So the news last week was that the housing market was seemingly getting back on track. Take a gander at this, via Calculated Risk. Based on data put together by Matt Padilla, it tracks foreclosures in Orange County. Now Orange County has certainly been one of the harder hit markets, but still there is no turn around in the trend. The trajectory is straight up. And until foreclosures start to slow down, the housing market can’t really bounce back, now can it?
James Kwak weighs in here.
Question: How do you stimulate the housing market, when virtually no one can get a mortgage of greater than $417,000?
That’s the limit on so-called conforming loans in most parts of the country. Bigger loans, called jumbo mortgages, are hard to get and carry significantly higher interest rates and large down payments. The reality for most people is that everything else is cash beyond the $417,000 conforming loan. Try buying a house on that in one of this country’s talent-magnet cities. And what if you have to renovate? From Bloomberg:
“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.” … Habetz said he had a customer with a 740 credit score who had a down payment of $500,000 on a $1 million home in Easton, Connecticut. The borrower had to wait two weeks for approval when in December he would have gotten the mortgage overnight. “Mortgage lending right now is like wading miles and miles in waist-deep mud,” Habetz said. “It’s so difficult. Jumbo borrowers will be tortured and it’s nothing they should take personally because everybody is getting tortured.”
Expect the housing market to continue in its current zombie state for some time.
Fed Governor Kevin Warsh, in a speech on the Promise and Peril of the New Financial Architecture (via Calculated Risk), argues convincingly I think that the current crisis involves more than housing – a whole lot more:
Many observers maintain that the boom and bust in the housing market are the root cause of the current turmoil. No doubt housing-related losses are negatively affecting household wealth and spending. Moreover, the weakness in housing markets and uncertainty about its path have caused financial institution balance sheets to deteriorate. This situation has further accelerated the deleveraging process and tightened credit conditions for businesses and households…
While housing may well have been the trigger for the onset of the broader financial turmoil, I have long believed it is not the fundamental cause. Indeed, recent financial market developments strongly indicate that housing, as an asset class, does not stand alone. Indeed, the problems associated with housing finance reveal broader failings, including inadequate market discipline, excessive reliance on credit ratings, and poor credit and liquidity risk-management practices by many financial firms.
…I would advance the following: We are witnessing a fundamental reassessment of the value of virtually every asset everywhere in the world.
We are still in the very early phases…
Housing prices still have a long way to go before they hit bottom, when you look at metrics like the ratio of home prices to rents according to this report (and graph) in the New York Times.
One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms. In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody’s Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents. The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.
