Tuesday, December 7, 2010

More on Housing

Ben Bernanke was on 60 Minutes on Sunday discussing, among other things, why the second round of quantitative easing by the Fed was necessary. I agree with the Chairman, although I think the economy could also use some help from the fiscal side (but this seems unlikely to happen).

Much of the Fed's attention is focused on housing, which continues to be mired in a deep slump. I posted a couple of pieces last week about housing, but recent data that has been released reinforces the problems in this very important sector of our economy.

Interesting, although most of us would think that the way to increase demand for housing would be to simply reduce the cost of a home, this really doesn't seem to be the case. Management at Pulte - the largest publicly-traded home builder in the United States - mentioned that they saw no point in reducing the prices of their unsold inventory since consumer confidence, not prices, is what is holding back buyers.

Floyd Norris had a short piece in the New York Times on Saturday noting that lower price houses seem to be dropping at the fastest rate, which would be consistent with Pulte's comments. Here's an excerpt from his column, with the link below:

The S.&P./Case-Shiller indexes released this week showed widespread declines in home prices in the third quarter of this year as the market suffered from the removal of temporary tax credits that had led to a small rally in home prices earlier in the year. No region had lost more than 5 percent in a quarter since mid-2009, but that happened to Phoenix in the third quarter.

Home Value Sinking Fastest at Those Priced Low - NYTimes.com

The biggest fear about the future that Pulte expressed was the possible privatization of Fannie Mae and Freddie Mac. According to management, without these two government agencies there would be virtually no financing available for home buyers, since the private market has virtually disappeared.

This morning's Financial Times had article talking about the virtual elimination of the private mortgage securities market. Here's an excerpt:

The lack of new {private mortgage} deals does not mean that there are no new home loans being made in the U.S. Instead of being privately financed, new mortgages are almost entirely funded by the U.S. government, through its backing of mortgage agencies such as Fannie Mae and Freddie Mac. For nearly three years, these agencies have bought the majority of new mortgages from banks and repackaged them into government guaranteed mortgage-backed securities.

However, the private market has been shrinking: It is down by nearly $1,000bn since its peak in 2007. Indeed, {UBS's Paul} Jablansky says this has buoyed demand for other existing debt. Investors are receiving $20bn a month from expiring MBS and re-investing some it in deals that still exist.

In other words, whether the Fed's policies will be effective in helping housing may depend largely on factors outside of its control, such as consumer confidence and the fate of Fannie and Freddie.