Stimulus or Bailout?
While Bernanke and other policy makers may label their actions "stimulus", I classify them as bailouts, or subsidies. Here is why.
Once upon a time, two cities separated by a river decided it would be a good idea to build a bridge. It would not only create bridge building jobs, it would help the residents on either bank with trade, tourism and other future benefits. The engineers thought it was a great idea, so did the contractors. Most positive were the Wall Street financiers who gladly floated bonds to pay for the project. Regardless, the project was a stimulus to the economy.
As it turned out, the benefits were not close to original projections and there was a 300% cost overrun. Instead of letting the cities go bankrupt, and the financiers who should have known better take the hit, the government steps in and pays the debt. That is a bailout and has no stimulating effect. This is paying for past mistakes, not investing in the future.
Are policy makers, especially Bernanke, stimulating the real estate market or is it just a continuous stream of bailouts of the TBTF banks and subsidies for those who cannot afford to stay in their homes? How much bailout is in the real estate system now? While it is impossible to quantify with any statistical validity, it is "a lot", so much so that I believe we may be building a shakier house of cards than during the sub-prime era. Let's add up some of the components.
Greenspan lowered short term rates, and kept them low for a long time. Bernanke not only lowered short term rates further, he initiated all the QE programs that involve pumping in real dollars. It may not be dollar for dollar, but $45 billion per month in agency MBS purchases is a lot of money, in addition to all the other purchases from 2008 to date. How should we quantify this bailout component? Can we say it is a >$2 trillion bailout to housing from the first QE program to the present one?
I wrote about the hidden housing subsidy back in April 2009, and updated it here last year. Summarizing, I was just trying to quantify the number of households receiving free housing by simply not paying their mortgages. In spite of all the supposedly good news you have been hearing about housing, LPS reported that as of April, 2013, there were still 4.7 million households that are that at least 30 days or more delinquent. This number has been floating around 5 million for the last few years. I estimated this subsidy at over $100 billion per year and this "free" housing program is in its 7th year, if you use 2007 as the year of the collapse. Just imagine the shock to these households when their free rent subsidy ends and they actually have to start paying rent.
Intervention – Difficult to Quantify, But Substantial
Far more difficult to quantify are the foreclosure prevention policies. Early this year, the California's Homeowners Bill of Rights went into effect. More recently, because of some OCC guidelines, Wells Fargo (WFC), Citi (C) and JPMorgan (JPM) stopped foreclosing in five Western States including the big three – California, Nevada and Arizona. These delays obviously added to the foreclosure time line and the free housing subsidy discussed above. Looming on the horizon is Mel Watt, Obama's pick to be in charge of the “free housing for everyone” program.
Even more impossible to quantify the short sales and incentives. Each short sale is the equivalent of a forgiveness of debt. In addition, various lenders offer incentives to enter into a short sale and provide move out allowances. It is unclear how many households have been bailed out of their otherwise dire predicaments. Per Realtytrac, during the first quarter of 2013, 15% of all sales were short sales.
Refinancing has been on a tear during the last few years, accounting for about three quarters of all loan originations. If not for the QE programs, I would classify refinancing a stimulus. The difference being that previous monetary policies involved only manipulation of interest rates, but the QE programs involve actual purchases of MBS, and in enormous quantities to boot. These has to be reversed eventually and we have never seen anything like that done before.
The other reason why I do not consider refinancing a stimulus is because of all the HEMP modifications (which are technically not a refinance, just a novation of terms) and the HARP programs. HARPs are artificially created for borrowers who cannot normally qualify, mainly due to bad credit and insufficient equity. Per the Mortgage Bankers Association, HARP accounts for about 30% of all refinancing activities. I have only seen MBA report this data point once, for the week ending 5/22/13. With mortgage rates increasing, refinancing is dying fast, dropping 8%, 12% and 12% for the past three weeks. I suspect that if rates move up just another 50 basis points from here, refinancing will drop to zero, with the exception of whatever is left of the HARP program.
Back in the days of the Greenspan bubble, there was plenty of hoopla about the real estate wealth effect and all the benefits of MEW (mortgage equity withdrawal). Consumers were using their homes as ATMs, never questioning where the money actually came from. There is less fanfare today, even though refinancing undoubtedly has reduced household expenses and has contributed significantly to economic activity. When the current wave of refinancing activities stops, it would be unreasonable to think that the impact on the economy won't be felt.
In conclusion, the current so-called real estate recovery is supported by subsidies and bailouts, providing very little real stimulus. Not only are these losing their effectiveness, they are destined to be terminated. We are already so deep in uncharted waters that future bailouts are going to be even more costly with effects unknown.
I think the time is drawing near for something I previously discussed here: Is It Time To Short The Home Builders?
The Philly Housing Index HGX – note the recent divergence between price and RSI/MACD – via StockCharts.