Housing Really Is Turning

Inman News

Friday, August 10, 2012

In the absence of meaningful U.S. data, European Central Bank rattling of the printing press has taken away some of the fearful bidding for Treasurys (10-year T-note in four days from 1.49 percent to 1.72 percent), and mortgage rates have risen a little as well.

For us to return to interest rate lows or set new ones requires Armageddon over there or recession here.

Instead, odds have risen for a new European can-kick, held for the moment by a new standoff: Spain and Italy need a lot of money, but those with the money will not offer it until asked. Spain and Italy will not ask until they know what strings will be attached. (No, I am not making this up.)

Italy is the less weak of the two, and thus expects its promises alone will do, no strings. Spain already has strings: to cut its 8.5 percent of GDP budget deficit to 6.5 percent this year, to 4.5 percent next year, and to 2.8 percent in 2014. It’s chances are about even with a six-legged, eight-eyed critter snapping an Instamatic at Curiosity.

New strings would force Spain to give control of its budget to the euro Gestapo. The next inadequate and temporary can will be kicked as soon as Spain decides to the right thing: lie.

Here at home, genuine good news, adding to the up-push on rates, and to the Fed’s evident wish to defer more easing: Housing really is turning.

We get housing data in a constant stream from dozens of sources, none definitive because “housing” is an a aggregation of a gazillion micromarkets, and measuring national trend is an art form. The sources range from the imaginary (Zillow), to permanently loopy (NAR), to perma-bear (Gary Shilling), and financial analysts have an especially hard time grasping a market so different from theirs (no exchanges, no uniformity, no mobility …).

One of the best sources: mortgage-insurer MGIC’s quarterly market summary, notable for descriptive adjectives on a single page, no numbers or percentages, and the right balance of detail. MGIC rates current conditions in 73 metro areas, classifying each market as either strong, stable, soft, or weak. The report also projects whether MGIC sees conditions in each market as softening, improving or unchanged.

In the best ratio in a half-dozen years, MGIC projects 12 markets as improving versus two softening. In markets changing ratings in the last 90 days, the score is 9-0. MGIC also dropped its credit redlines of Arizona, Florida and Nevada.

However, MGIC’s assessment of current conditions shows how far we have to go: 20 metro areas are rated as weak, 25 soft, and 28 stable. Not one is rated “strong.”

To grasp the difficulty ahead, the policies that have hurt and the ones that would help, nothing beats N.Y. Fed President Bill Dudley’s speech on Jan. 6. One of a volley of papers delivered by the Fed that week, not one idea in it or the others has been adopted or advocated by the administration, by either party in Congress, or by any Republican presidential contender. (Exception: HARP underwater refis are happening in volume, but based on frequent client testimony I am suspicious of overcount by inclusion of non-HARP loans, possibly intentional by lenders looking for gold stars.)

On the essence of housing as cause of this weak economy, Dudley says, “Since home values peaked in 2006, homeowners have lost more than half their home equity — about $7.3 trillion. At present, roughly 11 million households are in negative equity with the aggregate amount of negative equity estimated to be roughly $700 billion.”

Credit is too tight. “Seventy percent of new prime conforming loans go to borrowers with FICO scores 760 or above, versus 30 percent before the crisis.” The response of lenders to the crisis has been punitive and self-defeating: “Fees for new purchase mortgages should be based on the expected losses on these mortgages — not the realized losses on loans of earlier vintages.”

Dudley also called for more loans to investor buyers. And for an end to open-season, loan-buyback demands, to be replaced by requirements for material defect, imposition of time limits, and to give buyback relief for loans defaulting after job loss.

And an equitable means of principal reduction: “The borrower could be given an open-ended option to pay off the loan at an LTV (loan-to-value ratio) of 125 percent, and the right to pay off the loan at an LTV of 95 percent after three years of timely payments.”

Of all the policy mysteries today, how advice like this can be ignored is beyond me.