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Caveat Lector - Politics, Government and the Free Press – by Mark B. Evans

Hey Obama, it’s about homes, stupid

by on Sep. 09, 2011, under Politics

During the 1992 presidential election, James Carville coined the now-cliched phrase “It’s the economy, stupid” to sum up what the election was all about.

This go round, the phrase is back, though it’s been modified to “It’s about jobs, stupid.” Which is why President Obama addressed a joint session of Congress yesterday to propose a new jobs stimulus plan, a plan promptly rejected by Republican Congressional leaders and all of the Republican candidates for president.

But high unemployment and a sputtering economy are not what it’s all about.

It’s about homes, stupid.

The burst housing bubble is what got us into this mess and it will be the recovery of the housing market that gets us out. America has a consumer-driven economy and the engine powering that car is the housing market. And for the past four years, the engine has been out of gas.

We have more wealth in our homes than in any other sector of the economy. At the height of the hyper-inflated housing bubble in 2007 American homes were worth an estimated $66 trillion. Two years later, they were worth $49 trillion (It’s back up to about $56 trillion now).

That $17 trillion kick to the groin is what doubled over the American economy. And as any man can tell you, if you take a shot to the nards, it takes a while to recover.

The question for the President and the Congress is: Can they do anything to help speed the recovery?

Liberal economists say yes, conservative economists say no. But all of the economists agree that no amount of jobs stimuli will have much effect on the economy until imbalances in the housing market are resolved.

There are four main problems keeping the housing market from recovering:

• Millions of foreclosed homes and millions more in the process of foreclosure. In order to get these assets off their books, banks have been increasingly willing to accept short sales – selling homes for less than what is owed. Short sales are a drag on home values.

• Millions of excess housing inventory. There is an enormous quantity of vacant homes, especially in the states hit hardest by the burst housing bubble – Arizona, Nevada and Florida. Other parts of the country may recover faster than these states because the excess inventory has to be absorbed before homebuilders start building again. Excess supply is a drag on home values.

• Millions of homeowners “underwater” on their home loans. Many Americans refinanced their loans in the bubble years and the loss of home value has them owing more than what they can sell the house for. This is preventing homeowners from taking advantage of historically low mortgage rates and traps owners in their homes. If they live in Arizona but could get a better job in Texas, they can’t move because they can’t sell their home. A workforce that’s immobile is a drag on home values because it holds down demand.

• Millions of homes stuck between 80 percent and 100 of Loan to Value ratio. Most lenders won’t refinance a home unless it has at least 20 percent equity (an LTV of 80 or below) and they won’t loan money for a home purchase contingent on an existing home sale unless there is enough equity in the sale home to equal a 20 percent down payment on the new home. The loss of equity, even if a home loan is “above water” is preventing millions of people from selling their homes or buying news ones. That, too, is a drag on demand.

Conservatives want the market to play out and let these problems resolve themselves. But the problem with that is it may take anywhere from two to five years. Which means the economy won’t recover for two-to-five years, no matter how many tax cuts or road building bills Congress passes.

That’s why liberals want something done about the housing market. But they’re divided about what to do because of the law of unintended consequences.

Any injection of federal cash into mortgages to prevent foreclosures alters the lending market and any injection of federal money into the housing market creates artificial demand to drive up prices that will have to be suppressed later by the extraction of that cash through the sale of the excess inventory. It was the federal government’s “easy money” home lending policies that helped blow up the bubble in the first place, so any attempt to blow it up again could end up making things worse.

So it’s damned if they do and damned if they don’t.

The fallback solution has been to create an artificial supply of jobs through federal spending. The thinking is that by reducing the unemployment rate it will halt the foreclosure rate and buy time for the slow increase in the economy and the population to absorb the excess housing inventory and get home values moving up again.

But that will only work if the federal spending creates millions of jobs to offset the 7 million or so lost in the recession.

Paltry payroll tax breaks and few hundred billion for some road projects ain’t going to get it done.

Which brings Obama back to, “It’s about homes, stupid.”

Find a solution to the housing market in the next year, and Obama gets to be president again.

Don’t and he won’t.

This entry was posted on Friday, September 9th, 2011 at 11:14 am and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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  • Mike Brewer

    Good thesis Mark. A few observations. My oldest son works as an underwriter for a the Loss Mitigation Division of a major bank. He indicates that nearly 70% of the loan modifications are not working because they have to stay current for at least 90 days for the modification to become permanent.  They are not staying current because they cannot find work that replicates the income of previous jobs–the ones we sent overseas and are not coming back–ever.  So the housing market is intimately related to a re-tooling of American jobs.  In 1967, 97% of 30-50 year-old men with only a high-school diploma were working. In 2010 that figure is now 76 percent. The erosion of employment for American males is catastrophic and is an a priori to any  housing recovery.  There simply is no upward movement for the middle class worker, and it scares the crap out of most modern day parents. It is no wonder so many young men and women are flocking to the Armed Forces, none of whom are having any problem meeting quota.
    The other note, is the use of “upside down in my home.” You hear this siren cry everywhere. Statistically it is accurate. On a day to day practical basis it is of little relevancy. We have forgotten that homes are to live in! The asset moniker has exceeded the primary reason to own a home. Very few of these upside down folks have any intention of moving or refinancing.  It is not as bad as it seems.
    The oversupply of homes is indeed a problem. Yet the bargains are giving some families and opportunity to flee stress filled urban environments for a higher quality of life. Which in turn is depressing those markets they are leaving and aggravating the high urban un-employment issues. 
    As a bit of a contrarian, and a retired real estate professional, we need an infusion of new economic indicators if America is to shine again. We cannot have an entire economy based on brick and mortar development. That is not the way of  an interwoven global economy.  Levitt Town is history.

  • http://www.centerforsustainabledevelopment.net Hugh Holub

    Good commentary. The problem is the Wall Street scamsters wrecked the home financing system and until this is fixed, we aren’t going to absorb the existing stock of vacant homes and start building news ones. Maybe we need a very selective tornado outbreak that juck sucks up vacant foreclosed homes.

  • Judith Clark

    @Mike Brewer-”The erosion of employment for American males is catastrophic and is an a priori to any  housing recovery.” Pu-leez! What are we, dog food? It hasn’t been any easier for women than men, that’s for sure.
    Now, as for the big banks and mortgage companies with their pathetic, too little, too late loan “modifications”. They need get up off their big, fat piles of money and not modify the payments and interest rates, but adjust the values of the homes that they jacked up. I do not say the government should handle this, except to force their friends, the fat cat banks, to actually do it. Why should we pay again for letting our world be screwed up? Make no mistake, the banks, mortgage brokers and wall street people did mess up our economy with the help of our friendly, elected officials.
    Maybe some people don’t want to move but they don’t want to pay some huge, over inflated payment on a house that may never regain the value it was purchased for, especially since they could rent one down the street for a fraction of the monthly amount or buy one just like it next door for $100,000 less.  The next trend will be for more and more people to just walk away, after first pre-qualifying for a nice, new home somewhere else. The new house will priced like it should be and should have been. I have spoken to a dozen people lately who see this as their only option, some after months of trying to get some little, piddly modification.  
    People will do what they have to for their families and after this is all over, the norms of our society may just be a bit adjusted to a new reality. The stigmas of financial failures will not be quite what they once were.   
    Add this new dynamic of homeowners to the current pile of foreclosures and what are going to have? A whole lot more empty houses. The banks aren’t too worried about that, though. They are bundling their repos into nice packages and selling them to, in some cases overseas (read Chinese) companies to be sold at rock bottom prices. Oh, yeah, the banks win again.

    • O-dog

      I only want to interject the following:
      1) It does seem a little retrogressive to exclude women from such a statement about unemployment and the economy.
      2) I don’t believe one can walk away from a house after closing the deal on another (perhaps this is what you meant when you said “prequalifying”) without committing mortgage fraud.
      3) However, I agree that the walk-away is becoming a new norm and foreclosure does not mean what it once did, either financially or culturally.
      4) But mostly I just wanted to say that your profile picture is unbelievably adorable. (Please don’t suddenly change it to something that makes that comment sound creepy.)

      • Judith Clark

        Mortgage fraud? Look around you, the banks and mortgage companies committed fraud on all of us. Hey, qualify for a mortgage, stop paying for the other one. In some places, it’s taking over a year to actually repossess a home. How can they say you planned that? I remember this happening in Denver in the 80′s. Condos were the “thing” for awhile and then the economy tanked. People got older, had families and needed to get bigger places but it was impossible to sell one. So many people did that there that it was commonplace.
        I’m glad you like the ferret or whatever it is. I don’t know where it came from or how I would get rid of it!

        • O-dog

          I’ll defer to the ferret on this one.

  • http://pointmantucson.yuku.com/ Michael Patrick Brewer

    I knew there would be some feedback on the male employment thing. I spoke to my wife about this, and probably should have clarified more of the data. I am fully aware of the plight of women, fully. I once lobbied for female commercial property managers to be paid the same as their male counterparts.  Even my daughter calls me a feminist sympathizer! However the statistics for male employment and reduced wages over the past 40 years are indeed catastrophic and numerically exceed that of women who sad to say have always had a glass ceiling. The intent of the comment was not to compare nor exclude women. My apologies.
    In fact, thousands are walking from their homes. Most of the walking is in the jumbo loan category of  $800,000.00 and up. They simply have enough money to not care about a credit rating. And yes homes are being packaged for offshore investors. I cannot imagine why the “Take Back America” folks do not address this eroding sovereignty issue.  There were 4 short sales on my block in the past 6 months. All of them opened Escrow with an LLC based in India.  I have been in Real Estate for 33 years.

  • Rabberr

    Why are most all homes decreasing in value, most below what is owed on them and some even below the cost to rebuild them if they were somehow destroyed? Because appraisers are using the lowest values in neighborhoods as comparables for all the homes. This means that a home foreclosed by the lender, then sold at a deep discount (not its true and fair value, which should never be below cost of replacement) has created a new low value for all homes in the immediate vicinity, which included homes that are not distressed or at risk of being foreclosed. Guess what? Responsible homeowners that have faithfully made their mortgage payments have now lost a ton of equity. They can’t get a remodeling loan or sell if they have to relocate for job or retirement reasons. The building trades (the biggest sector of unemployed I believe) don’t get work. And so it goes.

    Banks are supporting this wrongheaded philosophy  because they don’t want bad loans on the books and they think it will work toward a recovery by flushing out the bad loans. What’s really happening is that its creating more bad loans and causing high unemployment to boot. The solution is to have two distinct levels of appraisal. One level for distressed properties and the other for those that are not. This will result in favorable appraisals which banks can lend against. The result will be that jobs will start to come back and the economy will begin to recover. The distressed homes will eventually be reduced to normal levels by customary market forces. 

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