A. Gary Shilling has recently contributed a three-part series offering the most cogent analysis of the challenges facing the
US housing market. A must read for any one who wants to know where we are in the housing cycle in the US.
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(BN) Why Renters Rule U.S. Housing Market (Part 1): A. Gary Shilling
Bloomberg News
The collapse in housing and the 33 percent plunge in house prices since 2006 are favoring renting over homeownership. This trend will dominate the housing market for the next four or five years, and put additional pressure on a weak economy.
Policy makers in Washington continue to have a soft spot for homeownership. Many recent government actions can be viewed as attempts to keep people in their homes, even owners who clearly can’t afford them. In addition to specific plans such as the
Home Affordable Modification Program, or HAMP, and the Home Affordable Refinance Program, or HARP, the Obama administration is trying to revive the moribund housing sector by encouraging mortgage lenders and servicers to refinance loans at lower rates.
This reduces interest income for banks, which are now compelled by the Dodd-Frank law to retain 5 percent of the credit risk on lower-quality residential mortgages that are securitized and sold to others. Furthermore, banks are reluctant to refinance loans that
Fannie Mae and Freddie Mac (NMCMFUS) then guarantee and put back to the lenders if they find any defects. The White House plan is a tough sell.
Refinancing Woes
As banks deleverage and mortgage activities increasingly involve unwanted loans, the ability to deal with refinancing has diminished. Four banks now control more than 60 percent of the mortgage market, and many mortgage servicers have reduced staff or been slow to gear up to handle delinquent mortgages and refinancings. Except for those who qualify for HARP, refinancing is highly unlikely for 8 million owners who are underwater -- owing more than the value of their homes -- because new terms are treated as new loans. Those who have positive home equity face dramatically tightened lending standards, a clogged refinancing system and new fees that can wipe out the savings from refinancing.
Almost 90 percent of mortgages today are only originated because of guarantees from Freddie Mac, Fannie Mae and the
Federal Housing Authority, and all three have raised their fees substantially. As a result, many of the 20 million borrowers who could cut their mortgage rates by more than one percentage point through refinancing are unable to benefit.
--
Second Mortgages: Refinancing underwater borrowers is tough when they have second mortgages that also have to be renegotiated, or if mortgage insurers have to agree to the new loans. Many borrowers can’t qualify for refinancing because of tightened lending standards. Fannie, Freddie and the FHA have strengthened their requirements because of pressure from the administration to avoid more losses on bad mortgages. High credit scores are needed to refinance outside HARP, along with two years of tax returns, proof of income and recent evidence of assets such as retirement and brokerage accounts.
During the housing boom, appraisals for house purchases were generous. (And why not? Everyone was certain that house prices would rise indefinitely.) Cooperating appraisers were often recommended by real-estate brokers and mortgage lenders who wanted the deals to go through. After the house-price collapse, however, appraisals became very conservative, as lenders pressured appraisers to make low estimates.
-- Postponed Foreclosures: Foreclosures (HOMFCLOS) have been curtailed for several years, mainly because the administration essentially told lenders and servicers to hold off while they attempted mortgage modifications. Those efforts largely failed. Then the industry voluntarily imposed a moratorium while it was caught in the robo-signing flap, in which documents were approved without proper examination. More recently, lenders and servicers have been trying to avoid throwing people out of their homes as the industry worked out the recently announced restitution with the federal government and state attorneys general for troubled mortgages. As a result, foreclosures in 2011 fell significantly from 2010, and in the third quarter were the lowest since 2007.
Sadly, these efforts to keep people in houses they can’t afford are simply prolonging the process of repairing the housing mess and getting rid of excess inventories.
These measures are the opposite of the successful program led by the
Resolution Trust Corp. to clean up the savings-and- loan mess two decades ago, when loans, other assets and whole financial institutions were sold off quickly to private buyers, at very low prices. As we discovered then, large inventories of distressed assets overhang the market and depress prices. To rejuvenate markets, initial sales at low prices are needed to attract buyers and lead to higher prices.
-- Sagging Homeownership: Despite all the efforts to keep people in their houses, homeownership is falling. It dropped to 66 percent in the fourth quarter of 2011, compared with a peak of 69.2 percent in the fourth quarter of 2004. Meanwhile, the 33.5 percent drop in median single-family house prices is the first nationwide decline since 1930s.
Growing Delinquencies
Foreclosures, high unemployment, tight lending standards and lack of money for down payments are playing a role. In the second quarter of 2011, at least 3.6 million mortgages were delinquent and at risk of foreclosure; that could climb to 5 million with further house-price declines and if the recession I forecast for this year takes hold.
The FHA reported that 711,082 single-family loans it insured were seriously delinquent in December 2011, up 3.2 percent from November, and up 18.9 percent compared with December 2010. That pushed the seriously delinquent rate to 9.59 percent in December from 9.34 percent in November and 8.65 percent in December 2010.
Many people who are technically homeowners are really renters. They put little if anything down. In many cases, the equity is negative when, for example, home-improvement loans piggybacked on first mortgages and brought total indebtedness to more than 100 percent of the house value. Many also planned to refinance their mortgages with cash-outs due to appreciation before their mortgage rates reset upward or, in some cases, even before they skipped enough monthly payments to be foreclosed.
-- Rent-Free Renters: Since 2006, 3.1 million people are essentially living rent-free by not paying their monthly mortgage payments. Assuming a monthly mortgage bill equivalent to the national average of $1,721 per person, these nonpayers have increased their purchasing power for other items by $65 billion at annual rates, or the equivalent of 5.6 percent of after-tax income.
That is a big number, but then 12.5 percent of residential mortgages are past due or in foreclosure. This may be an important reason that consumer spending has held up as well as it has in this recovery, despite all the pressure to increase the saving rate and reduce debt. Nevertheless, as heavy foreclosures resume and ex-homeowners are forced to pay rent, this free money will evaporate.
-- Ripple Effect: When house prices were rising, Americans were eager to keep their houses. So the mortgage was the first bill they paid each month, even if that meant they postponed payment on credit cards, cars and student loans. Now, with house prices falling, mortgages are paid last or not at all, especially by the mortgage-holders who are underwater and may be strategically defaulting.
If historical trends hold, the total homeownership rate will return to its earlier base level of 64 percent by the fourth quarter of 2016. Continuing the average annual growth in households over the last decade of 891,000 would increase the total number by 4.5 million by the fourth quarter of 2016. This is enough to increase the number of new homeowners by 550,000 even with that further drop in the homeownership rate.
But it also means the addition of 3.9 million new renters, or 780,000 per year. This doesn’t suggest that we are becoming a nation of renters. Instead, it reflects the elimination of the widely held belief that house prices always rise and the end of loose lending practices that drove the homeownership rate to its 2004 peak. In fact, the reversal to falling prices and the extraordinarily tight lending standards may push the homeownership rate below that 64 percent norm; it would now be 60.9 percent if all those with mortgages that are delinquent or in foreclosure become ex-homeowners.
-- Affordability (AFFD): There are many, including the always bullish National Association of Realtors, who believe that homeownership is bound to rise because houses are now so affordable. In calculating its housing affordability index, the association assumes that a family with median income buys a median-priced single-family house with 20 percent down and finances at the current 30-year fixed mortgage rate. The collapse in house prices and decline in mortgage rates in recent years have more than offset the weakness in median family income, which, according to the Realtors’ group, dropped from $63,366 in 2008 to a $60,824 average for the first 11 months of 2011.
Nevertheless, it is impossible to compare the current attractiveness of buying a home and the conditions in the 1990s and early 2000s. Unemployment rates were much lower then, and house prices were rising as they had been since the 1930s. Financing a mortgage was easy with little or nothing down and spotty credit. Then, huge house-price declines and widespread foreclosures were unthinkable.
-- Weak Earnings: Furthermore, real weekly earnings are falling in what is supposed to be an economic recovery, even as payroll employment growth has been modest. Long-term unemployment is now becoming common, with 43 percent of the unemployed out of work 27 weeks or more and the average length of joblessness at 40 weeks. Job openings have been rising, but hiring is little changed because many of the long-term unemployed, and the newcomers to the job market, don’t have the required skills. Manufacturing output has revived, but it has been accompanied by the resumption of rapid growth in output per employee, which means production advances have arrested but not reversed the long-term downtrend in manufacturing employment.
Realistic housing affordability is also subdued by the 10.7 million underwater homeowners who cannot move to different, perhaps more expensive houses and thereby free up starter houses for new homebuyers. A recent study reveals that underwater borrowers are 30 percent less likely to move than renters or those with positive home equity.
-- Expensive Houses: Despite the collapse in prices, homeownership is still expensive relative to rentals, even as apartment rental rates rise and vacancies decline. Moody’s Analytics Inc. calculates a ratio of home prices to yearly rents at 11.3, down from the bubble peak of 18.5, but still higher than the 1989-2003 average of 10. You’d expect house prices to be lower than average in relation to rents, not higher, now that prices are falling.
Rents have to be higher for landlords to offset the eroding value of their properties. The decline in a rental house’s price is just another cost like taxes and maintenance. In any case, the house price-to-rent ratio is only relevant to the few who can qualify to buy.
In past decades, houses have sold for about 15 times rental income. That was true of the post-World War II years, when owners of rental properties expected inflation to enhance their 6.7 percent return, not including maintenance costs and property taxes. If I’m right about the outlook for slow economic growth and falling house prices, houses and apartments are more likely to sell below 10 times rental income.
The consumer retrenchment and recession I foresee for this year will only add to the lack of affordability of owning houses and to the attractiveness of renting. With it, unemployment will rise, while incomes will fall further. As employment drops, the duration of unemployment will rise, labor force participation will fall and median single-family house prices will decline an additional 20 percent. That will definitely make ownership less attractive even if it raises the Realtors’ housing affordability index.
(A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. This is the first of a three-part series.)
Read more opinion online from Bloomberg View.
To contact the writer of this article: A. Gary Shilling at
insight@agaryshilling.com.
PART 2
(BN) Why Renters Rule U.S. Housing Market (Part 2): A. Gary Shilling
Bloomberg News, sent from my iPad.
Why Renters Rule U.S. Housing Market (Part 2): A. Gary Shilling
In making my case for continued housing weakness, I’ve emphasized the negative effect of excess inventories on house sales, prices, new construction and just about every other aspect of residential real estate.
In housing, as in every goods-producing sector, excess inventories are the mortal enemy of prices. Lower prices are needed to unload surplus inventory, yet they also lead to the creation of more inventory by anxious sellers. The plight of house sellers and the reluctance of buyers are made worse by the realization that house prices can fall, and are falling for the first time in 70 years.
There are about 2 million excess housing units in the U.S., over and above normal inventory working levels. Before the housing collapse began in 2006, housing starts and completions were volatile but averaged about 1.5 million per year. So a 2 million excess is much more than the previous annual average build.
Furthermore, that excess is rising as homeownership declines as a result of foreclosures, unemployment, inability to meet mortgage standards or reluctance to own a depreciating asset.
Inventory Count
Many people think that house inventories are coming under control. They point to the declines in inventories in relation to sales for new and existing homes, yet that calculus doesn’t include the 5 million or so housing units with delinquent mortgages or those in foreclosure, much less the additional troubled loans that are probable in years ahead.
They also don’t include foreclosed vacant houses that haven’t been listed for sale and vacant units that owners pulled off the market. These vacancies are included in the Census Bureau category called “Held off the market for other reasons,” and they now number 3.6 million, up 1 million from 2006. Falling house prices are associated with declining residential listings as disappointed sellers retreat in hopes of higher prices later.
-- Foreclosures Down: New foreclosures have dropped considerably in the last two years, but for temporary reasons. RealtyTrac Inc. estimates that there were 804,000 bank repossessions in 2011, down from 1.05 million in 2010. Nevertheless, the Federal Housing Administration’s seriously delinquent mortgages, often foreclosures in waiting, jumped from 8.2 percent of the loans it guaranteed in June 2011 to 9.6 percent in December.
The federal government encouraged lenders and mortgage servicers to delay foreclosures as modifications were attempted. There was also the voluntary moratorium on foreclosures during the robo-signing flap. This pause continued while the five largest mortgage servicers -- Ally Financial Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- worked on the recent settlement with the federal government and state attorneys general that called for $25 billion in mortgage writedowns and other aid to homeowners.
-- The Logjam Breaks: With that settlement completed, mortgage servicers and lenders will probably step up foreclosures. When they do, the so-called real estate owned -- the properties owned by lenders -- will be dumped on the market with all deliberate speed.
The effect on prices will be dramatic. The National Association of Realtors’ survey for December 2011 found that foreclosure sales were at an average price discount of 22 percent, compared with 20 percent in December 2010. Short sales, in which the lender forgives the difference between the sale price and the mortgage principal, closed 13 percent below market value. As of the second quarter of 2011, RealtyTrac found that real-estate-owned sales were at a huge 40 percent discount while short sale discounts averaged 12 percent.
These discounts tend to drag down the prices of other existing houses and force homebuilders to sell properties below cost in order to compete.
The trigger of renewed foreclosures will probably initiate another big drop in house prices, returning them to the long- term trend identified by Robert Shiller of Yale University. This measure of median single-family-house prices is adjusted for general inflation and for the tendency of houses to get bigger over time and therefore more expensive.
With these two corrections, prices in 1990 were about the same as they were a century earlier. Then came the bubble, followed by collapse, but it still will take a 22 percent decline to return prices to the flat long-term trend that prevailed between 1890 and 2000. Because corrections often overshoot on the downside, our forecast of a further 20 percent decline may be conservative. That would bring the total peak-to- trough decline to 46 percent.
-- Spreading Effects: That further drop would have devastating effects. The equity of the average homeowner with a mortgage has already dropped to 17 percent, from almost 50 percent in the early 1980s, due to home-equity withdrawal and falling prices. An additional 20 percent price decline would push homeowner equity into single digits with few borrowers having any appreciable equity left. It would also boost the percentage of mortgages that are underwater to 40 percent, from the current 22 percent, according to my calculations. The existing underwater loans have already created a $750 billion gap between mortgage principals and house values, according to CoreLogic Inc. The negative effects on consumer spending as well as mortgages and mortgage-backed derivatives would be substantial.
-- How Long?: A principal reason that median single-family- home prices are likely to fall an additional 20 percent is that it will take years to work through the excess house inventory, giving plenty of time for surplus units to depress values. I expect housing starts and completions, now about 650,000 at annual rates, to average 700,000 annually in future years. About 300,000 of those will replace housing units that are torn down or converted to other uses. So the net supply is about 400,000.
The demand side is determined by net household formation. Contrary to popular belief, household formation isn’t closely correlated with population, at least not in a cyclical time frame. By definition, a household is one or more people occupying a separate dwelling unit. So all the forces that make people want to rent or buy -- house prices, unemployment and mortgage standards -- play a role.
Household formation is about as volatile as housing starts and homeownership rates. It surged a decade ago when owning houses was the route to quick wealth; it dropped as prices collapsed. In the boom days when house prices increased 10 percent a year, a homeowner with a 5 percent down payment made a cool 200 percent on his investment each year, neglecting mortgage interest, maintenance and taxes. And, as a bonus, that person had a place to live rent-free.
-- Annual Absorption: Household formation in the fourth quarter of 2011 was 659,000 at annual rates. Over the last decade, it has averaged about 900,000, a number that seems reasonable in years ahead. Note, however, that this number may be on the high side if significant doubling up reduces household formation. Demand of 900,000 and net supply of 400,000 per year, as discussed earlier, will absorb 500,000 of the excess inventory annually. So the 2 million surplus of housing units I’ve identified will take four years to work off.
That would extend the bear market in housing to 2015, a full 10 years after it started.
One of the biggest contributors to this lengthy resolution is that Americans, armed with first-hand experience of falling prices, are beginning to separate their abodes and their investments. In the days when owners thought house values never fell, they bought the biggest homes they could finance. They now know otherwise. Further weakness in the prices of single-family houses and condos due to the depressing effects of excess inventories will add fuel to the fire.
Contrary to general belief, a single-family house, excluding the effects of increasing size and general inflation, has been a flat investment for more than a century. Such properties provide a place to live, but that value is offset, at least in part, by maintenance, taxes, utilities, real estate commissions and other costs. Furthermore, even with the tax deductibility of mortgage interest, renting a single-family house or apartment is cheaper than owning, absent price appreciation. This trend will accelerate in the years of deflation I foresee, when nominal house prices will probably fall on average.
The separation of abodes from investments should work to the advantage of rentals in future years, as it has since the housing bubble burst in 2006.
I’m not suggesting that Americans will give up on single- family owner-occupied housing. That ambition is too deeply embedded in our culture. But many will be more inclined to rent, including empty-nesters who decide to unload their suburban money pits, especially because their homes are falling in price.
Young couples may decide that because houses are no longer a great investment, there’s no reason to strain their financial, physical and emotional resources to buy big, expensive ones as soon as possible. They’ll stay in rental apartments a bit longer and wait until their children are of the age that a single- family house makes sense.
Retiring postwar baby boomers -- those who aren’t locked into underwater mortgages -- are also likely to rent as they separate their investments from their abodes.
-- Single or Multifamily?: I’ve made the case for about 4 million new renters in the next five years or so. But will they rent apartments or single-family houses?
Investors are buying foreclosed and other housing units, most of them single-family. Some did so in 2010, when the new homeowner tax credit briefly raised prices. They expected to flip them promptly, but instead became landlords as prices resumed their decline. Nevertheless, the interest of investors, who are often all-cash buyers, persists. The Realtors’ association reported that in December 2011, 31 percent of all existing house sales were for cash, 21 percent went to investors and 31 percent to first-time homebuyers.
For investors, however, managing single-family houses is challenging. An apartment usually has one or two walls exposed to the weather, but a single-family house has four plus a yard to maintain and a roof that can leak.
-- Apartment Building: Even as investors are buying single- family foreclosed houses, rising apartment rents and declining vacancies have spawned a miniboom in multifamily housing starts, albeit from close to a zero base. Furthermore, some of the growth may be in anticipation of demand from new retirees. Multifamily completions have yet to reflect this trend because it takes about 12 to 18 months to finish an apartment building.
Supply will probably continue to be augmented by conversions of unsold condos to rental apartments. Will multifamily housing soon become more overbuilt and end the increase in rentals and decrease in vacancy rates?
Those in the industry say that until recently, multifamily developers have been cautious. Tight financing has been one reason, with lenders providing 50 percent to 60 percent of the financing, compared with 80 percent in the salad days of 2006. Also, developers, accustomed to 8 percent to 10 percent capitalization rates, are reluctant to accept today’s returns of 4 percent to 5 percent. And banks are hesitant to lend to developers with bad records and favor borrowers with fortresslike balance sheets.
In addition. Fannie Mae (FNM) and Freddie Mac (NMCMFUS) have shied away from multifamily housing after getting stuck with bad apartment loans they bought in 2007 and 2008 as private lenders withdrew. The agencies’ share of multifamily loan purchases leaped to 85 percent in 2009, from 29 percent two years earlier. By 2009, they owned or guaranteed 40 percent of the $325 billion multifamily mortgage market.
-- Slow Start: According to Reis Inc., a New York-based commercial real estate research company, less than 40,000 new multifamily units were finished in 2011, the lowest number in 30 years. In 2012, Reis expects 72,000 to 85,000 new units. Even with robust apartment demand, net absorption -- the surplus of demand over new supply -- fell to 153,000 units in 2011 from 225,000 in 2010. In October of last year, the National Multi- Family Housing Council, a trade group, reported that its National Tightness Index was 56, down from 82 in July and a peak of 90 in April. A reading above 50 indicates that markets are tightening.
My industry contact indicates that conditions justify apartment-building in some markets, such as Los Angeles, San Francisco, New York, Boston, Chicago and Washington, where capitalization rates of about 5 percent for Class A buildings prevail. In many other areas -- such as Detroit and Cleveland -- rents don’t justify new construction and capitalization rates of 6 percent to 7 percent for existing apartment buildings are the rule.
On balance, lender caution will probably curtail any developer zeal to overbuild rental-apartment buildings for a number of years, at least in most cities.
-- Single-Family/Apartment Split: It’s difficult to estimate exactly how the 3.9 million net new renters I forecast through 2016 will be split between rental apartment dwellers and renters of surplus single-family homes, but I will venture some projections. The return of the rental vacancy rate to its earlier norm of 7.6 percent would provide about 750,000 units. An additional 1.5 million would result from an increase of multifamily starts and completions to the earlier norm of 300,000 per year, from the recent annual rates of 200,000. That would leave 1.7 million to be supplied from single-family rentals.
These projections are in line with my estimate that the 2 million excess inventories would be eliminated over the next four years. This consistency suggests that in four or five years, the housing market will return to normal, with the ownership rate back to its 64 percent norm and 3.9 million new rentals supplied by the elimination of excess inventories as well as the return of multifamily starts and completions to the earlier 300,000 annual rate.
Single-family starts and completions in this scenario would continue at current depressed levels of about 400,000 per year, but the elimination of 1.7 million single-family units in excess inventory by converting them to rentals would relieve the downward pressure on prices.
-- Only Projections: These numbers, however, reflect plausible but uncertain assumptions. A lower homeownership rate than the 64 percent average is possible now that Americans know house prices can and do fall. If so, more single-family houses would probably be converted to rentals and apartment construction could be stronger. If more people double up, household formation will be weaker and it will take longer to work off excess inventories, unless weaker new residential construction provides an offset.
In any event, excess house inventory, over and above normal working levels, will be gradually worked off over the next four or five years by new household formation. But about 4 million of the 4.5 million increase in households will be renters of apartments or rental single-family houses.
(A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. Read Part 1 of the series.)
Read more opinion online from Bloomberg View.
To contact the writer of this article: A. Gary Shilling at
insight@agaryshilling.com.
To contact the editor responsible for this article: Max Berley at
mberley@bloomberg.net. Find out more about Bloomberg for iPad:
http://m.bloomberg.com/ipad/
PART 3
(BN) Why Renters Rule U.S. Housing Market (Part 3):
Bloomberg News,
Why Renters Rule U.S. Housing Market (Part 3): A. Gary Shilling
Think of all the recent federal programs to keep people who can’t afford them in their four- bedroom houses.
There are the Home Affordable Modification Program, the Home Affordable Refinancing Program and the Emergency Homeowners’ Loan Program. In addition, there are Hope Now, Hope for Homeowners, the Hardest Hit Funds and, most recently, the proposal to expand HARP to distressed mortgages not covered by Fannie Mae and Freddie Mac.
-- Hopeless HAMP: The administration initially said this program would relieve 3 million to 4 million distressed homeowners, but it’s been a miserable failure. That was to be expected because loose-lending practices put many people in houses so unaffordable that, short of canceling their monthly mortgage payments completely, no modification would return them to financial health. About the only thing HAMP has done is delay foreclosures while lenders, under federal government edict, attempt to modify home loans to reduce total monthly payments on mortgage, credit-card and other debt to 31 percent of income.
Through December 2011, 1.8 million HAMP trial modifications had been initiated, but the monthly pace of new modifications continues to drop. Only 43 percent of the HAMP trials -- 762,839 -- made it to permanent status. Nevertheless, the administration still has hope for the program and has extended it through December 2012.
-- HARP and EHLP: HARP was initiated in June 2009 by the White House to aid 4 million to 5 million homeowners by allowing those with mortgages guaranteed by Fannie Mae and Freddie Mac (NMCMFUS) -- which back almost half the $10.4 trillion of outstanding home loans and 87 percent of recent originations -- to refinance their loans even if they exceed the property’s value by 25 percent. Yet only 894,000 mortgages were subsequently refinanced. And even though Fannie and Freddie (FRE) guarantee about 5 million underwater mortgages, just 70,000 of those refinancings were loans that significantly exceeded the value of the home. Undaunted, the administration liberalized HARP in November and extended it through 2013.
EHLP was set up by the 2010 Dodd-Frank financial reform law to help 30,000 homeowners by providing zero-interest loans of as much as $50,000, which could be forgiven after five years if borrowers stayed current on their mortgage payments. Despite the attractiveness of this offer, of the 100,000 troubled homeowners who applied for EHLP by the Sept. 30, 2011 deadline, only 10,000 to 15,000 are expected to qualify, meaning the program will dispense $330 million to $500 million of the $1 billion it was allocated.
Most recently, the Federal Housing Finance Agency extended HARP to the one-third of all mortgages not covered by Fannie and Freddie and that are instead owned by banks or grouped in mortgage-backed securities sold to investors. The new loans, refinanced at lower interest rates, would be guaranteed by the Federal Housing Administration.
The administration says the program could benefit 3.5 million homeowners in addition to the 11 million who could be helped by programs for borrowers with loans backed by Fannie Mae and Freddie Mac. But as with those efforts, this measure transfers money from mortgage holders to homeowners. The new program will cost $5 billion to $10 billion, which the administration wants to pay for by taxing large banks. Because this would require congressional approval, Republican opposition makes enactment highly unlikely.
-- Try, Try Again: And don’t forget the tax credit for new homeowners that was in effect from 2009 to April 2010, and resulted in a temporary increase in house prices. Many speculators were encouraged to conclude that the price collapse was over and bought foreclosed houses for a quick flip and lots of profit. But as prices fell again and turned expected gains into losses, those investors became landlords and rented their properties hoping that rents and appreciation would bail them out at some point.
Also recall the Fed’s attempts to aid housing by pushing down interest rates. When it cut short-term interest rates to 0 percent, not much happened: Banks were too scared and too restricted to lend, and creditworthy borrowers had plenty of cash and little interest in spending and investing in a very uncertain economic climate.
So the Fed moved to quantitative easing, buying huge quantities of securities. Those purchases provided money to investors in stocks and commodities in late 2010 and early 2011, but there was no multiplier effect. Banks didn’t want to lend the $1.5 trillion in excess reserves created in the process to any but the most reliable creditworthy borrowers, who didn’t want or need to borrow.
With the second round of quantitative easing, initiated in November 2010, the Fed also hoped to push down 10-year Treasury note yields, which would then push lower 30-year fixed-rate mortgage rates, to the benefit of homeowners. This moved the Fed beyond monetary policy and into the realm of fiscal policy, but maybe dire circumstances justified the resulting potential loss of the central bank’s independence.
Nevertheless, the Fed’s second round of purchases didn’t do much to revive house sales or prices. Mortgage rates are only one factor influencing housing activity, and their decline continues to be offset by fear of further drops in prices, high unemployment, strict lending standards, higher loan fees and underwater mortgages.
Yet just as the administration hasn’t given up on its failed attempts to aid housing, lack of success hasn’t deterred the Fed. It subsequently embarked on Operation Twist, selling short-term Treasuries and buying longer issues to push long rates lower without further bloating its balance sheet. And the Fed has hinted at further action if the economy falters this year, as I’m forecasting, perhaps by buying more mortgage- related securities.
-- The Courts: The third branch of government is also trying to keep homeowners in their abodes, especially those who can’t afford them. The Massachusetts Supreme Judicial Court recently voided foreclosure sales on two houses because owners of the loans couldn’t prove that the mortgages had been assigned to them before they were securitized. The frequent change of ownership in the securitization process led to sloppy paperwork with the names of the owners left blank.
In some so-called judicial states, such as Florida, New York and New Jersey, lenders have to go to court to be able to foreclose. This greatly increases the foreclosure time, to 986 days in New York as of the third quarter of 2011 and 749 days in Florida.
Washington’s efforts to reverse the trend away from homeownership and toward rentals will probably continue to be futile, even though the National Association of Realtors reported this week that sales of existing homes increased 4.3 percent in January, to a 4.57 million annual rate, the highest level since May 2010.
Rental apartments should continue to be an interesting investment area for years, as rising rents provide attractive returns. Single-family rentals may also be fruitful if the problems related to large-scale management of houses can be resolved.
(A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. Read Part 1 and Part 2 of the series.)
Read more opinion online from Bloomberg View.
To contact the writer of this article: A. Gary Shilling at
insight@agaryshilling.com.
To contact the editor responsible for this article: Max Berley at
mberley@bloomberg.net. Find out more about Bloomberg for iPad:
http://m.bloomberg.com/ipad/
Data, data, every where 
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