Money
No Double-Dip For Housing
Brian S. Wesbury and Robert Stein,
04.06.10, 12:01 AM EDT The Fed's termination of a mortgage purchasing
program won't be detrimental.
With evidence of a self-sustaining economic recovery now hard to
deny, many pundits are finding new reasons to be bearish. The most
recent is that the Federal Reserve has officially ended its massive
($1.25 trillion) mortgage purchasing program. This, some say, will lead
to another downturn in housing, which could drag the economy down all
over again.
Although the end of the Fed's purchases will certainly
not help the housing market, we do not believe it will result
in a "double-dip" for housing or the economy. Instead, we expect home
building, home sales and home prices to all be up a year from now vs.
where they are today. Not on every street or in every community, but
for the nation as a whole.
First, it's important to recognize that while the Fed has stopped
buying mortgage-backed securities, it is not planning on suddenly
selling its holdings. Most likely, the Fed will hang onto the vast bulk
of them for at least several years and allow the natural process of
refinancing and principal repayment to gradually reduce the size of its
portfolio.
Second, we do not expect mortgage rates to suddenly
spike as the Fed exits the market. The Fed announced the eventual end
to its mortgage purchases back in September 2009, when long-term
mortgage rates were about 160 basis points above the yield on the
10-year Treasury (roughly the 20-year average). But today, even though
the Fed has ended its program of purchases, the "spread" between
mortgage rates and the 10-year is only 120 basis points. If mortgage
lenders are suddenly having extra trouble finding the funds they need to
lend, they sure have a funny way of showing it.
Third, watchful
observers of the mortgage market know that the total amount of lending
necessary to support the housing market in the next year is not
particularly large by historical standards. Lower home prices,
relatively low levels of sales and the high loan-to-value ratios that
prevailed during the bubble years mean that the capital needed to
support housing in the next year is not that substantial.
The average price of an existing home sale right now is roughly
$220,000. Meanwhile, the typical homeowner now has a mortgage worth
62% of their home's value. So, if a buyer has to make a 20%
down-payment (which means the new mortgage equals 80% of the home's
value) and the debt that is retired by the previous owner is 62% of
value, the demand for mortgage credit goes up by only 18% of $220,000,
or approximately $40,000.
So if existing homes sell at a 5.75 million rate in the next 12
months (a 10% increase vs. the previous 12 months), that should require
about $230 billion in net new lending. Meanwhile, new home sales should
require about another $90 billion. (New homes average $275,000, and
we're assuming 20% down and sales equal to 400,000.)
In other
words the total new lending needed to support a 10% increase in housing
activity over the next 12 months is just $320 billion. Compare this to
the $150 billion to $200 billion in principal repayments over the next
year and you can see that mortgage lenders do not need a large increase
in their loan book to finance a rise in home sales.
Fourth,
housing prices have fallen below fair value. Relative to rents,
national average home prices are about 10% below fair value and have
been the lowest relative to replacement cost in more than 30 years.
Markets are efficient and participants in the housing market are well
aware of its problems, so we believe these prices already reflect the
"shadow inventory" of foreclosures and short sales in the pipeline.
Buyers and sellers are not blind, they don't have to wait to see homes
pop up on the MLS to factor them into the price they are willing to bid
or ask. That's why in the past three months some of the places with the
largest excess inventories have seen the biggest gains in prices,
including San Diego, Phoenix and Las Vegas.
Fifth, and perhaps
most important, the labor market--the last of the lagging economic
indicators--has finally fallen into place as a positive for the economy.
Private sector payrolls increased 123,000 in March (198,000 including
upward revisions to prior months). Meanwhile, civilian employment, an
alternative measure of jobs that includes the self-employed and startup
businesses, is up 1.36 million in the past three months, the most for
any three-month period since 1994.
Yes, the housing market has taken it on the chin. And, yes, the Fed
is finally backing out of the market. But for the five reasons above,
we think the battered and bruised housing market is going to be in
better shape one year from now than it is today.
Brian S. Wesbury is chief economist and Robert Stein senior
economist at First Trust Advisors in Wheaton, Ill. They write a weekly
column for Forbes. Brian S. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear
and the Economy Will Thrive.
Source: www.forbes.com
http://www.forbes.com/2010/04/05/housing-federal-reserve-mortgages-opinions-columnists-brian-wesbury-robert-stein.html?feed=rss_home
