Can Housing Be 'Rescued'?

First, a quick data check of Existing Home Sales:

• Unit sales dropped 8% in September; this is the lowest level in eight years;

• Sales of existing homes were down 19.1% year over year;

• Sales of existing homes fell to a seasonally adjusted annual rate of 5.04 million;

• Inventories of single-family rose to a 20-year high;

• Sales fell in all four regions.

• Median sales price for homes and condos was $211,700, down 4.2% in the past year. 

• Median sales prices have fallen in 13 of the past 14 months, pressured by a decline in jumbo mortgage lending (> $417,000).

Here's a chart worth looking at closely:

Existing Home Sales (gray), Inventory (red) and Months of Supply (blue)

Courtesy of Calculated Risk

The always interesting Rex Nutting Marketwatch column had quite few interesting quotes:

-The deepening subprime crisis is threatening a recession, said Peter Morici, a business professor at the University of Maryland.

-Lehman Bros. now expects the Federal Reserve to cut its overnight lending rate by a full percentage to 3.75% by the middle of 2008, including a rate cut next week.

-"The housing crunch is accelerating; the Fed can't stand by and watch," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. 

>
Rubbish.

I am continually surprised by some of the more absurd commentaries I've read on the housing situation, and what we need to do to "rescue" it.

Here's some tough love for economists, real estate agents, and especially those people in Washington on both sides of the aisle: fuhgedaboutit.   

The problem in the housing market is really, quite simple: Over the past 5 years, 100s of 1,000s people -- perhaps a million buyers or more -- were creatively financed into homes that THEY CANNOT AFFORD.

This may not be what people want to hear, but it is unfortunately true: Forget the 2/28 ARMS, the teaser rates, the Interest only loans -- if we were to magically reset every one of those problem mortgages at a 6.25% fixed rate 30 year mortgage, it would not "fix" the housing problem. A huge swath of them, perhaps a majority, would eventually default anyway.

I have yet to hear anyone in Washington acknowledge this simple reality. The problem is not one of a credit crunch -- although that is what uncovered the issue to the broader public; rather, it is the cost of housing relative to income ratio.

I don't want to appear cold, but this is a simple economic reality: many, many current homeowners are likely to be ex-home-owners unless they find more income or a random chunk of non-loan cash.

The issue isn't credit availability --its affordability . . .

~~~

Here's a wild idea: All you alleged believers in the free markets: Why don't you let the market do its job, via defaults, foreclosures and auctions -- and process the problem? Its either that, or "gift" a few billion dollars -- $100k at a time --  to those people who over-leveraged themselves.

Source:
Mortgage Availability Improving But Hampered September Existing-Home Sales
Shits & Giggles, October 24, 2007     http://www.realtor.org/press_room/news_releases/2007/ehs_sept07_mortgage_hampered_sales.html

Home sales crater on credit squeeze
Sales of single-family homes at 10-year low; inventories highest in 20 years
Rex Nutting
MarketWatch, 11:15 AM ET Oct 24, 2007
http://tinyurl.com/2wm9f

Comments

[Still Renting:]

I refused to buy when I could have. The reason was simple: I saw it as a tulip bulb thing. People were selling themselves into indentured slavery just to "own their home". I rented. The good news is that while home prices in my area (Seattle close-in suburb) doubled or more, rents stayed flat - and I saved for a nice down payment for when sanity returned.

However, the thought that I will, via my tax dollars, have to bail out thost that DID do the wrong thing has me absolutely fuming! The market needs to be allowed to do what it does best. Period.

2007 Oct 26 12:51 PM

[MSA:]

Hi Barry: I have made the same comments, and cautioned many people over the last few years that the housing market is unsustainable, for one simple reason, and that is "affordability". Very few listened, and many said to me "you're wrong - you should buy, too".

Now these same people are crying the blues and pleading with the government to "help us". And Congress, in its infinite shortsightedness, will likely aid these people, who, as you pointed out, could never, in the first place, afford the homes they bought.

And then we have Larry Kudlow, CNBC - who loves to boast of the wonders of the free market, that is when it's lining his pockets - crying for government bailouts and Fed rate reductions. His crys for help, are of course self-serving, as he and his Wall Street buddies are up to their ears in leveraged asset backed securities. And, by the way, where is Larry when we try to lend a hand to the poor and needy, and those who need assistance for education. Not a peep from the greed-meister then. And this guy calls himself a "free market economist" - not true, he's just another big mouth on TV.

At any rate, thanks for your straight-up speaking of the real problem with housing. I hope that indeed the free market forces are allowed to play out - as that is the only way that the market will correct with true functionalilty.

2007 Oct 26 01:54 PM

[Rhett:]

Ritholtz tells it like it is. He's the best. Keep it up, Barry. We need honesty and reality instead of more hype in the housing sector.

2007 Oct 26 02:32 PM

[Rhett:]

Ritholtz tells it like it is. We need less hype and more reality to face the current housing crisis.

2007 Oct 26 02:40 PM

[freemarketer:]

What happened to the day when we let free market forces take care of the problem. When home prices were going through the roof, homeowners and RE speculators loved the free market, and they actually believed the obscene profits made sense. The lenders were playing the free market like mad, and the profits were unreal. Now suddenly the free market makes no sense to these people-we have to have a bailout. Barry, you are right, and the sooner these people capitulate and let the market work, the sooner this "crisis" will pass. Somehow we all survived the dot.com blowup, and we'll get through this one too.

2007 Oct 26 02:45 PM

[Bajatexas:]

This column states the obvious, but it is equally obvious that no politician is going to sit by and let the free market work when there are votes to be bought, uh, I mean earned. The whole system is broken and has been for some time. The Federal government is now "responsible" for making people whole after a natural disaster such as Katrina or the California wildfires. It isn't much of a stretch for the average person to believe the government should bail them out of every mistake. That would be comical, except that the government seems to agree with them. Therein lies the "real problem."

2007 Oct 26 02:54 PM

[User 117295:]

Absolutly, positively correct.

2007 Oct 26 03:57 PM

[TRF:]

We are a Utah-based development group with considerable background in the capital markets. You aptly describe the reality associated with hyper-saturation, rotational fund deployment and the mingling of non-existent lending standards (liar-loans). The country had virtually the same problem in the "other market" after our celebration during the nineties when a few of the more rapacious executives and Arthur A. were fed to the wolves to atone for "conflicted" Wall Street. Let “em” throw a few coins (read Countrywide’s restrictions for debt relief for a good laugh), it'll reduce the amount of time that we have to endure Washington expressing concern. We've learned to invest in the high-end where high and ultra-high net worth money is insulated from cyclical madness and/or to take gains without having the responsibility to turn off the lights. Give me a natural, one-of-a-kind, hot-spring mineral-water resort opportunity--which we have--any day over a cattle call.

2007 Oct 26 06:51 PM