The New Year has dawned. With it comes the annual Running of the Bulls!
We are not talking about the national sport of Spain right now, we are talking about America and the Housing Bulls.
Predictions of a housing bottom, and subsequent recovery were made in '09, '10, '11 and once again this January the rumbles have begun. The Bulls were wrong the previous three years. Will their energetic predictions prove prescient this time.? Or will the carnage in the streets prevail?
My mantra has not changed. We do not have enough qualified home buyers (excluding cash buyers) to take on the true, massive inventory existing in this country. Market behavior proves this. In spite of historically low interest-rates, the numbers of mortgages obtained by homebuyers remained weak.
Housing bulls ignore that fact and insist that the market has bottomed and will begin a true long term housing recovery this year.
Below are the reasons housing bulls give for their views, and why I think they are wrong.
1. Existing and New Housing Inventories are low.
While it is true that inventories of homes on the market are low, it is also true that the Banks, Freddie and Fannie are holding distressed properties off the market for now, in hopes that a stronger economy will allow the market to slowly and steadily absorb the backlog. I believe there are likely 10 - 15 million more distressed properties that will either be foreclosed upon, or part of a short sale over the next 5 – 10 years. Unless the Banks, Freddie and Fannie decide to either rent, or burn them down, it is mathematically impossible for the market to absorb this inventory in 2012.
2 . Job creation and Record Levels of Affordability
Again, this bullish argument runs smack into the wall of a harsh reality. People who have jobs right now have not been able to qualify for home loans. New lending standards (which are great for this country) and the destruction of exotic loans such as 80/20 stated income subprime loans , 80/10/10 stated income option arm loans, and the many other horrific loan products that were created and facilitated the housing bubble mean that people now must qualify for loans based on real income. But, real income has not grown in the last decade. In order for buyers to qualify for the best rates, a person must have a a good credit score. As of now , 25% of the country has a FICO score of 620 and under. Also, many homeowners who suffered short sales or foreclosures on previous properties will have to wait a period of time before they are allowed to qualify again. Even if we have job expansion in 2012, I don't believe that will create a flood of new homebuyers who can qualify for a home loan. The truth, like it or not, is that there are not enough Americans who can or will be able to afford homes as housing Bulls profess there to be.
3. Government Intervention to prop up Home prices
Government has already intervened in various ways in efforts to prop up home prices. These efforts have included: TARP, trillions of dollars spent to push mortgage rates lower, homebuyer's tax credit, financial incentives to encourage a mortgage servicer to modify distressed mortgages, and President Obama's GSE refinance plan among others. Nevertheless, even taken all together, none of these were able to stop the bleeding.
In fact , in an admission of this failure the Federal Reserve Chief Ben Bernanke issued a 28 page white paper pleading with Congress to put new housing initiatives into play. One of the items discussed was similar to an item in our housing predictions for 2012, which is a suggestion that Freddie Fannie and the banks have a structured plan to bring distressed homes onto the market as rentals rather than putting them back into for sale inventory.
The fact that the Federal Reserve has brought forward ever more efforts and suggestions to prop up housing proves that the Bulls are wrong and there is not yet an end in sight to the carnage. Bulls cannot run when they need crutches to walk.
What other steps can the Government take beyond those mentioned above? Some ideas mentioned include principal write downs, more expanded GSE refinance plans, easing up on lending standards (which will never happen), and a more aggressive loan modification program after the state AGs settle their long term disagreement with the banks.
Even if all of the above actions were taken and implemented, the hoped for results would not evolve rapidly enough to have a strong effect in 2012.
Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgages services for California residents since 1988