Market Commentary
Housing Recovery Slowed by Economy. Recovery in our nation’s housing sector has taken a step backward. Most economic and housing measures and indicators suggest continued weakness in the housing markets during the first half of this year. We believe the Case Shiller twenty city home price index will drop another 8 to 12 percent before home prices begin to stabilize. Inventories remain excessive and residential construction activity is at a standstill.
Market Insight
Bank Problems and the Housing Sector. The U.S. banking system is ailing and further deterioration could have serious negative implications for the economy and housing sector. First, it is now clear that large banks are too big to fail and that creates perverse incentives. Second, taxpayers via government injections are paying for the bailout of banks and that brings up fairness issues. Third, banks are now being positioned to be the primary focus of mortgage lending and that could stifle competition at some point.
Industry Intelligence
How Far Has Fannie Mae Fallen. Nearly half of Fannie’s loss occurred in the fourth quarter, after it was “placed under conservatorship” by the Treasury Department in September. Immediately, Treasury began to use Fannie and Freddie to buy up mortgage backed securities at a loss in an effort to restore faith in the MBS market. Now it is clear that Fannie and Freddie will be the Obama Administration’s primary conduits for refinancing and modifying mortgages held by foreclosure prospects-and the costs will be borne by the taxpayers.
Federal Ownership of Citigroup Reaches 36 Percent. Investors have punished the shares of Citigroup and other banks in recent weeks out of concern the government could nationalize troubled banks, which would involve replacing management and wiping out shareholders.
Government Watch
Support Grows for Foreclosure Policy. Two national surveys conducted immediately after President Obama released the outline of his foreclosure plan ten days ago show a marked shift in public opinion in support of using government aid to help homeowners having problems paying their mortgages. Yet the nation remains split over whether the policy is fair or unfair to those who have met their mortgage payments.
Obama Budget Limits Mortgage Interest Deduction. Last week President Barack Obama proposed $634 billion in new taxes on upper-income Americans and cuts in government spending over the next decade to pay for his promised health care expansion. The new taxes included a limitation on the amount taxpayers earning over $250,000 can deduct for mortgage interest payments and other deductions.
House to Vote on Foreclosure Bankruptcy Changes. The Obama Administration has made the bankruptcy legislation a central plank of its plan to prop up the housing market. However, officials say they view it as a last resort, to be used only when serious attempts at voluntary modifications fail.
Looking Ahead
Pending home sales for January is expected to fall a bit, reflecting continued weakness in the housing sector. Housing demand has retreated due to massive job losses and falling consumer confidence. Mortgage applications for the week ending March 4 are expected to hover near their cyclical lows due to a weak economy and tight credit conditions.
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