The Housing Chronicles Blog: Why housing remains in a deep freeze

Tuesday, February 26, 2008

Why housing remains in a deep freeze

It seems somewhat odd that in places where median prices have fallen by up to 17% -- like Miami -- home sales haven't risen as affordability increases. The reason is that lending standards have become so much stricter, which is seriously blunting the impact of declining prices and lower interest rates. After all, even a 1% interest rate doesn't help you if no one will lend you the money. From a WSJ article:

There were signs of spring last week in housing, with home-builder sentiment and home construction showing glimmers of improvement. But two developments -- tightening lending standards and a surprisingly mixed interest-rate environment -- suggest a real thaw is far from near.

In December, Fannie Mae began demanding bigger down payments from borrowers in housing markets where prices were declining -- which would describe every one of the 20 biggest U.S. housing markets tracked in the S&P/Case-Shiller home-price index.

Last week Freddie Mac, for the second time since November, raised the fees it charges when it buys riskier loans from mortgage lenders. Lenders can either eat these fees or pass them on to borrowers, sometimes in the form of higher mortgage rates...

Freddie Mac says it wants to be compensated for the risk of taking on a mortgage -- setting the lending bar higher to keep defaults low. If it didn't do this, Freddie says, it could be forced to take on more capital, reducing the amount of money available to finance new home purchases.

"We're in one of the worst housing-market reversals in 80 years, and that's going to have an impact on credit risk," Mr. German said. "We're going to have to align our fees with the real risks in the marketplace."

Meanwhile, the Federal Reserve's rate-cutting efforts are having a mixed effect. The three-month London interbank offered rate has come down significantly thanks to Fed rate cuts. That is a boon to many borrowers whose mortgage payments shift with Libor. The average five-year adjustable-rate mortgage interest rate on "conforming" mortgages, those that Fannie and Freddie are allowed to buy, has fallen to 5. 57% from 6.43% when the Fed began its credit-loosening campaign in September, according to HSH Associates, a Pompton Plains, N.J., publisher of mortgage-rate data.

That will help hold down the monthly mortgage bills of many homeowners. Still, these rates haven't fallen nearly as much as the 2.25 percentage points in Fed short-term rate cuts...

This week will bring a barrage of housing news, including reports of preowned- and new-home sales, along with S&P/Case-Shiller and Office of Federal Housing Enterprise Oversight home-price data. Also due out are earnings reports from Freddie Mac, housing-focused retailers Lowe's and Home Depot, and home builder Toll Brothers. Each of these numbers is expected to move in the wrong direction: lower.

Despite the Fed's efforts, in other words, there is really little reason to think the sector is near a clearing from this storm.

It looks to me that the Fed just doesn't have the power to fix these issues, and that another type of government intervention will be needed. I don't see how we're going to avoid some type of government bail-out, especially in an election year. Politics generally seem to trump everything else in the U.S., perhaps including angering those who rent and those not at risk of foreclosure.

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