Question: Do you think the Democrats are worried about a housing slump in the second half of 2014?
Earlier this week, I participated on a panel in Washington at a conference sponsored by my friends at The Five Star Institute, one of the leading media companies focused on the housing sector. With me on the panel were three housing senior bureaucrats: Laurie Maggiano from the Consumer Finance Protection Board; Meg Burns from the Federal Housing Finance Administration; and Genger Charles, a political appointee now at the Department of Housing and Urban Development.
All of these fine public servants spent a great deal of time talking about how their various agencies are creating “guidance” to help lenders make more loans in the nightmare environment we have created for mortgage credit since 2010. The passage of the Dodd-Frank law and the adoption of the Basel III capital rules have essentially killed the supply of credit for millions of American families that want to own homes. However, the lack of supply of credit is not the only factor constraining the housing sector.
Earlier that day, a number of speakers from various government agencies commented on how weak the US housing sector remains. Home purchases, mortgage lending, and new applications for mortgages are all running at levels that are less than half of pre-crisis volumes. The most recent data from S&P Case-Shiller for January 2014 shows that home price appreciation or “HPA” is continuing to slow from the torrid levels seen last year. In many communities, home prices have started to fall. S&P notes:
The 20-City Composite, a broader measure of home prices, posted its third consecutive monthly decline of 0.1%. Twelve cities declined in January with Chicago decreasing 1.2%. Las Vegas led at +1.1% and posted its 22nd consecutive monthly gain. Despite recent advances, Las Vegas is still the farthest from its high set in August 2006 with a peak-to-current decline of 45%. Dallas and Denver are now less than 1% away from their recent all-time index highs.
One big reason that the current level of home prices may be difficult to maintain is the lack of first-time home buyers. Frank Nothaft, Chief Economist at Freddie Mac, noted that a weak jobs market and consumer income are major factors preventing many Americans from buying homes. Another participant at the Five Star event noted, “House prices cannot keep going up double digits, must reconnect with the fundamentals… Consumer confidence remains weak…”
Many of the bureaucrats represented at the Five Star event believe that consumer protection is the most important ingredient to restoring health to the US mortgage market; however, in fact, the government is perhaps the largest obstacle to achieving that goal. The duopoly between the “too big to fail” banks and the mortgage GSEs has a stranglehold over the mortgage markets, making it difficult for private investors to operate at all in the market for housing finance.
Yet while it is important to be critical of the role of government in throttling the housing recovery, it needs to be said that conservative pipe dreams about a “return” of private capital to the mortgage market are equally ridiculous. The government monopolizes the $10 trillion market for mortgage finance because the private sector is unwilling to put capital at risk to finance home mortgages. As Ginnie Mae President Ted Tozer told the audience at The Five Star, global investors have been unwilling to take default risk on mortgage securities, in part because their sheer size of the asset class is too large. Even the US banking industry supports only about 20% of that total or some $2 trillion on its balance sheet. The rest of the $10 trillion is owned by investors who are willing to manage the interest rate risk of a 30-year mortgage but have no interest in understanding, much less underwriting, private credit risk on home mortgages.
My view of housing reform is that an ideal market is going to look something like Ginnie Mae today, with private capital standing in front of the US government, which will act as the ultimate backstop for the housing finance market. Before we can really talk about eliminating Fannie Mae and Freddie Mac and moving to a new model for housing finance in the US, members of both parties need to focus on the fact that the US housing market recovery is basically over. In 2014, it is likely that home prices in many markets are going to fall.
Maybe this bleak outlook for housing is why Ms. Charles and her colleagues at HUD are desperately looking for ways to break the choke hold that Dodd-Frank and Basel III have placed over the market for new home mortgages. Charles, who was selected by President Barack Obama as a young “leader,” makes no bones about the fact that addressing the “false tension” between regulation and home mortgage lending is suddenly a top priority for the Obama Administration.
In fact, the Obama White House is facing the prospect of Republicans winning the House and Senate this November, in large part because excessive regulation via Dodd-Frank is killing the US housing sector and, indirectly, the prospects for jobs and growth in the wider economy. Until we all understand that government regulation is perhaps the biggest obstacle to restoring the health of the US mortgage sector, millions of Americans are likely to be shut out of realizing the dream of home ownership.