It’s a chilly, rainy day here in New Jersey under iron grey skies. If where you are is sunny, and you’re feeling happy and optimistic, and you want to stay that way, let me strongly suggest that you not finish reading this post. This is where I engage in paranoid fearmongering speculation.
You have been warned.
Actual post continues after the jump.
July 2010: Worst Month Ever for Housing
July’s housing sales numbers were not merely bad; they were catastrophic. They were so bad that even the legacy media outlets noticed and went into full metal jacket panic mode. Here are a few samples:
Housing, the real estate market, it’s a disaster, in plain English. The numbers came out for July today. One economist calls them eye watering. Here’s the big bad number. Sales of existing homes fell off a cliff last month, down 27%. That’s the biggest one-month drop on record in our history. (NBC News)
Economic forecasts were plenty pessimistic ahead of Tuesday’s report by the National Association of Realtors because of other data pointing to weakening sales since the federal tax credit ended in April. The actual numbers were far worse — sales fell more than 27% from June and 25% from a year ago to an annual rate of 3.83 million units. (USA Today)
The latest sign that the economy is losing steam: Home sales fell 27 percent in July, the steepest one-month drop since figures were first compiled in 1968, according to a report released Tuesday. Analysts had expected sales to decline following the expiration of a federal tax credit for homebuyers this spring, but the drop was nearly twice as large as forecast. (Washington Post)
And this drop in sales happened in an historically low interest rate environment, which leaves the talking heads on TV scratching their heads. Many of the commentators talked about how the expiration of the $8,000 homebuyer tax credit led to this unexpectedly large drop in sales. The implication is that if only the tax credit had been extended, or put in place permanently, more people would have bought houses.
I and others within the industry have been saying for months that all that the tax credit did was to pull demand forward and that it seemed very odd that folks would put themselves into hock for hundreds of thousands of dollars over a measly $8,000.
One question that naturally arises is… how could economists be so surprised by July numbers? How the heck are they “unexpected”?
The New *@#&(%#$ Normal
NBC’s Brian Williams says, “What’s equally scary is this: the inventory, the number of unsold homes on the market, rocketed to a 12 and a half month supply.”
Actually Brian, that’s not the really scary thing. The really scary thing is that this is merely the start of the New Normal for residential housing in the United States.
I’ve been writing on the Obama Administration’s new housing policy for the past few weeks. Of course, that meant I had to read a bunch of stuff on impenetrable government websites, boring news sites, and various blogs.
I am forced to conclude that the Obama Administration seeks to redefine American housing by changing the national housing policy. For decades, the national policy on housing has been to encourage homeownership. The creation of Fannie Mae and Freddie Mac, of FHA, of HUD, of various other agencies that are involved in housing and housing finance, the mortgage interest deduction, the bailout of Fannie/Freddie, the wholesale takeover by the Fed of the housing finance market… these were all undergirded by the commitment by the United States that owning a home is part and parcel of the American Dream. One can debate whether such subsidizing of the housing market was a good idea or not, but the fact that the Federal government has long encouraged homeownership is not debatable.
The new housing policy we’ll be seeing come down the pike is one of “sustainable homeownership” combined with encouraging rentals. The Treasury and HUD held a conference recently in which various handpicked experts opined about what needs to happen. Reading between the lines — and referencing a number of other policy moves of late — I have speculated that the following will happen:
- The mortgage interest deduction will be eliminated, or at least sharply scaled back
- Fannie/Freddie will wind down participation in the single family residential market, and raise participation in multifamily housing (aka, rentals)
- The 30-year fixed rate mortgage is headed to the ashbin of history; I rather expect the “new normal” will be something closer to a 10-15 year adjustable rate mortgages that adjust every year or even every quarter.
- Down payments are headed up, up, up from its current levels (some FHA loans are still requiring only 2-3% down); Bill Gross of PIMCO has said that if he were funding mortgages, he’d require a minimum of 30% down payment. I think that’s where we’re headed.
- Some form of national regulation for rentals, in order to (a) encourage rentals by those who would otherwise be first-time homebuyers, and (b) protect renters from eeeeevil landlordz. It may be as heavyhanded as a national rent control regime, or (more likely) an expansion of Section 8 to include far more “middle-income” units.
There will be other changes, of course. But the overall impact is to decrease the pool of buyers, drive housing prices lower, and have fewer transactions. Only those buyers who can easily afford to buy their dream homes, and have significant skin in the game to keep them honest about paying back their loans, will be buying homes in the future.
That’s the New Normal for the housing market.
The 27% drop in July has folks all atwitter with fear and trembling. Guys, 27% will seem like nothing relatively soon. Economists are suggesting that the elimination of $8,000 in first-time homebuyer tax credits is to blame for the historical drop; wait till you see what the elimination of home mortgage interest deduction does. Buyers have lost confidence, commentators commentate. Wait till you see what buyers do when the standard mortgage is not the 30-year fixed at 5% with 10% down, but a 10-year ARM at prime + 2% with 30% down.
That’s the New (*@)(#%&@# Normal for housing.
The Politics of Fingerpointing
Of course, with Republicans quick to jump on Obama and Democrats given the dismal news of July, it may be that the political pressure will force the boys and girls at Treasury and HUD to scale back their ambitious plans.
Again, whether you think the Federal government should be so heavily involved in housing or not, fact is that as of right now, it is. Without significant policy changes, we will probably have gloomy months and years ahead, and a reset of expectations as Glenn Kelman of Redfin says in the New York Times:
His house, he knows, is “an illiquid asset, a long-term asset, something I won’t be able to tap in for cash. But we chose a place we’ll be able to stay for a long time, to ride out any trouble.”
Once upon a time, before everyone from the banks to the buyers to the sellers got greedy, that was how everyone thought about the housing market. And however bumpy the path, that is once again the market’s future, said Mr. Kelman of Redfin.
“It’s not the apocalypse,” he said. “People will buy homes when they need to move or want the house, not when they want to make money. There will be winners and losers — not just, as in years past, winners and bigger winners.”
Yeah, well, if the Administration does successfully push through its program for “sustainable homeownership”, I rather think even the normally unflappable Glenn Kelman would describe that as the apocalypse.
Welcome to the New (*@)%&#@$ Normal. You may now commence the fear and trembling.