Housing Market’s Fate is Tied to Jobs and Mortgage Finance
Like we needed another metaphor for housing’s deep freeze here in Washington, D.C…. now intrepid (or foolish) souls who venture out–as we did this morning–into the bleak icy tundra that is the nation’s Capitol need to tromp nary a block before they encounter some car or truck stuck, tires screaming, going nowhere at full speed.
Ice and snow paralyzed city streets….Wheels spinning futilely, hmmm, now what does all this remind us of? Here, verbatim, was the comment one of our best remote workers had when he learned our D.C. offices might be closed in synchrony with the human resources dictates of the Federal Government:
Hey….if the federal government shuts down, that means they can’t spend any money… BRING ON THE SNOW!
You’d have to question the intelligence, sanity, or desperation of the people who’d actually get in a car–especially an everyday two-wheel drive sedan–and try to get around Washington’s mean streets amid the historic blast of winter that has been D.C. over the past few days. Then again, you’d be questioning lots and lots of people. There they all are, stranded atop virtual burgs of ice or rocking from forward to reverse deeper and deeper into their personal snowbanks.
Whether or not it’s a case of a low IQ, an elevated degree of madness, or same extreme measure of urgency, we think each of the paralyzed drivers must have started their vehicle with the same thought: “Not me; others might get stuck, but I won’t.”
Isn’t this just like the mess so many of us have gotten ourselves into with our household balance sheets? Isn’t it also just like the boneheaded ways many of us try to get out of the mess, which only appear to make matters worse?
If 2009’s rabbit-out-of-hat economic development–both costly and hard-earned–left us with a nascent, entirely-too-fragile housing recovery, what we’ve got now is either an affordability-and-scarcity-based continuation of that baby-steps recovery, or we’ve got a relapse into full-scale housing deflation and misery.
Housing Bulls believe right now that historical affordability–monthly payment comparisons to market rate rentals, household income levels, and comparisons to peak pricing of 2006–and the gradual vanishing point of new-home inventory will catalyze demand beyond April 30, June 30, right through and into 2011 on a modestly upward trajectory.
Housing Bears believe right now that historically high levels of absolute house unit vacancies and scary rates of delinquencies and defaults will continue to smother any green shoots of demand with a tidal wave of supply.
What those in the know fear most about the fragility of recovery is not so much the expiration of home buyer tax credits, but the host of artificial supports and supply constraints that have buoyed housing for the better part of three years now, but which have also prevented assets from finding their own supportable floor.
So, policy’s double-edged sword is that the programs that are probably masking widespread insolvency in the financial system are also keeping the private investor sector from engaging in productive bid-ask dealings. The kind of catharsis that would truly cleanse both Wall Street and Main Street of all their respective financial shennanigans, would cripple too many parties too profoundly–or so the thinking goes.
Hence, the daisy-chain of interventions, some of them mere theories and ideas thrown against the wall to see if they’ll stick. Treasury’s HAMP hasn’t.
Sheila Bair plunged head-first into trying to get her agency to lever FDIC powers among member banks to play nice and HAMP distressed homeowners with more tolerable monthly payment terms. The FDIC’s focus on enabling mortgage modification brought with it a series of consequences, one of which has been a massive stalling of the resolution of properties around newly viable bid-and-ask transactions.
Just talk to a few veterans of the home building world, and many of them will tell you it’s still “too soon” to find opportunistic, franchise-making plays in the market place.
What residential real estate continues to deal with is a bunch of “wished fors” that we should have been more careful about wishing for in the first place.
We’re in limbo because “strategic non-foreclosures” — a term we borrow from The Big Picture financial blog — have become the banks’ answer to “strategic defaults.” If there’s little or no negative consquence to the pervasive “extend and pretend” environment, then what incentive might there be to work through the problem and concede on some portion of each dollar at stake that one wants.
What current dynamics and actual transactions tell us with eloquent brutality is that the residential real estate dollar is no longer worth a dollar (or, rather it was never worth a dollar but everyone thought it was).
In exchange for our 2006 dollar we get a series of difficult choices: 1) a few pennies and a lot of righteous indignation; 2) a few more pennies and a willingness to cooperate with so-called opposing interests; 3) the most pennies, the willingness to cooperate, and a go-forward plan that viably bridges a job-loss environment to a job-creation environment of the future.
Andrew Hede, a managing director for restructuring consultancy Alvarez & Marsal, worries that smaller, lending-reliant home building and development companies hold the short end of the stick when it comes to proving their viability for the long run in this inhospitable marketplace.
“Lenders look first at where they have the most to lose, the bigger companies, and they’re beginning to be willing to renegotiate and come to new terms,” says Hede. “They’re not so willing to do that with the smaller players, which doesn’t bode well for smaller players’ viability in the long run.”
“Extend and pretend” may keep foreclosures from erupting into Armageddon, and it may actually keep some lenders from foreclosing on some nonperforming communities and AC&D loans while everybody keeps vigil on the mood of the almighty prospective home buyer.
Some estimates are that the tangible net worth of the average renter right now is about $7,500. That’s 20% of less than $38,000, which is about one-third the cost of a modest new home.
So, the tailwinds necessary for the pro formas of any new-home construction business to make viable sense right now are 1) the opposite of job losses, and 2) the opposite of excessively tight lending standards. Anything aggressive in a home builder’s sales projections will still get a big red flag from any body with money at stake.
“Until there’s beginnings of a marketplace recovery, and you see job creation and easier access to mortgage finance, companies have to focus on fundamental balance sheet issues,” says Hede. “Liquidity, cash flow, preserving core fundamental assets, possibly exiting non-core communities or markets, and everybody needs concessions everywhere with partners, lenders, and other creditors.”
In other words, 2010 is one big work out. Or as New Yorker writer James Surowiecki phrases it in his piece, “The Populism Problem:”
“The only way out is through.”
What some drivers learn in Washington, D.C.’s ice and snow choked streets these days is that the more they gun the accelerator, the more likely it is they’re going to need more people and more time to push them out of the hole they’re in.
Too bad the government’s shut down, or some of them might learn something by walking through the Capitol’s streets on a Winter’s day that should be the start of housing’s Spring selling season.
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