From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘secondary mortgage market

New Home Sales — “Much Ado About Not Enough”

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Big news today — new home sales hit an annualized rate of 369,000 in May, compared to 343,000 in April.  That’s 20% higher than a year ago.  It also beat economists collective prognostications of 350,000.

Wow…. and only about 63% less than the 1,000,000 per year we would consider health.

And about 74% below the peak of 1.4 million during the boom years.

Obviously, there’s a problem here, and unless and until we get back to “normal”, the portion of the economy which is driven by home development, construction, financing, and sales will continue to suffer.  Three things are currently terribly broken, and fixing them is no easy task.

1.  The lending market is utterly disfunctional.  There was a great headline in one of the papers the other day — if you don’t NEED money, there’s plenty of it.  Unquestionably, one of the contributing factors (not a major one — but one, none the less) to the market meltdown was the sale and financing of homes to folks who had utterly no idea how they were going to meet their mortgage payments.  However, even in good times, we know that a certain percentage of loans will go sour — call it about 2%.  The straw that broke the camel’s back was when the recession hit, that “sour loan” percentage went up to about 4% – 6%.  Unfortunately, the secondary market had “priced” these loan pools with the notion that only 2% or so would go bad.  The loan pools themselves were so badly over-leveraged (at Lehman, apparently, the pools were leveraged something like 35-to-1 or more) that an increase into the 4% range completely destroyed the secondary mortgage market.  Today, the pendulum has swung too-far in the other direction, and first-time homebuyers, who often have good jobs but little in the way of demonstrable credit, are completely shut out.  If they can’t buy “starter” homes, then the “move-up” market suffers, and the retirees (who want to buy in places like Reno and Ft. Lauderdale) can’t sell their homes to “move down”.  Fixing this lending crisis is the first order of business.

2.  The land development business is broken.  Even if we magically “fixed” the lending problem tomorrow, there is a real shortage of land in the development pipeline.  It takes years to turn a vacant field into a subdivision full of lots (or a condo site), with extensive engineering, planning, financing, and entrepreneurship efforts.  Even in good years, there is a fair amount of risk-taking and capital expenditure.  We can’t just pick up where we left off a few years ago, because many (most?  nearly all?) of these development projects burst like soap bubbles during the recession.  Thus, we have to completely hit the “re-start” button on subdivision development in America.  Unfortunately, there is absolutely no appetite for financing these projects, and many of the players have gone out of business.  After World War II, the country was able to kick-start the housing market with extraordinarly favorable financing (remember VA and FHA loans?).  None of that exists today, and the secondary market to sustain all of that has gone away.  In the absense of a Federal mandate to kick-start housing, comparable to the GI Bill of 1944, this aspect of the market will continue to be flat-lined.

3.  Local community infrastructure development is broken.  Housing development requires a substantial public-private partnership.  In many communities, much of this is paid for as a “public good”, while in others there is the expectation of significant developer contribution.  Nevertheless, local planning agencies, transportation and utility departments, and even school districts and fire departments have to stand ready to provide infrastructure for housing.  Local government fiscal crises have frequently broken the back of these agencies.  Nationally, we’ve laid off something like 50,000 teachers in the past few years, yet new housing development and household formation will require increasing numbers of schools.  The same is true for fire fighters, EMTs, police, road maintenance, and utilities.  Until our cities, counties, and states are back on their financial feet, this segment of the equation will continue broken

Sadly, these are interactive parts of the same equation.  For example, local governments fund planning departments with fees paid by developers.  Hence, the city or county reviews tomorrow’s building permits with fees paid by yesterday’s developers.  Restarting the system will take talent, money, and some significant leadership, none of which is currently apparent.

Written by johnkilpatrick

June 25, 2012 at 9:11 am

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