If you haven’t read it, I can highly recommend Paul Kiel’s magnum opus on the US foreclosure crisis, available online or as a Kindle Single. Kiel tells the national story using synecdoche: the story of Shelia Ramos is representative of millions of others. And Kiel makes it very clear just how typical her tale is, zooming back out to a big-picture view on a regular and welcome basis.
What Kiel doesn’t do is look forward, and give his informed opinion on whether the new rules being outlined by the Consumer Financial Protection Bureau are likely to work to prevent such events from happening again. The question isn’t whether the new rules are good ones; the much more important and salient question is whether they will be followed and enforced. I’ll believe it when I see it: as Kiel shows, servicers are really bad at this kind of thing, and there’s a strong case to be made that they’re simply not capable of following the rules that the CFPB is laying out.
Meanwhile, the weird cognitive disconnect in the housing market seems greater than ever. If you look at Fannie Mae’s latest monthly survey, it shows lots of new highs being set: the percentage of people thinking that house prices are going up, the percentage of people thinking it’s a good time to buy, and, especially, the amount that people think they’re going to have to pay for housing if they don’t buy.
And yet, the facts on the ground don’t support any of this. Check out the latest quarterly home price report from LPS, for instance. Not only are prices still falling, they’re actually falling at a faster rate than they were a couple of years ago:
The rate of relatively slow price declines, from January 2009 to May 2010, was the time when there were tax incentives for first-time homeowners. When those tax incentives went away, so did the artificial support for the housing market; in hindsight, most of those first-time buyers would probably have been better off just waiting, and buying a house now without the tax incentive instead.
What’s more, this index, unlike other indices, excludes short sales. If you include short sales, then the numbers are far worse. And as the mortgage industry moves from foreclosures to short sales (since short sales don’t require the lender having to prove title to the home), the discount on short sales is growing alarmingly, and approaching the discount on foreclosure sales.
In Kiel’s story, Ramos abandoned her house to the mercy of her lender, rather than suffering through a foreclosure: in that sense, when it was finally sold it was more of a short sale than a foreclosure sale. But the distinction is less and less important these days — and there’s still a shadow inventory of millions of homes being lived in by delinquent borrowers, which are going to come on the market sooner or later at discounts of more than 20% to their peers. So long as that’s the case, it’s hard to see how house prices are going to stop going down and start going up.
So what explains Americans’ optimism surrounding house prices, especially when they think mortgage rates are going to rise? My guess is that it’s the fact that the recovery is proving itself to be real, combined with a natural bullishness when it comes to housing, which somehow wasn’t eradicated by the 2008 crisis.
But color me contrarian: if house prices can’t rise even with mortgage rates at all-time lows and the government desperately underwriting nearly all the mortgages in the land, I can’t imagine how they’re going to go up in future when rates go up and the government manages to extricate itself from the market. And if house prices don’t go up, of course, then the number of underwater borrowers will stay high, and the foreclosure crisis is going to remain a big problem for the foreseeable future. That’s the real horror of Kiel’s story. Not that it happened in the past — but that it’s likely to be repeated into the future, as well, for many years to come.