reluctant to respond, but yet there have been enough mortgages modified to give a pretty clear picture that it is not a long-term cure, only a short-term band-aid. Although involving only ‘qualified’ borrowers the banks believed could successfully make the lower modified payments, more than 40% of such modified mortgages, on which monthly payments were cut more than 20%, were back in default within 12 months.
And three to six months of assistance to unemployed homeowners is not a program with long-range chances of success, given the length of time that workers are remaining unemployed, unable to find new jobs after being unemployed for a year or two.
Meanwhile, the two programs that have had the best success in reviving the housing industry, or at least prevented it from dropping further into a black hole, have been the $8,000 rebates to first-time homebuyers, and the Federal Reserve’s program of buying mortgage-backed securities to help hold mortgage rates down.
The rebate program is due to expire April 30, and the Fed has announced it will halt its purchases of mortgage-backed securities this month.
I predict neither program will be allowed to expire, unless the government is willing to see the housing industry lead the economy back into recession.
