I was browsing over at Yahoo's Tech Ticker, where Aaron Task interviewed Dan Greenhaus, chief economic strategist with Miller Tabak. Greenhaus says that Signs of A Housing Recovery Will Fade When Govt Stimulus Ends.
Home prices in November fell 5.3% from a year earlier, the smallest year-over-year decline in two years. Overall, the S&P/Case-Shiller home-price index rose 0.2% from the prior month, the sixth-consecutive monthly rise. Meanwhile, the pace of annual decline in home prices has improved for 10-straight months.
So is a housing recovery upon us?
This is one of those set-up questions we all like to use to make a negative point. Is a housing recovery upon us? Are you kidding? Surely you jest!
Figure 1 — Latest Case-Shiller home prices, year-over-year percent change. Home prices continue to decline by this measure, but have risen month-over-month for the last 6 months. It's like unemployment, the losses pile up at a slower rate.
Figure 2 — Calculated Risk's "Distressing Gap" between existing and new home sales. The boost in existing home sales was due to the first time home buyer credit. New homes sales rallied briefly, but are headed down again. See my The Reverse Square Root.
And the obvious point?
Also, Greenhaus says any signs of a recovery are built on a foundation of government stimulus in the form of the first-time home buyer's credit and the Federal Reserve's purchase of mortgage-backed securities (MBS) -- which are both set to expire this spring.
When those policies fade Greenhaus is confident prices could decline "another 10%" and mortgage rates will rise, the latter because he doesn't see enough private demand for MBS to replace the Fed's buying.
What's the bottom line? Here it is—
There is no private housing market in the United States
OK. That's a small exaggeration. There's no private housing market to speak of.
Can you imagine where house prices would be without the massive Fed purchases of government sponsored enterprises (GSEs, aka Agency) MBS? Without the home buyers credit? And of course you know that Fannie Mae & Freddie Mac are both insolvent. You will recall that Tim Geithner stepped up on Christmas Eve to cover their losses for the rest of Obama's term of office (which will also be the extent of his presidency).
The Treasury Department announced on Christmas eve it would allow the two firms, known as government-sponsored enterprises, to have unlimited losses until the end of 2012.
Their losses had earlier been capped at $200 billion each. The Treasury also said it was scrapping plans for the two agencies, which play a role in funding three-fourths of all U.S. residential mortgages, to reduce the size of their investment portfolios. The 2010 limits on their portfolios, in fact, would allow their investment holdings to grow.
That timeline gives the Obama administration time to figure out what to do with the two entities since any changes are politically difficult and most analysts see the process taking years.
[My note: We the tax payers current own 80% of these dogs. Full nationalization is an option.]
So here's the second thing you need to know.
The government-supported housing market in the United State is bankrupt
Bankrupt? Yes, but as long as Fed can print dollars and the Treasury can issue & sell bonds, they can extend this mess for a long time ... until they can't.
What will happen when the Fed stops buying Agency MBS? Well, do you really believe the Fed will actually end their purchases in the Spring? I don't. Extend & Pretend. Pray for Rain. Most analysts see the process taking years.
Do you want to get a handle on the current (and future) housing market? Think of the American housing market as a comatose patient on a heart-lung machine—that's close enough.