Home Sales Double Punched by Financial Regulation

Home Sales Double Punched by Financial Regulation

iStockphoto/The Fiscal Times

The hideout in Abbottabad isn’t the only bin Laden property that’s looking for a new occupant. Turns out there’s a waterfront five-bedroom mansion within missile range of Disney World now on the market for $1,999,000 that once belonged to one of Bin Laden’s 54 siblings. (Fifty four! Where was Planned Parenthood?) Something of a “fixer-upper” – bullet holes decorate the walls and some damage was sustained when a safe was thrown down the stairs – the house still appears a bargain, on the market for less than half the purchase price of $4 million paid in 2006.

Unfortunately, the fire-sale price on the bin Laden property reflects an industry that is still wildly depressed, and according to at least one source, actually getting worse. News from real estate site Zillow that the slide in housing prices accelerated in the first quarter was disheartening. A report showed that home values dropped 3% from the last quarter of 2010 - the worst decline since the last three months of 2008. Zillow concludes that March marked the 57th consecutive down month for housing prices, with current values off 8% from a year ago and now nearly 30% off their high point in June 2006.

Spokesman Walter Molony of the National Association of Realtors (NAR) finds flaws with Zillow’s data, pointing out that the site’s price series began to diverge in late 2009 from the less negative assessments posted by most other sources, including Case-Shiller and NAR. The reason, says Mr. Molony, is that Zillow uses estimates based on a sample of transactions which are currently unduly influenced by properties in foreclosure selling at a steep mark-down. Others look at a much wider array of actual transactions.

That said, NAR’s most recent survey, published yesterday, also shows a continued slump in home prices. The report indicated that house prices were off 4.6% in the first quarter from the year-earlier level. NAR cited a large overhang of properties in foreclosure for continued pressure on prices. In either case, the news is discouraging.   

The country’s housing stock shrank
in value by $1.7 trillion in 2010
on top of a $1 trillion loss in 2009.

Though the consensus has been that real estate would be one of the last sectors of the economy to bottom, the continuing price slide has analysts revising down their forecasts. Given the importance of the housing market to the nation’s wealth, and to employment, the Obama administration has been scrambling to provide support. A Zillow report estimates that the country’s housing stock shrank in value by $1.7 trillion   in 2010 on top of a $1 trillion loss in 2009. That hit to consumers’ net worth is one of many factors retarding spending. Another is unemployment, which is above 17% in the construction trades.  

Unhappily, none of the programs offered by the White House has had much impact. The most ambitious was the homebuyer tax credit, initially adopted in 2008 but then modified and expanded in 2009. That program gave first-time buyers, generally thought to make up some 40% of all purchases, an $8,000 tax credit. The $29 billion effort is credited by the NAR with generating some one million new sales during the recession, producing a much-needed stabilizing effect and drawing down bloated inventories.  For sure, the gloomy downward march in prices saw a brief reprieve in 2009, courtesy of credit stimulus. 

However, the respite was short-lived, and most analysts conclude that a sizeable portion of those sales was “borrowed” against the future, an assumption supported by the accelerating market downdraft after the program’s expiration. At the same time, the government’s mortgage modification programs have been beset by widespread problems, including alleged abuses on the part of banks and mortgage issuers. 

What else can be done? Mr. Molony says there are two important factors attenuating the recovery in housing. First, banks have tightened their credit terms, making it harder for would-be buyers to get a loan. He says consumers qualifying for loans today have FICO credit scores of about 760 compared with 720 in 2007, for instance. The difficulty of securing a loan is showing up in the rising number of all-cash sales. In the most recent month, some 35% of home purchases were paid in cash – a record level. Normally, only about 10% of purchases cash transactions. This trend, though damaging near term, is essential to the industry regaining its financial soundness and should not be sidetracked.

10% reported a sale cancelled because the
appraisal had come in below the contract price.

However, a second problem gumming up the works is the implementation of new regulations governing home appraisals. First introduced in 2008 and then rewritten as part of the Dodd-Frank financial overhaul, the revised rules were meant to prevent banks from exerting undue influence on the appraisals they use in making and selling loans. Instead, the regs have cost the industry dearly. Among other reasons, Mr. Molony says, mortgage issuers now frequently use appraisers who are not local, not familiar with the markets, and who tend to err on the side of caution.  

In a March survey of NAR members, 10% reported a sale cancelled because the appraisal had come in below the contract price, 11% had a contract delayed for the same reason and 14% had to renegotiate a lower price because of an appraisal.  NAR thinks that if the industry were allowed to return to normal sales, underwriting and appraisal standards, housing sales would rise by 15-20%.  That would represent real progress, and wouldn’t cost taxpayers a dime.

The real estate industry will heal over time, as declining prices find an equilibrium level bringing together buyers and sellers. The government should not try propping up sales again; such intervention skews this natural, though painful, process. Among other things, it distorts expectations, which make both buyers and sellers afraid to commit. However, if the White House wants to help, it can toss the new regulations on appraisals – preferably tomorrow.

Related Links:
Double Dip U.S. Recession is Foregone Conclusion in 2011 (Seeking Alpha) 
Housing Recession Deepens as Case Schiller Double Dips (Forbes)