Case-Shiller 20-City Index Flat As HARP Will Distort Reality
According to the Case-Shiller 20-City Index for August - home prices remain unchanged. This isn't particularly good news for several reasons. First, the summer months are your strongest demand periods for homes as people tend to shop for, and move, during the summer months rather than during the school year. This stronger demand for homes typically leads to price increases during the summer months. Secondly, mortgage rates have fallen to historic lows for 30-year fixed rate mortgages which should have led to higher home sales and prices. It didn't.
One encouraging point, if you can call it that, is that the annual rate of decline improved, with prices in the 20 cities down 3.8 percent compared to a year over year decline of 4.1 percent the month before. So while the rate of decline is improving this still doesn't indicate any real shift to a strong housing market.
Of course, housing market prices have been supported, and distorted, by banks holding on to delinquent properties that should have been pushed through foreclosure and a variety of mortgage refinance programs from the government as well as the banks themselves to try and keep homeowners in homes that they can't really afford.
This is a point not lost on the White House as they enter into full blown campaign mode and event through TWO previous versions of trying to force a housing market resurgence failed it is with determined effort that a third program will surely succeed. Of course, the reality is that that there is too much inventory, too little income and not enough job growth to keep this latest anti-foreclosure from being an anti-failure.
The decline in home prices adds another problem that can't be cured anytime soon. In most cases, those that are in trouble with their mortgage stems from the fact that they overpaid for the real estate to begin with and now, due to the massive declines in prices, owe more than the property is worth.
Obama's answer is HARP - the Home Affordable Refinance Program which will now be opened up to all underwater borrowers. This growing class of home occupying debtors makes up roughly 25% of all homeowners. A shocking statistic to say the least. The problem is that many of these individuals owe more than 125% of the value of the home and while the program may temporarily stall the fall in home prices...it will only be temporary.
Why? Because the people that are underwater on their mortgage face several problems. First, if they are suffering due to a job loss the refinancing process keeps them from being mobile to move to another area where work may be found. They may save a few hundred bucks a month now but eventually, without a job or government support, they fall behind and eventually wind up back in foreclosure. Second, as people realize that they are paying money into a property that they will most likely never be able to sell for more than they owe on it - they will walk on the property anyway. Finally, the excess supply of existing homes is continually being added to, albeit at a slower rate, by new homes which ultimately begins to deteriorate existing home values as they compete with buyers for new homes.
These issues combined with overall economic weakness will continue to press on home prices in the future as they continue to revert to their long term mean. As prices continue to fall the pressure to vacate properties as the deleveraging process continues will continue to increase. In the end - guess who winds up taking the hit? Taxpayer-backed Fannie Mae or Freddie Mac since those are the only loans that are eligible under HARP.
So while the White House continues to try and keep people in homes they can't afford it trashes loan-to-value requirements, other lending standards, and prices. Since applicants can miss a mortgage payment in the last year the banks are also able to suspend appraisal fees, points and other closing costs normally charged during the refinancing process.
In other words, if you can't afford to refinance your house because you are completely broke - no problem the government and the banks will pay the costs for you. This is the type of thinking that got us into these problems to start with. If an individual can't scrape together a 20% down payment and closing costs then that means they are already living well beyond their means. Therefore, what chance do they have to succeed at paying their mortgage when something inevitably goes wrong like a job loss, etc? This is why programs like this will eventually fail and the clearing process of the system excesses will continue ultimately forcing prices lower.