In a posting earlier this week I made light of Bernanke's attempt to get a recovery in housing moving by using his immense balance sheet at the bank to push longer term rates lower. The reason simply put is if 3.25% mortgage rates will not get people out buying, who thinks 3.00% will get them moving and that is about the extent the fed can make rates move.
Yesterday the market did it's part pushing down pushing down the 10 year US treasury bond to 1.72% and the 30 year bond to 2.78%. Now say what you will, but tying up my money in a 30 year bond and getting paid 2.78% interest is absolutely nuts with the inflation risk you take on. Add in that essentially paying the government to take your money for one year at .10% is equally nuts. The only thing that is not nuts is taking out a home loan at 3.25%. Check out the amortization table on that baby and you will see why, you pay virtually nothing interest wise on the loan. So lowering it to 3.00% is going to save little interest, lower the payment nominally and frankly will do nothing to move the housing market forward. So the question is why and then what to do about it.
First off let's be honest no matter how much Obama begs you to by a home and no matter how much the federal reserve lowers rates getting a home loan now is a crap shoot. You either better have 20% down or sterling credit. Ignore all the BS being said by government types the fact is they have made it tough to get a loan. It begins with the new Dodd-Frank regulation and ends with the soon to be in force international rules called Basil 3. The FDIC has also put the squeeze on as well. All these require banks to keep lots more capital in house and not lend it out. They also say the bank will be penalized severely if they are even caught considering lending to someone that might be a bad loan. If you do not believe it ask someone who actually deals with loans today and the first thing you will hear is they are making nothing commission wise due to the few loans being issued. If you do have good credit be prepared to be pursued for your business however. Of course tight lending leaves out young people who are the prime candidates for homes. It also does not help those who would buy up multiple homes for rental purposes who could deploy more capital if down payments were lower.
Of course there are other reasons for housing not moving and at the top of the list is the employment situation in the US. Two things in play here. One, the simple fact many who are unemployed are underwater in their homes and therefore can not move to new employment even if they wanted to without defaulting on their homes. Two, like it or not the unemployment checks going out right now for what seems a never ending limit keeps many who actually could sell their homes from moving since they are just waiting for a job to open in their current location before moving. Just not much you can do with these situations to make the situation better.
There are some things that could be done to make things eventually turn up and none of them involve Obama or the US government propping up home values, homes loans, or helping to keep people in their homes. Frankly the government got us into this housing mess by pushing banks to make home loans to anyone who breathes and the market complied with lots of home loan arrangements for subprime customers and the accompanying massive building of homes to sell for those loans. The result now is a massive oversupply of homes and lots of homes in or near default. The first thing the government needs to do is just get out of the home business. No more Fannie Mae, no more Freddic Mac, strip Dodd-Frank of the onerous bank regulations, tell Basil 3 to kiss off, and no more loan programs to keep people in homes. Most importantly tell banks no more selling of your home loans to secondary servicers thereby keeping them in house, but in return you can lend to whoever the banks thinks can service a loan. That means a return to home savings and loans and the situation as it was in the past when loans were mostly local. The FDIC would then be only interested in making sure there is enough capital on hand just in case the bank goes down, but with homes loans kept in house trust me that will be an outlier. Ask Canada how this works since they basically handle home lending this way and never had the housing debacle the US is saddled with currently.
Of course when you allow all those loans to default you will get even more supply on the market. But in return banks and loan firms will then have the opportunity to turn many of them into rentals and many of them into real home loans for young people who have good career prospects and a real chance to pay off a home loan. Heck, maybe even get people to buy homes that are the right size for them, not McMansions that some felt they needed in the past couple of decades to keep up with the Joneses. Another effect of the government getting out of the home business and the supply getting much bigger is that home prices will actually get to drop to what is the real price via supply and demand and with the low loan rates trust me you will see some serious buying up of inventory.
The next thing you do is make clear that the current 99 weeks of unemployment will not be extended and new people coming into the unemployment insurance payout will be ended at one year period. This will focus unemployed minds on the need for new jobs and moving if needed to the new job. Default or not when you are hungry you move. You also consider taking to a new career while on unemployment by attending a local community college and acquiring a new skill. Yes, you default, but again the bank in the new location will consider your situation and just might see your new career as a risk to take for a home loan. There will so many people like this banks, who will then be locally making home loan decisions will be attuned to the fact if they do not make the loan someone else might. Markets are beautiful things when allowed to operate. Finally your new home will likely be priced much lower than the one you left and much easier to afford and the bank, who now is keeping the loan in house, will not allow you to make a foolish mistake of buying as much home as you can afford.
Of course none of the above will happen, too many interests with their hands in the honey pot. and too many politicians wanting to equalize home ownership.
No comments:
Post a Comment