Housing in Peril as Obama Fails to Get Financing Breakthrough

By Kathleen M. Howley

June 29 (Bloomberg) -- Driving through Riverside, California, Bruce Norris pointed to a half-dozen empty houses with “For Sale” signs stuck in untended lawns that he said investors might buy if banks would just extend some credit.

“People today look at us as the enemy,” said Norris, 57, head of Riverside-based Norris Group, which purchases and renovates homes to rent or sell. “That’s a big problem for housing because if we can’t get the financing we need, a lot of these properties are going to sit vacant.”

Four months after President Barack Obama pledged $275 billion to shore up home sales, the engine that powered every U.S. recovery since 1960 is stalled. Bankers’ reluctance to finance buyers who won’t live in properties is one barrier to a turnaround. Stricter qualifying rules and a rise in the cost of residential loans to 5.42 percent have impeded new mortgage lending, which is at a 13-year low. An inventory of 2.1 million unoccupied houses on the market, created by the fastest foreclosure pace in history, may be a drag on a revival.

The $8,000 first-time homebuyer tax credit in the U.S. economic stimulus package and a government program to subsidize some mortgage payments have had little effect, according to Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts.

“It hasn’t been much more than a see-sawing of data,” Belsky said in an interview. “Housing has led the U.S. economy out of every recession for at least 50 years, and for that to happen again more stimulus is going to be needed.”

‘Lousy Job Market’

The residential real estate market improved ahead of the end of the past seven contractions, with home construction starts beginning to climb an average of seven months before gross domestic product picked up and sales gaining about four months in advance, according to data compiled by David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.

Expenditures by homeowners -- first on transaction fees, then on necessities and luxuries including furniture, gardening tools, kitchen renovations, basic upkeep and property taxes -- kept the momentum going, Belsky said.

Existing U.S. home sales in May rose 2.4 percent to an annual rate of 4.77 million, lower than forecast, and the median price was down 16.8 percent from the same month in 2008, according to the Chicago-based National Realtors Association.

There’s little chance the turnover will increase enough this year to end the housing recession, said Andres Carbacho- Burgos, an economist with Moody’s Economy.com in West Chester, Pennsylvania.

“We have a lousy job market and an excess of around 1 million extra homes that has to be worked off,” he said in an interview. “The housing market is not going to hit bottom before mid-2010.”

‘People Are Scared’

Housing starts are at their lowest level since 1945, even with a 17 percent increase in May that pushed the annual rate to 532,000 from a 454,000 pace the prior month. So many properties are for sale -- 3.8 million as of last month -- that it would take 9.6 months to unload them at the current sales pace, according to the Realtors group. The inventory averaged 3.6 months in the five years before the boom ended in June 2005.

While there is pent-up demand that would eat away at the stock, “people are scared to spend the money because they’re worried about losing their jobs,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, in an interview.

The unemployment rate, which reached a 26-year high of 9.4 percent in May, will probably exceed 10 percent this year, Obama said at a June 23 White House news conference.

“The American people have a right to feel like this is a tough time right now,” Obama said, calling it “pretty clear” payrolls will continue to shrink. About 6 million jobs have disappeared since January 2008, marking the biggest employment loss of any retrenchment since the Great Depression.

20.4 Million Underwater

Personal bankruptcies rose 37 percent in May from a year earlier, according to the American Bankruptcy Institute, based in Alexandria, Virginia. Credit card defaults in the first quarter went to 7.79 percent from 4.83 percent a year ago, Federal Deposit Insurance Corp. data show. While the share of loans entering foreclosure moved to 1.37 percent, the highest ever, the first-quarter mortgage delinquency rate climbed to a record 9.12 percent, the Washington-based Mortgage Bankers Association said.

About 20.4 million of the 93 million houses, condos and co- ops in the U.S. were worth less than their loans as of March 31, according to Seattle-based real estate data service Zillow.com.

Sharing a Bedroom

After the Federal Reserve pledged to acquire as much as $1.25 trillion in mortgage-backed securities to free up money for home loans, mortgage rates fell to a record low of 4.78 percent twice in April. Rates began climbing last month on investor concern federal spending will fuel inflation.

That dashed the hopes of 14-year-old Justin Southwell of the Bronx borough of New York, who is fed up with sharing a room with his 11-year-old brother.

“He’s so disappointed, it’s like someone died,” said his father, 48-year-old Lorson Southwell, a systems analyst who decided not to bid on a three-bedroom house in Yonkers when higher rates made it unaffordable, even with the $8,000 federal tax credit. House-hunting is “back on the sidelines” and the family will remain for now in their two-bedroom apartment, Southwell said in an interview.

‘Permissive’ Days Gone

If the cost of money doesn’t put consumers off, loan officers’ new strictness may keep them out of the market, said Grant Stern, a mortgage broker and owner of Morningside Mortgage Corp. in Miami Beach, Florida.

About 50 percent of banks tightened requirements for prime borrowers in the first quarter, asking for bigger down payments and more cash on hand, among other things, the Fed said.

“Six years ago, standards were pretty permissive, and two years ago all you needed was a pulse,” Stern said in an interview. “Nowadays, even people who have reserves that equal amount of the loan are getting rejected.”

While “demand remained at elevated levels” in April, mortgage lending at the 20 U.S. banks that received the greatest share of Troubled Asset Relief Program funding dropped 3 percent to $114.2 billion, the U.S. Treasury Department said in a June 15 report. Home purchase loans issued by all institutions in the first quarter totaled $131 billion, the least since 1996’s first three months, according to the mortgage bankers group.

‘Risky Bets’

“Each lender is wondering who is going to go first and how much should they open their door,” said Lawrence Loik, head of the Westlake Village, California-based Real Estate Investors Network, which runs workshops and publishes material for people who buy property for profit. “They’re all afraid.”

Banks base decisions on careful evaluation, not fear, said James Chessen, chief economist of the Washington-based American Bankers Association.

“The risk of lending today is much greater than it was a few years ago, so banks are being more prudent,” Chessen said in an interview.

Investors face roadblocks because of their perceived roles in helping inflate the housing bubble, said Norris in Riverside, which had the fifth-highest U.S. foreclosure rate in the first quarter, according to RealtyTrac Inc., an Irvine, California, real estate data company. Las Vegas was No. 1.

“That means the people who have the experience to repair these houses can’t buy them until they deteriorate to the point they can pay cash,” Norris said in an interview.

Key Recovery Role

Obama cited some real estate investors in a Feb. 18 speech, saying government efforts “will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell.”

Washington-based Fannie Mae in February increased from four to 10 the number of mortgages one borrower is allowed for investment properties.

“Bona-fide, experienced investors bringing significant equity to the table will play a key role in the housing recovery,” said Amy Bonitatibus, a Fannie Mae spokeswoman, in an e-mailed statement.

Fannie Mae and Freddie Mac in McLean, Virginia are government-chartered companies that own or guarantee more than half of single-family mortgages in the U.S.

At the June 23 White House press conference, Obama said it was too early to endorse calls for another round of stimulus spending. He signed the $787 billion American Recovery and Reinvestment Act on Feb. 17.

“It’s important to see how the economy evolves and how effective the first stimulus is,” the president said.

Assistance For Borrowers

The Obama administration’s housing market program includes $75 billion to reduce payments for people in danger of losing their properties. Data about the borrowers receiving assistance won’t be released by the Treasury until July, according to Michael Barr, assistant secretary for financial institutions.

“If we’re not on track by the end of August, we would need to decide whether to make significant modifications to the program,” Barr said in an interview.

After each of the last seven U.S. economic slumps, growth was more than 4 percent on average in the first year of recovery, data compiled by Bloomberg show. In the three months before each recession concluded, GDP shrank at an average 2.8 percent annual rate, according to the data.

The economy contracted at a 5.5 percent annual rate in the first quarter, capping the worst six-month performance in half a century. In May, consumer spending rose by 0.3 percent, the Commerce Department said.

Home sales probably won’t be the fuel to end the recession that began in December 2007, said Global Insight’s Behravesh.

“It’s going to be different this time,” he said. “The pattern this time will be the government kick-starts housing, and then consumer spending comes around to kick-start the economy.”

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.