How to survive a five-year slump in housing

The hopeful maxim of Charles Dickens’ perennial debtor that “something will turn up” nourishes American housebuilders, realtors and homeowners. The industry has endured a horrible five years. Housing starts rallied a little in June but are still at historic lows. Prices continue to fall, although there is huge variation between regions. The stockmarket is above its mark of five years ago; the homebuilders index is 60% below.

Eventually, perhaps soon, the market must obey Mr Dicken’s dictum. Prices have dipped below fair value, according to The Economist’s price-to-rents ratio. Homes are now affordable. The rate of household formation, suppressed for years as people have put off renting or buying their own homes, will bounce back: few sane people want to live with their parents until they’re 40. A big bounce is unlikely: credit for mortgages is hard to get and consumer confidence fragile. But rental markets are tightening and builders are already talking about inflection points.

Not long ago “there was no light at the end of the tunnel,” “Now there’s light, it’s just that the tunnel is very long.”

Are Unsellable Homes Holding Back Job Growth?

Many economists have argued that the continually deteriorating housing market may be holding workers back from relocating to areas where jobs are more plentiful. If you can’t sell your home in Detroit, where the unemployment rate is 11.6 percent, you’re not able to move to Fargo, where the rate is a mere 3.5 percent. That creates a geographic mismatch in the labor market, and keeps job growth lower than it might otherwise be if workers were more mobile.

A new study from researchers at the Federal Reserve Bank of Chicago calls this assumption into question. The researchers looked at Census data on state-to-state migration patterns through the summer of 2010, paying special attention to migration of renters versus homeowners. Homeowners always have lower migration rates than renters, but if “house lock” was unusually problematic in recent years, you would expect that the two migration rates would move in opposite directions; homeowners would move less than they usually do, while renters would continue moving at the same rate as they do during a normal economy, or even faster.

The authors also found that states with unusually bad housing busts did not have appreciably lower emigration rates, either. They concluded: State-to-state migration rates among homeowners fell roughly in line with those of renters during the latest recession and early recovery period and roughly in line with previous recessions. Moreover, there is little evidence that migration varied based on the magnitude of a state’s recent house price decline or the employment status of the household head. Given our findings and the significant amount of other current evidence, we conclude that there is little empirical evidence that house lock has been an important driver of the recent high unemployment rate.

That’s not to say worker-job mismatch is totally absent. While economists generally agree that the jobs crisis is primarily cyclical — that is, related to temporarily low demand — there are reasons to believe that at least some of the problem is structural.

California Senate Bill 458 CA SB 458 Forgives All Debt After a Short Sale

July 18, 2011: A new California law will further protect homeowners pursuing short sales by barring first and second lien holders from going after sellers for money owed after the short sales close.

Gov. Jerry Brown signed Senate Bill 458, authored by Senate Majority Leader Ellen Corbett (D-San Leandro,) into law on Friday. Full Text of the Bill here.

A short sale is a transaction in which the homeowner owes more on the loan than the property is worth. To sell the home, the lien holder or lien holders must approve the sale because the amount owed to the lien holder will be “short” of what is currently owed by the borrower.

The new law builds on the protections offered by a previous law, SB 931, which required the first lien holder in a short sale to accept an agreed-upon payment as the full payment for the outstanding loan balance. The previous law did not address junior lien holders. The new law, which became effective immediately, now prohibits secondary lien holders from pursuing deficiencies after a short sale closes.

The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference,” said California Association of Realtors President Beth L. Peerce. “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”

Letting Bankers Walk

Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers. This principle was on display during the final months of the Bush administration, when a huge lifeline for the banks was made available with few strings attached. It was equally on display in the early months of the Obama administration, when President Obama reneged on his campaign pledge to “change our bankruptcy laws to make it easier for families to stay in their homes.” And the principle is still operating right now, as federal officials press state attorneys general to accept a very modest settlement from banks that engaged in abusive mortgage practices.

Last fall, we learned that many mortgage lenders were engaging in illegal foreclosures. Most conspicuously, “robo-signers” were attesting that banks had the required documentation to seize homes without checking to see whether they actually had the right to do so — and in many cases they didn’t.

The claim that removing the legal cloud over foreclosure would help the housing market — in particular, that it would help support housing prices — leaves me scratching my head. It would just accelerate foreclosures, and if more families were evicted from their homes, that would mean more homes offered for sale — an increase in supply. An increase in the supply of a good usually pushes that good’s price down, not up. Why should the effect on housing go the opposite way?

You might point to the mortgage relief that would supposedly be extracted as part of the settlement. But if mortgage relief is that crucial, why isn’t the administration making a major push to reinvigorate its own Home Affordable Modification Program, which has spent only a small fraction of its money? Or if making that program actually work is hard, why should we believe that any program instituted as part of a mortgage-abuse settlement would work any better?

Sorry, but the case that letting banks off the hook would help the housing market just doesn’t hold together.
What about the argument that getting tough with the banks would threaten the overall economy? Here the question is: What’s holding the economy back?

It’s not the state of the banks. It’s true that fears about bank solvency disrupted financial markets in late 2008 and early 2009. But those markets have long since returned to normal, in large part because everyone now knows that banks will be bailed out if they get in trouble.

The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. Serious mortgage relief could make a dent in that problem; a $30 billion settlement from the banks, even if it proved more effective than the government’s modification program, would not.
So when officials tell you that we must rush to settle with the banks for the sake of the economy, don’t believe them. We should do this right, and hold bankers accountable for their actions. By Paul Krugman.

Mexico has become a better place to live

Over the past 15 years, Mexico once defined by poverty and beaches has progressed politically and economically in ways rarely acknowledged by Americans debating immigration. Even far from the coasts or the manufacturing sector at the border, democracy is better established, incomes have generally risen and poverty has declined.

Circumstances in Jalisco, a state in west-central Mexico, are illustrative:

The recession cut into immigrant earnings in the United States, according to the Pew Hispanic Center, even as wages have risen in Mexico, according to World Bank figures. Jalisco’s quality of life has improved in other ways, too. About a decade ago, the cluster of the Orozco ranches on Agua Negra’s outskirts received electricity and running water. New census data shows a broad expansion of such services: water and trash collection, once unheard of outside cities, are now available to more than 90 percent of Jalisco’s homes. Dirt floors can now be found in only 3 percent of the state’s houses, down from 12 percent in 1990.

I was recently admiring Walker Evans’s photographs of Depression-era sharecroppers in “Let Us Now Praise Famous Men”, his masterpiece with the writer James Agee. The pictures of dirty-faced families in tattered clothes and tumbledown shacks reminded me that within my grandparents’ lifetime America was to a large extent a “second-world” country (if that), by today’s standards. In the broad sweep of history, American standards of living have come a long way in an amazingly short period of time.

As Mexico continues to improve its physical and institutional infrastructure, educate its populace, and put productivity-enhancing technology to better and more widespread use, its standard of living will swiftly approach America’s. “Catch-up” growth is swift. When a typical Mexican can expect to live at a level of comfort comparable to a typical 1960s American, the “problem” of Mexican immigration will be no more. An overwhelming majority of Mexicans want to stay in Mexico and, as we are seeing, they do stay when Mexico offers even a relatively middling level of opportunity and material welfare.

Jobless Claims Expectedly Increase

HOPES had risen in the past week that America’s economic soft patch was ending. They have just been doused with a bucket of cold water. The job market showed further deterioration in June from May, the government reported on Friday. The number of non-farm jobs rose a meager 18,000, lower even than May’s 25,000 number (itself revised down from the original estimate). The two months together mark a dramatic deceleration from the previous three when payroll growth averaged 215,000 per month.

The unemployment rate, meanwhile, rose for the fourth consecutive month to 9.2%, from 9.1% in May. It was 8.8% in March. The economic recovery celebrated (if you could call it that) its second anniversary on July 1st, and in that time the unemployment rate has moved a lot while ending up almost exactly where it began. America has made almost no progress closing the output gap opened up by the recession. The U-6 unemployment rate, which includes people who have given up looking for jobs and part timers who want full time work, shot up to 16.2% from 15.8% and the average duration of unemployment hit a new high of 39.9 weeks. More women than men lost jobs. Indeed, since the recovery began, women have fared worse than men, a reversal of the pattern during the recession, as a new Pew study documents. Still, the male unemployment rate rose more last month than the female rate.

Housing Rents on the Upswing

A bubble that caused a global recession has been a long time deflating. The American housing market began to decline half a decade ago and hasn’t stopped yet. Prices dropped by 5.1% from the year before, according to the latest S&P/Case-Shiller national index.

By our calculations, however, America’s housing market has overshot the fair-value mark, as measured by the long-run average ratio of house prices to rents. Rents are rising: an increase in the cost of rental housing contributed to May’s robust American inflation data. With home ownership looking a better deal, prices should stabilise. The Case-Shiller index posted a month-on-month increase in April for the first time since July 2010. It was not alone in showing gains. The Federal Housing Finance Agency (FHFA) price series ticked up in April for the first time since May 2010, and the CoreLogic index of home prices, a favourite of the Federal Reserve, notched price rises in both April and May. The pace of sales has been sluggish but an index of pending home sales posted a surprisingly large gain in May.

The best news of all may be the ongoing improvement in credit conditions. Delinquencies have trended downward since late 2009. Consumer-debt payments relative to incomes are at a 17-year low and household credit scores are rising. Banks are still being stingy with credit but households are better positioned than they were to take advantage of cheaper homes states The Economist.