Thursday August 12, 2010 - 15:07:26 GMT
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Household Exposure to Housing-Related Debt, Falling Home Prices Big (FXA)
Household Exposure to Housing-Related Debt, Falling Home Prices Big
I canâ€™t help but sense that the housing calamity, the key to the financial crisis and economic Great Recession, is widely seen by markets, the general public and press as behind us. The bottom is in. Just like stocks put in a bottom in the spring of 2009.
Prior to 2007 we can recall the widely held perception that US home prices would never decline. Now we hear how home prices have declined enough to clear the market and prices canâ€™t fall again.
I canâ€™t pretend to know if home prices will fall more or whether housing will play into extending (I think it never ended) the Great Recession. But if there is any better indicator that most still think home prices have no downside than have a listen to one of my favorite academic economists Robert Shiller on Kudlow Report last night (here). If homeowners, which for the vast majority the home is the single biggest asset, were fearful of further declines in home prices they would clamor for some insurance against falling home prices (Shiller has been instrumental in launching a housing price futures contract). The volume in the housing price contract (based on Case-Shiller/S&P price index) is paltry. Build it and they will comeâ€¦if they see a need or risk. Clearly few if any homeowner sees any real risk of future declines in home prices or they would be paying up for insurance.
Which takes me back to Shiller who is always asked by TV interviewers where home prices are headed? He always says the same thingâ€¦I do not know. If only 5% of the talking heads could be this honest we might have a reason to turn the volume up on our favorite financial TV programs. Shiller is man enough to admit claiming to know the unknown is a foolâ€™s game. But what Shiller points out that in light of the fundamentals there is a risk home prices can still go lower and yet few homeowners see a need to insure against this â€“ or lenders (they could force high LTVâ€™s to insure against falling home prices on new or refinanced mortgages). Yet they donâ€™t. It is as if nothing was learned from the 2008-2009 collapse in banking and economic activity precipitated by falling home prices. Who says markets are rational much less households? Maybe it is time for academic economics to develop an irrational expectations model â€“ un-Lucas/Muth world. I do dumb things all the time and usually at greater frequency if money is involved. Behavioral economics is a good start, but like any problem in econ theory going from micro to macro is immensely problematic.
Housing data of late have been highly distorted by government programs â€“ end of the tax credit for qualified home buyers (mostly FHA sponsored loans for low-end, entry-level homes) in April. Also government efforts to get servicers and lenders to modify mortgages to keep people from defaulting have added months to the foreclosure process without really resolving the problem of affordability (recall Kudlow report on what happened in Atlanta Wednesday when federal money was released for aiding underwater homeowners). And it also coming to light that high end home foreclosures are also backing up at the lender level as banks do not want to take writedowns on jumbo loans, nor assume the risk of increasing supply of these homes for fear it drives like-priced homes down in price. And we should not underestimate the impact that households not making mortgage payments is having on â€śdisposable incomeâ€ť and consumption.
So it was with interest today that I read the NYTâ€™s article on how deadbeat homeowners are bagging it on home equity lines of credit for which lenders have no collateral and little recourse to recover (here). Who would have thought that the only incentive homeowners face for first defaulting on home equity lines of credit and also mortgages is public humiliation and to preserve a credit score. This is not a position of strength for lenders. Default is no longer a taboo and credit scores are meaningless in the new world of a cash-based economyâ€¦anyone can open a bank account and get a debit card for transactions.
Does anyone think banks want to be in the business of lending to households when the incentives are so aligned against making good on loans at the margin?
What is government doing now to address foreclosures? Channeling funds into 17 states and Washington, DC where high levels of unemployment are forcing homeowners into foreclosureâ€¦yes California, Arizona, Nevada and Florida all are on the list. OK the program is peanuts at $2bln but this could be the beginning of doing for Main Street what was done for Wall Streetâ€¦household (homeowner) bailoutâ€¦and could grow from here. However, this kind of assistance will need to become enormous before it has any impact at all on the dam of foreclosures up stream ready to spillover.
So it is not wildly out of the realm of possibilities to think the problem that triggered the 2008 debacle is still with us if in a less threatening (not nuclear annihilation) manner. Like Shiller I am worried and looking at his home price futures contracts.
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