A fellow colleague of mine, Logan Mostaghimi at Benzinga.com, had asked me what I thought the problem in housing was and what could be done to fix the housing problem and his query inspired this response:
The biggest problem in housing involves many issues in our economy.
First, banks are not lending and the reason for that is because borrowers are not able to qualify due to tight lending requirements and home equity deteriorating. Banks are also not lending because of the imposed Basel III reserve requirements and the Dodd-Frank Act as this article mentions about the Volcker Rule as part of FinReg: Moody's sees Volcker rule as credit negative for big banks
The banks have to classify their assets and determine if it is better to spin-off some assets to determine whether they have enough to meet these requirements. At this point, it doesn’t seem like the banks are 100% certain that they can meet these requirements which leads to uncertainty and tight lending standards.
Secondly, home prices have to level-off and start appreciating before you will see an easing of lending guidelines. The banks have staved off their foreclosure inventory and many homes are in the short sale or loan modification process that is why foreclosure inventory is down in some states. This should stabilize home values and home values should start appreciating and I have heard both Chase and Bank of America projecting home values to appreciate by the middle of next year. At least that is what they are saying and they have been wrong before so who really knows.
Thirdly, the government has to exit from the mortgage industry and I believe they are implementing their exit strategy by not imposing another QE3 and announcing Operation Twist which will raise the short term bond yields higher. Here is a good article on this topic: The Future of Non GSE Lending Is...
Fourthly, this is going to be a jobless recovery as there is low demand to hire new employees because consumers are not spending due to all the uncertainty in the economy stemming from the upcoming election, ObamaCare, Dodd-Frank, Basel III, the crisis in Europe, and Obama’s Job Bill. It’s a fine line that the Fed has to tread because as the velocity of money starts to increase, there is the fear of increasing inflation and interest rates.
The solution to fix the housing problem is unfortunately going to take time and I firmly believe that Bernanke has a good plan and I am almost positive that the contagion inEuropewas not fully factored into his equation.
And I might even interject the proposition of another first time homebuyer tax credit incentive to spur home buying again during the next year. That seemed to work before. Just like the payroll tax cuts which were about the only thing that was working which was extended again, so, implementing another first time home buyer tax credit is not too far fetched.
And finally, uncertainty will have to be dispelled from people’s minds. Demand for goods and services will have to increase so companies can hire. Banks have to loosen their lending standards and start lending again and somehow get the velocity of money moving again. One of my mottos for 2011 is that once you get money flowing again, life will be flowing again.
by LC Wong Oct 16, 2011