Wednesday, February 9, 2011

Good News For Housing, For Real

The WSJ reports today that home affordability has returned to pre-bubble levels in many US markets in the past year. Having prices return to a point where the average person can actually buy one is far better for the economy than any bailout, tax break or zero interest rate. It didn't stop our politicians and friends at the Fed from attempting to artificially inflate prices to keep this dreaded reality from occurring, by offering free money mostly to those who didn't need or deserve it. For there are many folks out there who were prudent, bought what they could afford, had bad timing, are underwater now, can't refi, and have had to watch the parade of hand-outs pass them by. It'd be like the government refunding everybody who bought pets.com stock on margin in 2000 at the highs, without giving a penny to those who bought Enron in their retirement accounts, even though Enron was a fraud and pets.com was just a really dumb business idea. Both of them pumped by Wall Street, of course. But back to housing...

The ratio of home prices to annual income had fallen to 1.6 by last September, below the historical average of 1.9 from 1989-2003 and down from the peak of 2.3 in late 2005. Great news for those who: a.) have a job b.) need a house and don't already own one and c.) can get a mortgage. In the bad news department, there are still: a.) lots of unemployed folks out there b.) people who bought at the highs who are underwater and might walk away if prices continue to decline, and c.) mortgage rates are marching higher.

Fannie and Freddie have been the mortgage market since all of our friendly neighborhood non-conforming specialists, ahem, got out of that market rather quickly in 2007-2008. The White House is planning to release its plans for the two mortgage behemoths on Friday. Although somebody leaked to the WSJ that the administration wants to phase out the housing-finance giants, it seems impossible to imagine. They are 90% of the market. We're talking trillions of dollars. Are banks really going to originate and hold on to all those mortgages? Cause nobody is going to buy them without government guarantees. Especially not after the CDO fiasco of 2007. We'll see what the government has to say, and then the market is just going to do what it wants to do.

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