There was no good news over the last month from any of the thirty market drivers in the Housing Market Monitor. The key market drivers are depressed and many continue to worsen. The apparent stabilization of housing activity in the previous few months no longer looks likely to lead to a summer recovery in the market. That has been delayed again.

Remodeling and home affordability are the only items that could possibly be stretched to be classified as good news. But the remodeling data is too volatile to be certain that any activity pick up is underway. Home affordability is still high enough to support much higher starts and sales if only consumer confidence were not so depressed. But affordability is declining and will probably fall further as credit costs rise and income gains ebb, apart from the tax rebates.

More reason to be concerned about the survivability of mortgage investors was the most damaging news in the last month. Another large California subprime lender failed and Fannie Mae and Freddie Mac had to be rescued by the Treasury Department and the Federal Reserve Board. The consequences of this will be higher mortgage costs, some mortgage losses shifted to taxpayers and even tighter mortgage approval standards. The expected improvement in housing starts will slip several months toward the end of the year, even longer if Congress fails to act on housing legislation or adopts a solution that is too much “anti-lender”.

Congress is still struggling with how to resolve the residential mortgage mess. One faction insists on helping distressed homeowners by forcing lenders to forgive some or all of their mortgage debt. Another faction insists on preserving the viability of the mortgage finance system, centered on Fannie and Freddie, so that the majority of homeowners who did nothing to set off this problem do not get dragged into it.

The apparently final plan in Congress tried to satisfy both factions, by pushing some debt from homeowners to lenders and taxpayers and simultaneously requiring more risky mortgage loans to be made while requiring Fannie and Freddie to raise more capital. This may be smart politics but it was bad economics. Fannie and Freddie shareholders and bondholders panicked at the prospect at having the value of their assets diminished by both more risky mortgage loans and additional capital with a claim on the reduced profits at the mortgage giants.

The 50% plunge in Fannie and Freddie stock prices has reopened the discussion on what to put in the final legislation. The resolution is still pending but is likely to be a tilt toward preserving Fannie and Freddie to preserve the prime mortgage market. Few members want to explain to voters this fall why they pushed Frannie and Freddie into receivership and turned everyone’s prime mortgage into an FHA mortgage with all of the attendant horrors that millions of homeowners worked hard to avoid.

Housing Market Monitor — June 2008

Abbreviations: NAR = National Association of Realtors; NAHB = National Association of Home Builders;
OFHEO = Office of Federal Housing Enterprise Oversight.
Table: Reed Construction Data and Reed Construction Data - CanaData.

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