Thursday, December 23, 2010

Has the Fed "Walked Away" from Housing?

Hat tip to Karl Denninger for catching this gem.

The Dallas Fed released an interesting report this morning that discussed the path to a healthy housing market.

It appears the Fed is coming to the conclusion that a reversion to the mean in home prices is the only answer you can see below,  we need to see another 23% drop in housing in order to get there:

In a nutshell, the Fed shockingly admits that their meddling via HAMP and other programs were ineffective and only juiced housing prices by about 5%. 

The Fed candidly discussed how poorly the program worked:

"A study found that in a best-case outcome, 20 to 25 percent of modifications will become permanent.[5] In 2008, one in three homeowners devoted at least a third of household income to housing; one in eight was burdened with housing costs of 50 percent or more.[6] Failed modifications suggest that, without strong income growth, the bounds of affordability can be stretched only so far.

Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration.[7] Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply (Chart 3)."

As a result, they are dramatically ramping down HAMP modifications:

As you can see below,  the effects of pulling forward demand using the housing tax credit were catastrophic:

The Fed is basically admitting that housing has been a complete nightmare since the tax credit has expired.  The time on the market for homes has surged, prices have continued to fall dramatically, and the number of offers and closed transactions and offers have also collapsed after pulling forward demand.

The Bottom Line

The Fed is basically admitting that the programs they designed to prop up housing was a total failure.  75-80% of the modifications have failed.   I have been screaming about this would not work for two years now.  One must wonder how many billions could have been saved by just allowing prices to revert to the mean.

As I have said before, you cannot re inflate bubbles once they burst.  Housing prices were simply mathematically unaffordable when they rose 85% from their mean.  The only answer in the first place was to just let them fall to levels where buyers could afford them.

That being said:  I give the Fed some serious kudos for coming out with this report.  It's the first logical thing I have heard from them in a few years.  I will always give the Fed credit where credit is due.  I am often very hard on them, but I will be the first to admit that I am pulling for them if they decide to do the right thing.

They have a long ways to go yet but hey:  It's a start.

This will not be good in the short term for the housing or banking industries if the Fed winds down these programs.  A 23% drop in housing prices to the reversion of the mean is a long ways down, and we all know that bubbles almost always overshoot the mean when they are in the process of bursting.

Prices are already down 33% so the total peak to trough drop in housing prices according to the Fed would be 56% when it's all said and done.  I guess this is possible but it sounds optimistic to be when you consider the fact that housing prices rose 85% in 2006 at the peak of the bubble. 

The banking stocks are all down today and I am sure this housing report isn't helping.


getyourselfconnected said...

Merry Christmas Jeff! All my best for 2011.

Jeff said...

Thanks Get

You as well. Happy Holidays!