Pop Goes the Housing Market

By John Hines
Economist

Unfinished Homes Bankers won’t tell you, but bankers are almost always motivated home sellers. They don’t become bankers to be landlords. The U.S. mortgage market is worth $10-billion in profits each year, and the people who peddle money like a pharmacist dispenses pills can make a lot more money making loans.

The direction bankers and mortgage companies are taking these days is a study in contrasts as bankers wait on the sidelines for the Obama Administration and Congress to come up with more money to buy their bad loans.

But bankers are also dumping properties through auctions and conventional means at cut-rate prices. It’s a mystical combination of actions in unprecedented times as bankers unwind the mess they made with Wall Street and order the foreclosures of millions of properties. Conventional wisdom says buying real estate as an investment these days could be the opportunity of a lifetime.

However, paying too much for property is damaging the credit records of millions of Americans as foreclosures climb and more and more homeowners walk away from property. ‘Strategic foreclosures’ are growing. The crisis has caught the attention of just about everyone, many of whom are amazed at the number of people walking away from mortgages. Studies show as many as 25% of today’s foreclosures are strategically planned.

A loss of equity is the primary motivator with a lack of confidence in a healthy recovery of the market coming in a close second. The prevailing economic winds indicate that Fannie Mae and Freddie Mac have become nationalized entities for good. Mortgage lending is nationalized.

The uncertainties of real estate are many. But demand drives consumers’ spending habits. The demand for lower priced housing is soaring as evidenced by the rise in home buying conventionally and at auctions.

Growing unemployment figures, however, demonstrate another sign of continued weakness in the economy as are a host of other economic indicators. But why is housing looking up? It may just be that people think prices are low enough and when people believe prices are at the low point sales rise. The equation that historically follows is higher home prices.

In economics the theory is known as a feed back loop. When people feel things are getting better and they talk about how prices are at “new lows” then it eventually transforms into a better market. The catch is figuring out the mania of human nature, which even the best of psychiatrists say may be impossible to predict. Then again, the market could turn into another buying frenzy as prices continue falling, destabilizing the housing market further.

Banking analysts are trying to get a handle on this. Congress has held hearings to listen to testimony on how it will play out, and veteran real estate analysts study the inner-workings of the process daily. There is no clear cut answer. Consumers drive all business markets.

Bankers are trying to manipulate housing markets by holding back foreclosed inventory. More than 2-million homes are vacant in the U.S. New home builders are taking it slow with new housing starts.

Bankers are waiting to hear how much more they’ll be subsidized to foreclosure on properties by the government. In the mean time, new home and business lending remains slow as bankers keep lending qualification standards at high levels. So it might be best to make sure that you can reasonably afford a new home even in a hardship like losing a job before taking the plunge on a new bigger mortgage.

John Hines is Housing Predictor’s real estate economist.