Housing Rebound? Not So Fast

Senate Democrats are a dogged bunch. And they’re not easily deterred from their primary duty of kowtowing the big banks. Case in point, the first-time home-buyer tax credit, the controversial bill which provides an $8,000 tax credit (re: subsidy) for new home buyers. Changes in the bill, will provide a $6,500 credit to homeowners “earning up to $250,000 for couples” if they have lived in their home for five years.

The Senate is pressing ahead with the bill despite overwhelming disapproval from liberal and conservative economists. Their main objection? It’s a waste of money. The Brookings Institute estimates that the $8,000 credit costs taxpayers $43,000 per home. This is based on the fact that 85% of the nearly 2 million buyers were planning to buy a home anyway. The new add-ons to the bill mean that its final costs will be much greater than originally anticipated.

The senate bill is nothing but a $6,500 bribe to keep people in their homes and out of foreclosure. It’s another giveaway to the banks so they don’t have to face the mountain of debt they generated through fraudulent loans. The banks aren’t satisfied with merely blowing up the financial system and extracting trillions of dollars from taxpayers to fix the mess they left behind. Now they want to ensure that they’re a constant drain on public resources, by diverting dollars earmarked for healthcare or state aid into broken institutions run by high-stakes gamblers. The Congress has played a critical role in this fiasco.

The Senate has also shrugged off the many reports of fraud related to the home-buyer credit. Here’s an excerpt from the Wall Street Journal which summarizes hundreds of similar stories:

News of the latest taxpayer-funded mortgage scam has traveled fast. The Treasury’s inspector general for tax administration, J. Russell George, recently told Congress that at least 19,000 filers hadn’t purchased a home when they claimed the credit. For another 74,000 filers, claiming a total of $500 million in credits, evidence suggests that they weren’t first-time buyers.

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old. This pre-K housing whiz likely bought because mom and dad make too much to qualify for the full credit…

As a “refundable” tax credit, it guarantees the claimants will get cash back even if they paid no taxes. A lack of documentation requirements also makes this program a slow pitch in the middle of the strike zone for scammers. The Internal Revenue Service and the Justice Department are pursuing more than 100 criminal investigations related to the credit, and the IRS is reportedly trying to audit almost everyone who claims it this year. ((“First Time Fraudsters,” Wall Street Journal))

Does it bother senators that the public is being plucked like a Thanksgiving turkey, once again?

Everything that has been done to prop up the ailing housing market, has really been aimed at helping the banks. The Fed has launched the biggest government intervention in history– purchasing more than $900 billion in mortgage-backed securities, $200 billion in agency debt, and another $300 billion in long-term US Treasuries–all to stabilize a market which was sabotaged by the Fed’s low interest rates and the banks abyssal lending standards. Private label “securitized” mortgages have defaulted at 5-times the rate of conventional loans, clear proof of fraud.

The Fed’s capital injections will eventually add $2 trillion to the aggregate value of the residential real estate market. The Fed is doing its best to prevent the market from clearing by keeping home prices artificially high. That’s the only way to avoid more bank failures.

The Fed’s intervention is a sign of desperation. In the long-run, the action is unlikely to have any bearing on prices which will be determined by incomes and supply. Housing inventory is still unusually high, which is putting downward pressure on prices. Distress sales (short sales, foreclosures etc) represent 45 percent of all home sales, which reduces the number of creditworthy buyers for organic sales.

So, what has the Fed’s multi-trillion dollar intervention achieved aside from creating a fake market with fake interest rates, fake financing, fake down-payment ($8,000 first-time home buyer giveaway) and fake media coverage of a fake rebound. Not much, really. The Wall Street Journal‘s James Hagerty sums it up like this:

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday…

But these artificial props won’t last forever and may have created a false bottom in the market.

“The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.” ((James Hagerty, “Uncle Sam Adds 5% to Prices of Homes, Goldman Says,” Wall Street Journal))

Over $1 trillion has been committed so far, and prices have budged a mere 5%. Does Fed chair Ben Bernanke really believe this is an affordable plan?

The Administration’s Making Home Affordable Modification Program (HAMP) will have only a marginal effect on the rate of foreclosures when the next wave of pay-option adjustable-rate mortgages and other oddball loans come due. And, when the loans reset, more banks will default pushing even more inventory onto the market at firesale prices. Foreclosures have exceeded 300,000 for the last 3 months and the inventory-backlog suggests the worst is still to come.

This is from Diana Golobay at housingwire.com:

Recent analysis by the Amherst Securities Group indicates the housing industry will not only worsen as a delayed pipeline of foreclosed loans begins to liquidate, but that the Administration’s Making Home Affordable Modification Program (HAMP) will have no lasting effect on keeping delinquent loans current…

Amherst estimates this “shadow inventory” at around 7m housing units, or 135% of a full year of existing home sales, compared with 1.27m units in this bucket in early 2005. The backlog is due to high transition rates, low cure rates and a longer timeline for loan liquidation — in other words, loans continue to transition into the delinquency/foreclosure pipeline at a rapid pace, but are moving out at a very slow pace.

The loans, however, are “destined to liquidate” and will impact the signs of recovery seen in recent months by pulling down house prices through distressed sales. ((Diana Golobay, “Amherst Sees 7m Foreclosures Poised to Distress House Prices,” housingwire.com))

So, what can Bernanke do to head-off a bigger meltdown in housing?

The Fed revealed its long-term strategy in the minutes of its September 22-23 FOMC meeting. Here’s an except from the Fed’s statement:

The Committee agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated.

In other words, the Fed is planning to continue its quantitative easing (QE) program (monetisation) which pumps liquidity into the system and puts more downward pressure on the dollar. Bernanke is trying to inflate-away the problems in housing, but with little success. In fact, according to Robert Shiller, who created the index for measuring house prices in 20 major cities, the Fed may have generated another bubble. This is from the UK Telegraph:

The S&P Case-Shiller index… showed that house prices were up 1 percent from the previous month, following a 1.2 percent increase in July. However, August’s prices were still down 11.3 percent year-on-year, highlighting the continued problems in the market as a whole. Professor Shiller, who is credited with calling both the late 1990’s tech market bubble and the bubble that led to the US property market crash three years ago, pointed to price increases in areas including San Francisco and Minneapolis, which have seen double-digit gains in the last four months. He said that if these rises are viewed on an annualised basis they could be seen as “bubble territory.’ ((UK Telegraph))

Housing prices will continue to tumble through 2010 no matter what the Fed does. In fact, on Wednesday the Commerce Dept reported that sales of new one-family houses in September dropped to a rate of 402,000, down 3.8 percent from August. That’s 7.8 percent below 2008, well below economists worst predictions. The news sent stocks plummeting.

The sense that the economy is returning to normal, is an illusion nurtured by the financial media. This week’s dismal consumer confidence data, shows that the public “isn’t buying it.” And, neither are investors, who continue to avoid equities despite a seven-month, 68 percent rally in global stocks. According to Bloomberg, “Almost 40 percent of investors and analysts in the latest quarterly survey… say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.” The mood is grim. The public has lost faith in the media, in the Fed, and in public institutions. The “cheery predictions” are no longer having any effect. No doubt, this will make it even harder to stabilize the teetering housing market.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com. Read other articles by Mike.

6 comments on this article so far ...

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  1. Michael Kenny said on November 2nd, 2009 at 10:35am #

    I really wonder why Mr Whitney (or, since he told us way back he knows nothing about economics, whoever ghost-writes the articles) bothers to continue to write these articles! One day, the dollar is going to crash, the next day it isn’t, the day after, it will crash in 15 years but not 5 years, then it won’t crash because “crash” means a decline in value only when there’s an R in the month, then the whole world is lining up to buy US Treasury bonds because they’re unbeatable value, now nobody wants them at any price and so on! His previous article of only a day or two ago began with the words “the recession is over”. Today “the sense that the economy is returning to normal, is an illusion nurtured by the financial media”! You’d almost think that these articles were written by several different people who disagreed violently with each other! Is there really any point in that?

  2. Melissa said on November 2nd, 2009 at 11:38am #

    Perhaps the point is to catapult the feelings of uncertainty.

    I hear what you’re saying Michael Kenny. ? Mr. Whitney is not worth a whit in the economics arena. He’s good at confusing people, though.

    Gotta go chase my tail.


  3. Don Hawkins said on November 2nd, 2009 at 12:43pm #


    Read this by mike a few years back. Mike again thanks for your witting as you helped me to sell my house about 4 years ago and right now in Florida where I did live deep do do. Come to think of it we are all in deep do do.

  4. Serfdumb said on November 2nd, 2009 at 12:45pm #

    Yes, perhaps his point is to catapult feelings of uncertainty. In fact he catapulted enough feelings of uncertainty back in 2007 regarding the subprime mortgage meltdown and it’s impact on the economy as a whole that I pulled out of the market before the dow tumbled from 14000 to 6500.
    Yah, what a hack huh?
    I don’t see anyone here sticking their necks out like he does. It’s easy to criticize, not so easy to analyze. It seems a lot of economists feel if we can just generate enough enthusiasm everything is going to be fine. Yeah, right.

  5. Don Hawkins said on November 2nd, 2009 at 1:19pm #

    I can read Einstein or Hawking, Hansen, Max, Bozh and understand most of it. Now for me to try and understand the economy or the market well thinking in reverse or backwards is hard for me. Roubini sort of but Mike has a touch of genius at times and that’s what I look for.

  6. Art said on November 2nd, 2009 at 2:13pm #

    One of the problems with listening to economists is they may have a lot of information and theories, but is it helpful in looking at what MAY happen in the future? “Gut Feelings” by Gerd Gigerenzer shows beyond a doubt how poorly stock market “experts” and their complicated predictive algorithms do when compared to choices the uninformed masses might make if they just relied on name recognition. Having one or two “good reasons” to think we haven’t reached ‘bottom’ yet on this may be just plain horse sense. Seeing people still losing jobs and houses by the thousands in your own community may be sufficient reason for us common folk to sit on the sidelines and wait for something that has more recovery quack and waddle than pundit platitudes.

    Despite the efforts of the banks, politicians and their sycophants to make the current Mortgage Crisis complicated and now “recovering”, Mike puts forward the idea that it is very simple. The banks, the Fed and the politicians lied. The proof Mike offers may be more convoluted, as the guilty have worked hard to make this process as opaque as humanly possible. And predicting the future will change as the “deciders” try new ways to fleece an already shivering flock.

    My from-the-trenches 2 cents? Having read Galbraith’s history of the ’29 Crash etc., the main difference I see is this time the politicians caved to the banks et. al. and tossed in huge volumes public money to attempt to re-inflate/create the next investment bubble. (Anyone wanna buy some tulip bulbs?) Only time will tell if this was smarter than waiting for the worst of the banks/car companies to fail, the remainder to be willing to be regulated, and then using the Ace-in-the-hole that public funds should be.

    But this time the public cupboard is bare.