Housing Recovery?

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The facts are clear; The housing market is in a period of stabilization. Home values are increasing in many markets http://finance.yahoo.com/news/us-housing-inks-another-uptick-102324993.html, foreclosure sales have risen and are at price levels near BPO (broker price opinion), and consumer confidence is rising. Home sales in August 2012 increased 7.8% – the highest level in two years. Should we claim victory? Maybe – and maybe not. Lets look at a few of the things we should be considering:

1. The Economy and Unemployment – Ultimately for Americans to buy they need good credit, a job, and a down-payment. With unemployment rates in the 8% range, we still have a long way to go before we can view the employment market as a positive contributor to the housing sector. Household formation is still far below normalized levels as Americans delay moving into their own home. The US has had a significant decline in new household formation driven by the economic slowdown. Until the unemployment numbers return to normalized levels, this will remain as an issue to watch.

2. Deficit and the fiscal cliff. As of June 2011, the US ranks as the nation with the single highest amount of debt, closely behind the combined European Union. http://en.wikipedia.org/wiki/List_of_countries_by_external_debt. How we address this issue will affect the rating of our countries debt, the drain on available revenues as we pay interest on this debt, and will most certainly delay or impair any hope for long term recovery. Looking at the table in the link above clearly reflects the question as to why we should think our path may differ from that of so many EU nations. For each $1 trillion in debt, a 5% difference in bond rates caused by a ratings downgrade could result in $50 billion in annual cost. This concern may not be far from reality. Today (9/24/12) the US 10 year is 1.62%, the the Italian 10 yr is at 5.19%, and the Greek 10 yr is at 19.2%. Our yields are low today, but could they rise suddenly? We benefit today from two things. First in a relative sense we are far stronger so ‘flight to quality” benefits us. Second, some investors of US debt help drive the yields lower. Asia depends upon us a as a consumer of their goods so keeping our debt low, by buying it, creates more consumer demand. This cycle cannot continue long term especially if the China economy slows. How we deal with this issue in the next congress may be the single most critical issue for this country to address.

3. Regulatory uncertainty and access to credit. Fed Chairman Bernanke said in Feb 2012, “In the housing sector, affordability has increased dramatically as a result of the decline in house prices and historically low interest rates on conventional mortgages,” Bernanke said. “Unfortunately, many potential buyers lack the down payment and credit history required to qualify for loans; others are reluctant to buy a house now because of concerns about their income, employment prospects and the future path of home prices.”

The fact is that credit tightening is directly associated with the risks of making a mistake that might result in violating a new regulation, litigation, or repurchase. In fact, in the same speech Bernanke said, “We had risk-amnesia going into the crisis and I think now we’ve gone a bit too far in the other direction,” he said. Bernanke said Fed surveys show that even when home buyers can make a 20 percent down payment, banks are often reluctant to offer mortgage money to any but the best qualified. “Most banks indicated that their reluctance to accept mortgage applications from borrowers with less-than-perfect records is related to ‘put-back risk’ – the risk that a bank might be forced to buy back a defaulted loan if the underwriting or documentation was judged deficient in some way,” he said.

The fact is that the opportunity for a true recovery, one that is long term, exists for the US Housing market. Attacking unemployment, addressing the deficit in order to protect our credit rating and control the use of tax revenues, and eliminating uncertainty in order to expand credit – these are three of the big ones that go beyond party and politics.

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