Housing, Finance and Jobs

Here is a post from Calculated Risk from last week discussing a Fed Study on mortgage originations, and how lack of home equity and tough underwriting standards are limiting refinancings despite record low mortgage rates.  A quote:

Back in 2003, about 35.5% of all homeowners refinanced. In 2010 only 10.7% of homeowners refinanced. On page 62, the study provides a table by FICO score, year of origination, and states with steep house price declines compared to all other states ("Steepest declines" consists of the five states with the steepest declines in house prices from 2006 to 2009: Arizona, California, Florida, Michigan, and Nevada; "other" consists of all remaining states.) Only a few borrowers with low FICO scores refinanced in 2010, and the rates for refinancing were lower in the five states than in the other states.

This is important - although we may see sub 4% conforming 30 year fixed rate mortgages soon, many borrowers will not be able to refinance.

Then yesterday the LA Times had this article on poor home sales, which are now at forty-eight year low:

The August read on new home sales showed properties selling at a seasonally adjusted rate of 295,000, down 2.3% from a revised July rate of 302,000 and just 6.1% above August 2010, according to the Commerce Department.

I am convinced the lack of financing and record low home sales are directly related.  Until the housing market rebounds the economy is going to muddle along, with employment staying near current levels.  Low home sales is not a new trend, and annual new home sales have fallen dramatically since peaking in 2006 at over 1,900 completions.  The table below shows housing completions for the past five years:

2007          1,399

2008          1,002

2009            694

2010            552

2011 (est)    449

The data is from last summer that I obtained on Calculated Risk, and based on July and August figures, it looks like the 2011 estimate of 499,000 new home completions may be optimistic.

Strict lending standards are hindering the rebound in housing and the economy.  The Fed, through Fannie Mae and Freddie Mac, which control over 90% of the mortgage market, can boost the economy by loosening lending standards and generating housing demand.  Relaxing mortgage requirements does not require a return to 2005 standards.  It means letting qualified people buy homes and allowing current homeowners to refinance their homes.  It makes sense to allow a qualified homeowner to lower his or her mortgage payment.  The alternative is not better.

A deliberate Fed strategy of easing home lending requirements will not require new Federal borrowing, or Federal spending, or Congressional debate, or a Presidential speech.  Fannie Mae and Freddie Mac can act on their own to make home lending more accessible, and the economy will benefit, including employment as construction and ancillary housing related jobs increase.  Sometimes you have dance with the one who brought you to the party, and to get out of the current slow economy, we need to focus on housing and finance, the two ugly dates we're stuck with at this gloomy soiree.  It's time to dance.