Oh Joy, Cheap Mortgages Continue

I don’t know that loans for homes have ever been this low before. I have friends who are refinancing their mortgages for another 30 years, just to lock in the pricing. But keep in mind that these friends are not the kind of people who necessarily need the help.

I’m curious what the Fed’s reaction will be if cheap money does not finance a resurgence in housing. Will it totally floor them that monetary policy can have no effect? I think Bernanke is much smarter than people give him credit for, but it could definitely shake the faith of some of the “less worthy”; certain unnamed officials from California, for instance.

I wrote a piece back in July talking about the effect that income will necessarily have on the price of housing. In it, I speculated that we could see a resumption of downward trending prices, even after the temporary reprieve we got through that spring.

The question is a matter of duration; how long until we hit the fat middle of the population in our distribution? In the real world, that translates into: how long until the middle 50% of the population has made enough to buy a home again?

Based on what I saw when I started looking at income distributions, what I saw was that there is the potential for a very large lull after the higher incomes have had their opportunity to buy in. I have no reason to believe that cheaper money from lower treasuries will correct for this.

The Fed seems to be betting it all on lucky number 32; if housing prices rise, it would do wonders to pull the country out of its funk. And sure, that’s probably true; but there are other problems here. Banks just aren’t going to give loans to anyone who doesn’t have a reasonable down payment; at minimum it would make them look bad. That suggests we need to wait until we start seeing savings sufficient to cover that 20% down, or whatever it will be.

Another big issue I’m seeing is with the vacant homes themselves. Imagine, some of these places have been vacant for almost three years now; some longer. I don’t even want to think about the kind of structural problems they’ve been developing in that time. Small maintenance issues left untreated for years become large foundational issues. So even if we start to see a push higher in home prices, the problem has been persistent for so long that plenty of these properties are going to be worth less to a potential buyer than they are on paper. They’re going to be huge headaches; rotting infrastructure that will require lots of investment of money, time, and effort, just to make them hospitable again.

I won’t be surprised if, when the time comes, lots of these properties remain vacant simply because nobody wants to deal with them. The current holders of these distressed properties aren’t going to want to put any more into them, so the option starts to become a choice between letting it go at prices way below current market just to get it off your hands and into someone’s care who will stop the deterioration process, spending the money to demolish the home, or letting it stand as is.

Two of those choices are bad for local real estate markets, and the one that isn’t requires the holders of the distressed mortgage to take the time and energy to claim ownership of the property and then sink money into tearing down the house.

At any rate, only time is going to really work out these issues, so I don’t see housing prices bottoming in 2012. My intuition tells me around 2014 is still as good a guess as any, but definitely not this year.

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