Are we in the Great Housing Depression?

Opinion: America's real-estate market is in a decline that doesn't seem to be getting better.

By TheStreet Staff Aug 30, 2011 11:43AM

Image: Housing market © Ocean/Corbis/CorbisBy Gary Weiss, columnist for TheStreetTheStreet

 

The stock market, as measured by the

S&P 500 ($INX), rose almost 3% Monday, perhaps pleasantly surprised that the Northeast doesn't resemble the Gulf Coast -- Katrina-cable-TV hype notwithstanding.

 

So as traders picked their way across tree limbs and flooded roads on their way to work Monday, perhaps they overlooked a commonplace sight that was even more prevalent than clogged waterways: for-sale signs on lawns, sometimes with the nauseating come-on "auction today."

 

We're in the middle of a real-estate depression, folks, and it's not getting any better. Perhaps it's good news that the financial markets have gotten used to the bad news out of the housing market, because the bad news keeps coming. But if the housing-market woes are an indication of the direction of the economy, we're in sorry shape. And as with a number of questions I've explored recently, it comes down to this: What, if anything, is the Obama administration going to do about it?

 

Yesterday, it was reported that foreclosures comprised 31% of housing sales in the second quarter, less than the 37% recorded at the peak two years ago, but still six times what you see in a healthy housing market, according to foreclosure-tracking firm RealtyTrac. The silver lining, if you can call it that, is that the percentage declined a bit from the previous quarter.

 

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But, meanwhile, another bad housing number got worse. The percentage of "short sales" -- homes sold for less than what's owed on them -- climbed to 12% in the second quarter. And Bloomberg reported the other day that a third of the country's 800,000 foreclosed properties are owned by Fannie Mae, Freddie Mac and the Federal Housing Administration. In other words, Uncle Sam is now the biggest owner of misery-bedecked real state in the nation.

 

All these numbers have a kind of numbing effect on people. It's a bit like what motorists were seeing in upstate New York yesterday, as hundreds of miles of the New York State Thruway were closed because of not-quite-Hurricane Irene. You curse, and then you get out a map and plot out a detour, and then pull out your map again when the detour is blocked by downed power lines and flooding.

 

Forces greater than oneself are like that. But the housing crisis isn't exactly a force of nature, and that's what's frustrating about the Great Housing Depression of 2008-20??. It's understandable for you or I to be numbed by these horrendous housing numbers. But sometimes it seems as if Timothy Geithner and his colleagues in the Obama administration are like motorists driving around the fallen tree limbs but seem helpless to do anything about it.

 

The sorry fact is that record-low interest rates just aren't sufficient, in themselves, to bring people into the market. The horrid numbers we are seeing are evidence enough of that. So what's the answer? Well, one idea that seems reasonable enough is to extend to under-water property owners the same largesse that two consecutive administrations have bestowed upon the big banks. There's a plan reportedly under consideration that would push Fannie Mae and Freddie Mac to loosen their refinancing guidelines. That way, homeowners would be able to refinance even if their homes wouldn't otherwise qualify.

 

Oh, yes, I realize that a lot of people say that such an idea would screw mortgage-security bondholders and would be "unfair" to homeowners who were able to refinance without help. I think that's baloney. A small-fry bailout -- imagine that, non-billionaires and non-bankers being bailed out! -- would not be unfair to a soul. It would pump dollars directly into the economy and serve a broader public purpose: to keep properties from going into foreclosure, or having to be sold short. That would be to the benefit of everybody, including homeowners who didn't need government help to refinance and might be feeling a tad resentful.

 

They shouldn't be. We're in the middle of a Great Real Estate Depression, and that homeowner who managed to refinance through normal means may want to sell his house next month or next year. Right now he's facing the prospect of taking a shellacking. That's why the refinancing plan being weighed by the Obama administration not only makes sense, but is fair for everybody -- the direct beneficiaries, their neighbors, and for Fannie, Freddie and their bondholders.

 

It's fair because something other than pushing rates lower needs to be done to revive the housing market. A refinancing-bailout would derail a vicious circle that is plaguing U.S. real estate.

 

Foreclosures and short sales are pulling prices down in markets throughout the country. That hurts both sellers and homeowners seeking to refinance. That's because a homeowner needs to get his or her property appraised in order to refinance, and lenders won't allow refinancing if the appraisal doesn't support it. That screws buyers who bought their properties during the housing mania. Since they can't refinance, they may just walk away from their houses. More foreclosures. More price declines. That's where the small-homeowner bailout comes in, putting an end to this vicious circle.

 

Will Obama do it? Or will he or Geithner find an excuse not to engage in this sensible action? I'm not holding my breath. I think that they're reasonably happy that the market seems to be holding up for the time being, and that we're all numb to the bad news from the housing market. Obama is not going to jeopardize his Wall Street contributions by taking such a dramatic action. He'll recognize, like the smart Chicago pol that he is, that people dissatisfied with his policies haven't much choice next year.

So the Great Housing Depression of 2008-20 will continue -- unless Obama thinks that the feeling of overwhelming numbness might derail his chances for re-election. Not likely, but we have a right to hope.

 

102Comments
Aug 30, 2011 5:09PM
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People can debate all day long but the only thing to talk about is going forward. How do we get out of this? We will never change things without revenue spending to change the momentum. The GOP has everyone convinced that we should cut everything. Great. And what will that accomplish? More layoffs of course. We have to raise taxes but through tax reform and spend our way out of this. 43% of the population pays no taxes at all. I have not paid any taxes in over 5 years because of the write offs I can take advantage of. This is the problem.

 

Spending is how we have gotten out of every other recession in the past and that's the only way we'll get out of this one. Everyone pays a little more and it stimulates the economy in all directions. This is simple economics. This is what Reagan did and eventually it worked. Unfortunately we now have a split government which was a huge mistake. The Tea Party is completely right about cutting spending, but their timing is completely wrong. And they cannot govern with their philosphy.

Aug 30, 2011 4:55PM
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Wouldn't hurt a soul?  What about those of us who've battled tooth and nail to live within our means - who didn't fall for the teaser rates, who didn't get sucked into a fool's mortgage on a McMansion that costs a third world worker's annual salary to heat through the winter?  Those of us still stuck renting but who dream of a postage stamp of grass to call our own.

This policy shafts me three ways, Weiss, and don't you forget it:

1.  It props up prices.  The Federal Government, the Fed, and the Big Banks were more than happy to throw money around and hand each other high fives for the real estate gold rush of the 90's and 00's.  But they didn't call it a BUBBLE for nothing.  The government distorted the market, and the banks were more than happy to take their cut.  They don't call it a BUBBLE when the prices are naturally derived from free market forces.  They call it a BUBBLE when a manufactured distortion causes a certain class of assets to be overpriced.  This policy recommendation is a pathetic suggestion that overpricing should continue.

2.  It's inflationary.  For Fannie and Freddie to be able to afford throwing money around to do this, they're gonna have to go to the Fed.  The only thing the Fed has left to do is turn on the printing presses.  So, not only are you planning to prop up the drastically over-inflated prices of homes, you're going to raise the prices on everything else.

3.  It's putting the burden on my children's backs.  And what happens when a large number of those who got a sweetheart refinancing deal still can't manage to pay their bills and still end up in foreclosure?  Then the Feds will inevitably be back to bailing out Fannie and Freddie - adding even more debt to future taxpayers.

Weiss is living in a fantasy world with Bernanke and all the other Keynesians where you can just make up money and everybody will be happy.
Aug 30, 2011 4:53PM
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interfering with the natural forces of the housing market are what got us our current mess.

 

So in addition to the billions (trillions?) of money already spent to get us to NOW in this fiasco, your advice is to double down and spend MORE taxpayer dollars to MAYBE fix this gigantic mess?

 

How about we follow our Founding Fathers advice of laissez faire and let natural market forces correct this Government made problem.

 

The current problem is there are too many houses on the market and more on the way as the housing market crashes along with the economy.  I know this may be hard for you to understand, but there isn't enough money in the world to stop it and it shouldn't be stopped.

 

Some homes will get bought and some will rot and ultimately get torn down.  Eventually, prices will fall and the market will correct itself.  The LAST thing that should be done is build more houses or put economic incentives in place that would encourage speculative purchasing.

Aug 30, 2011 4:36PM
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Maybe I have no understanding BUT if low interest rates allowed builders to build bigger houses that people bought with teaser rates that were then sold to savvy investors in AAA bundles how does bailing out a homeowner help? They can't afford the upkeep or the utilities, they're renters that have been hood winked. We are in the midst of the great fraud. The process must be allowed to proceed through foreclosure and write downs. The financials have to experience the pain of their terrible investments and either not survive or become stronger. The geniuses have to be held to account. 
Aug 30, 2011 4:23PM
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Refinancing to lower rates those who are current on their mortgage, but underwater is what would make the low interest rates the FED has created actually worth something as a stimulator of the economy.  Usually lowering rates boosts the economy because people can refi and save money....but with 33%+ and climbing homes underwater (not to mention at 80% LTV, probably less than 1/2 of homes at that level) the low rates are essentially worthless as a stimulator.

The banks made money prior to the crash, and got free bailout money.  I see nothing wrong with refinancing those current on underwater mortgages, it can be done while costing the taxpayer $0...and actually likely saving the taxpayer money by avoiding more "walkaways" on loans backed by Freddie/Fannie.

Fannie/Freddie can say "to continue to get our guarantee backstop on your loans you own (investors) you must adjust the rate to the current 4.25% for all mortgages current.  If you do not adjust the rate we will remove the guarantee"

Simple, if investors refuse, they will be left with a higher % of walkaways in their investment.  No principal write down needed.  Tax revenues increase as you just lowered interest deductions on all these loans also....Uncle Sam wins....economy wins....we all win....

As far as I'm concerned it's a no-brainer

Aug 30, 2011 4:18PM
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When I was a small child  in 1952, a farm in Missouri sold for 18,000 dollars.  In 2011 the same farm

worth about 900,000 dollars.  This is what will happen to the price of homes if the government

bails out everyone.  Wall Street bankers should have not been bailed out.  The bankers bailout

just made things worse.

Aug 30, 2011 4:15PM
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So now housing default is Osama's fault too? Wait... let me approach this a different way. Can anybody else (except Obama)  fix this? Who? Perry? Romney?...Christie? Please! The housing market is going to have to run it's course. It took time to create the mess and it is going to take time to get out of it...PERIOD!

 

The author attempting to link this to the current administration (or the next; even if Obama is not elected) is plain Tea partyish, or in other words just plain STUPID!

Aug 30, 2011 3:56PM
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As soon as you get Obama out of the White house the housing market will recover!
Aug 30, 2011 3:35PM
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So we should artificially prop up housing values with taxpayer money instead of letting things correct to their intrinsic value.  Is that was I just read?  No wonder no one wants to take credit for writing that rubbish; the byline is just "TheStreetStaff."
Aug 30, 2011 3:34PM
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This author is a tool.

"What is Obama going to do about it?"

Nothing except make sure there are enough people to prosecute scam artists and people cheating the system.  Don't make any regulations that "help people stay in their homes" or use taxpayer money to inflate a popped bubble.

The market is doing what it is supposed to.  People who can't afford to stay in or get into homes have to make changes.  There are some sad stories, but those are the facts of life.  Prices in communities are adjusting to what those communities can afford.  There are still a few years of market correction to come and then we will see stable numbers in the housing market.
Aug 30, 2011 3:21PM
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Look on line with you-tube and check out the New World order. The john Birch Society was not a fringe organization but, they called it right. This has been part of the plan  for the last 50 years as the Socialist movement redirects wealth. ObAMA IS THE LEADER OF THE CULT RUNNING THIS COUNTRY INTO THE NEW WORLD ORDER.  THEY NEED US BROKEN TO TAKE OVER THE WORLD. THIS IS NOT FICTION READ YOU-TUBE THE NEW WORLD ORDER. ALL THIS WAS TOLD TO US IN 1974.

 

 

Aug 30, 2011 3:12PM
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Just another reason we are in this depression. We created a world depression

with the banks issuing of sub prime mortgages and the stock market rolling them up

into CDI's and selling them to the world. We still continue to do nothing about foreclosure,

as our home values, our real-estate investments, the stock market and our 401K's

diminish and the middle class slips into poverty.

Is the government blind, stupid, ignorant, or naive or all of the above? It's so

obvious to me and seems so simple to fix. Put the burden on the banks

(didn't the banks get the bailout) to refinance any family with one working party, to an

affordable payment (25% of their household income)!

Aug 30, 2011 3:12PM
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Maybe if they relaxed the mandatory period for purchasing after a short sale and foreclosure, there would actually be buyers.  I went through a short sale because of divorce and the fall of the market.  While neither of us could afford it on our own, each of us still have job and income, but due to the short sale, neither of us can purchase a home for a minimum of two years.  By the way, for what it sold for, either of us could have afforeded it on our own, but that is the way it works nowadays.  I have been living with my parents, now have a downpayment of 20% of the value of the average home in my area, and cannot purchase anything for another 15 months.  I know others in my situation that have money but cannot get loan due to the short sale so there are would-be buyers out there that simply cannot buy.  Until we promote the buying again (not the rates, not the refinancing, and not loan modifications), the housing market will not recover. 
Aug 30, 2011 3:11PM
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Hey how about, I just do a SHORT SALE to myself rather than have Wall Street foreclose on me!!??

That way I could buy a house with out the negative equity that I have now, plus I will refinance at an interest rate that is 3 pts below what I have to pay now!!!

 

Is that SWEET or Not??!!

How about it Fannie Mae?

Aug 30, 2011 2:40PM
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The reason we're in both the real estate mess and overall financial recession can all be traced back to the Federal government making it too easy for people to buy houses, and banks to lend to those who shouldn't have ever gotten loans (policies started by Clinton and extended by Bush).  Why would we want the government getting further involved to "fix" the problem they created.  Buying a home is an investment, and by that definition, carries certain risks with it.  People need to learn that 1) life ins't fair and 2) that it isn't the government's job to make sure nobody ever loses.

There are no participation trophies in the real world, sometimes investments don't pay off.  If you can't deal with that, don't invest.
Aug 30, 2011 2:19PM
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By all means keep talking GLOOM and DOOM - YOU are a BIG part of the problem..........  Obama and his croanies - the wrong people, wrong time, wrong place.......... get rid of them........  and get YOUR head out of the sand that the SKY is FALLING - for God sakes we need people in office with some BUSINESS SMARTS - whether it be Republican or Democrat - or here is a novel idea - how about Democrats and Republicans actually coming together with no personal agendas (Pelosi) and accomplishing ideas that are actually GOOD for America !!!!!
Aug 30, 2011 2:15PM
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is losing in stocks included?

I need the government buys my lost in value stocks for at least the price i bought them.

 

Everyone around me will benefit from it - I'll buy something to revive the economy... 

 

Aug 30, 2011 2:12PM
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What a Merry-go-Round.  The housing industry employed millions of workers across the country and these jobs will not be replaced until the market returns in some sane fashion.  Unfortunately, we are probably looking at 10+ years so hold onto your hat for high unemployment, and a shaky economy, to stick around for awhile. Don't think any of the Politicians can fix it in the short term.
Aug 30, 2011 1:50PM
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also, another idea is to get governemnt assistance to everyone with a morgage to pay it off , so the homeowners woudl have extra cash to spend on something else. That would benefit the whole economy....

How about that ?

Am I not a genius?.....

 

Aug 30, 2011 1:49PM
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Experience has taught me that the banks, Fannie Mae and Freddie Mac would rather retain foreclosed / dumped properties on their books at the Wall Street pumped-up price as write-offs than sell them at market value or below to rid themselves of the real estate.

The banks don't care that the homes are falling into disrepair, every day deteriorating while bringing down the look and pride of neighborhoods in which they reside. Do you know--banks, supported by the OBama administration, actually had a law put into effect that requires an individual borrower (whether financing or refinancing) to have their Federal Tax Returns pulled directly from the feds by the bank instead of being submitted by the borrower? Why? Because, and I quote: "...people lied to us about their income and we made bad loans." WTF? Lied to you? Regular homeowners created fraudulent Federal Tax Returns for a home loan? That's fraud of the highest order and as a bank that reviews hundreds of loan applications you guys didn't catch these criminals simply by looking at key factors such as income and expense? ****. What individual buying a single home would or even could do such a thing so many times it being down the banking system? No. The banks and the Feds had to blame someone for their theft and they wanted to bailout their buddies on Wall Street, so the public paid for the cost of the bailout. And to make it look good, the public also had laws levied against them to further cover the tracks of the guilty.

It's not the individual borrower that was at a fault. It was the big money guys, their cohorts and the banks who didn't follow standard rules for lending. Banks are there to make money. They are centric in their policies and views of the public. Consequently, they now hold these properties to advantage themselves.

Yes, allowing the dumped homes to be sold at the current market value to those who could possibly afford to purchase them would bring down property prices in that area, but those properties are already worth much less and becoming more so each day. Pretending they are not is simply a lie the rest of the owners tell themselves and the banks back up--for now. At least they will until it's not to their advantage any longer. What they are really worth has always been less. It was not a pumped-up Wall Street value orchestrated solely to steal money from the public.
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