The housing industry, once a big part of the US economic growth machine, is now a much weaker contributor to US job growth and economic activity.
As NICK TIMIRAOS commented last month in the Wall Street Journal, “The U.S. has normally relied on an expanding housing market to help lift the economy as it exits a recession by fueling manufacturing, consumer spending and job growth. In the first year of all postwar recoveries, residential investment has accounted for nearly one percentage point of gross-domestic-product growth….But today, it has accounted for around 0.1 percentage point of GDP growth.”
The housing industry's anemia is being felt most acutely in large swathes of the former high growth, real estate dependent economies of California, Florida and Arizona; unfortunately speculative real estate construction activity itself fueled much of the economic activity in many parts of these states, not fundamental household demand-based growth.
The Los Angeles Times reported on August 16, 2010 that “Housing is a big business in California. Home builders employ hundreds of thousands of people, and other industries such as retail, manufacturing and restaurants benefit from the spending of those employees.
The slowdown in construction in California has muted those benefits. According to a report released Monday by the California Homebuilding Foundation and the Center for Strategic Economic Research, the economic output of the housing industry has fallen 80% since 2005.
In 2005, which the report says was near a peak in the housing industry, residential permit levels were around 205,000 units, generating 487,000 jobs and $67.7 billion in economic impact. By 2009, residential permit levels dropped to 35,000, employment hovered around 77,000. The economic benefits of housing dropped to around $13.8 billion, according to the report.”
The Long Slog
Rebuilding the housing industry will be long slog after housing's near apocalyptic self-destruction. The destruction was not only of basic housing demand (millions of US consumers were so severely hit by the meltdown and now are fighting to rebuild their credit and household net worth) but of the collapse of the entire system's infrastructure that once supported and processed all aspects the housing industry’s hyperactive (and some say slipshod) development, construction, sales and finance (bubble-making) machine.
All components of the US housing delivery system are still being questioned, probed, pounded, critiqued, dissected, dismantled, and above all litigated. Housing’s deconstruction is not yet complete. Commercial real estate too has suffered collateral damage from the direct relationship to it’s massive, ailing residential cousin.
No one yet knows what the housing and mortgage production will look like when reconstruction takes hold in earnest. There are too many unknowns. As always there is a naïve hope that the world will be the same as it ever was, an assumption that the rules will be as they were.
We don't think so.
Policy has yet to be written for the role of the surviving mortgage financing entities Fannie Mae and Freddie Mac. The smoldering remains of these two institutions are still too hot for politicians to touch. Will these sort of private but now blatantly public institutions, that have taken over for the private mortgage market, remain public agencies or become truly private this time? Neither side of the aisle wish to be labeled socialist nor put the final nail in the coffin of the housing industry left to pure and brutal market forces.
The new world order of mortgage finance will surely be one that is well underwritten and well documented. In other words it will not be as it ever was. It will be a much smaller, slower, more laborious and a less automated industry. It will take a long time for each loan to be underwritten and approved (to be measured in many months not the seconds of a phone call loan approval of times past) and it will be way more expensive (the current, temporarily and artificially low mortgage interest rates aside).
The Underwriting Pendulum Swings-More Questions than Answers
Lenders today, understandably, have a severe aversion to risk. How do they underwrite the US borrower today? How long before the millions of foreclosure casualties begin to heal their severely wounded balance sheets?
The mortgage origination business completely broke down. A permanent stable sustainable market has yet to emerge. Only massive government involvement has maintained what is left of the residential mortgage market’s faint pulse.
Fear now rules as “Lenders clamped down on the lax standards that fueled the housing bubble three years ago by requiring larger down payments, higher credit scores and greater documentation of borrowers' incomes and assets….private lenders have ceded the market to government entities Fannie Mae, Freddie Mac and the Federal Housing Administration. Those agencies, saddled with losses, are under heavy political pressure to avoid taking any new risks.” (Wall Street Journal DECEMBER 13, 2010)
Last year was kinda a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.
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It may be that we are looking at the housing market's recovery in the wrong way. We are waiting for the big picture to improve, when we should be focusing on the smaller picture. What is being done about the houses that have been foreclosed on? Are there properties lying about, waiting for new owners to take them over? What can we do to improve the economy in the small towns now, instead of waiting for change to trickle down from big government?
ReplyDeletePerhaps the answer lies in smaller real estate firms that are buying up properties, improving them, and then reselling them. Financing will always be a problem; too many toxic mortgages in the past have assured that. Those same firms are selling them on a rent-to-own basis when the prospective buyers cannot get a loan. This may be the answer, start small and heal slower. Rebuilding the Economy.