Front Porch Forecast: Housing Market Set to Tumble Without Intervention
The perilous condition of the housing market became obvious on Oct. 14 when Realty Trac, the national real estate research firm, released its third quarter report on foreclosure filings for the various states.
Foreclosure actions jumped 23 percent nationwide in the quarter from the same 2008 period, including 10,620 filings in Minnesota. That was a whopping 100.3 percent increase from the 2008 third quarter here in the 'land of 10,000 lakes.'
"This is worse that we feared," said veteran Twin Cities banker Larry Buegler. "And it's going to get even worse in the next few months."
That was the conclusion of industry experts interviewed by Stephanie Armour who wrote about the Realty Trac findings for USA Today (see reference below). A large number of adjustable rate mortgages are about to reset, stressing more households as monthly payment costs jump; about 2.8 million home loans are now on interest-only payment schedules, and those costs will rise. Meanwhile, unemployment data show jobs aren't increasing sufficiently to help struggling families with house payments.
This is what is triggering Obama administration efforts to stimulate the housing market.
The administration announced Oct. 19 it will use Fannie Mae and Freddie Mac mortgage companies to package mortgages made through state housing finance agencies and sell them as Treasury bonds.
It is also the reason why Minnesota 2020 teamed with Buegler a year ago to call for a Minnesota Home Values Guarantee Program to bring some stability to the state's housing market by effectively placing a five-year floor under home values. It would use the Minnesota Housing Finance Agency bonding authority in future years to underwrite the guarantee like an insurance policy-not unlike a trial program already on the books but rarely used in Syracuse, N.Y.
Not only would such a guarantee signal to home buyers and lenders that the bottom has been reached on home prices, it would also assure lenders they could restructure troubled loans without fear that rewritten mortgages would again sink "below water" in another few months.
Minnesota's stake in the worsening housing situation isn't clear, but we are not performing as well as other states in keeping roofs over our heads. In the Brookings Institute's MetroMonitor look at the economies of the 100 largest metropolitan areas for the second quarter, the Twin Cities metro area ranked 55th in employment with a 3.9 percent decline from the peak, 43rd in unemployment with a 3.4 percent change from the peak, 47th in gross metropolitan product (GMP) from the peak with a 4 percent decline, and 59th in percent change in housing prices from second quarter 2008 to this year, with a 2.9 percent decline.
In other words, the Twin Cities are middling, at best, against four major economic indicators when compared with the nation's other leading metropolitan areas. And in terms of homes held by lenders from foreclosures and voluntary conveyances, the Twin Cities are way down the list in 91st place with 7.66 held properties per 1,000 mortgages.
Compare that with Syracuse. The Brookings report showed that Syracuse had the lowest foreclosure rate among the nation's largest metro areas, at 0.6 percent for 1,000 mortgages. It ranked 38th in unemployment, way down the list at 85th in gross metropolitan product, but 12th in employment with a 1.8 percent decline from third quarter 2008 that bettered the national average decline of 4.1 percent.
Despite signs that Syracuse still lingers under problems from a weak industrial base, as the community's economy now revolves around education and health care institutions, the city's trial home values guarantee program appears to have nudged the housing market back to stability. Home prices gained 3.4 percent, seventh best among the 100 largest metro areas, between the 2008-2009 quarters, while the average for the metro areas was a 4.4 percent decline.
Alan Berube, senior fellow and research director at Brookings, said in an interview that diverse influences determine how metro area economies and housing markets perform. Nonetheless, he said, programs like that offered but not actually used at Syracuse and as proposed by Minnesota 2020 can turn markets at the local level.
Berube is a critic of blanket, non-targeted national programs like the $8,000 first-time homebuyer's tax credit program that is now set to expire. If politics requires that program to be extended, as now seems likely, Berube said in an op-ed piece made available by Brookings, then it should be targeted to areas where it is most needed. Estimates run that four out of five homebuyers who have used the program would have made purchases anyway, and that homebuyers already receive "all manner of tax breaks..."
Subsidizing purchases as opposed to propping up the market adds greatly to costs, said Buegler. Moreover, such subsidies do little to encourage lenders to restructure troubled loans-a problem that needs resolution for both borrowers and lenders.
That need was driven home in a Chris Serres feature in the Star Tribune on Oct. 5. He noted that a small fraction of Minnesota homeowners were getting relief under the federal Home Affordability Modification Program for restructuring onerous mortgage debt.
"If you look at all this, you should ask, 'What's going on?' Well, its pretty simple," Buegler said. "The economy can't turn around until the housing market turns around, strengthening consumer confidence and financial institutions. We're missing the mark because we aren't fixing the housing market."
Armour, Stephanie. "Foreclosures in 3rd quarter up nearly 23 percent from 2008." USA Today. Oct. 15, 2009.
Associated Press. "States to receive new mortgage help." St. Paul Pioneer Press. Oct. 20, 2009.
Berube, Alan. "Smarter Dumb Tax Policy." Brookings Institute. Oct. 9, 2009. Online at www.brookings.edu.
Berube, Alan, Howard Wial and Alec Friedhoff. MetroMonitor: Tracking Economic Recession and Recovery in America's 100 Largest Metropolitan Areas. Brookings Institute. September 2009. This second quarter report is online at www.brookings.edu.
Buegler, Larry and Lee Egerstrom. Stopping the Freefall: Stabilizing Minnesota's Housing Market. Minnesota 2020. Oct. 20, 2008.
Moriarty, Rick. "Syracuse housing market ranks high in new report on economies of 100 largest metropolitan areas." The (Syracuse) Post-Standard. Set. 15, 2009.
Serres, Chris. "Mortgage relief hard to come by." Star Tribune. Oct. 5, 2009.