It’s an election season cliché to forewarn an ideological opponent that he is not entitled to his own facts. But when it comes to the economy, it would seem one is entitled to his own facts. Or to be more precise, that there are so many facts floating out there that one can construct any reality he wants out of them. Sure, the unemployment rate has declined dramatically from its peak of 10% in 2009 to 7.8% today. But how much of that decline is a result of people dropping out of the labor force — of so-called discouraged workers? It seems as though every new piece of economic news that comes out can be spun to reflect a wide range of conclusions.
But there has been one aspect of the economy – the housing market – that has been persistently producing good news, so much so that even the most bearish observers have labeled it a bright spot. And a survey released yesterday by Fannie Mae serves to show that many U.S. consumers are feeling more positive about the housing market. Thirty-seven percent of respondents believe that home prices will rise in the next year, the highest percentage since Fannie Mae began releasing the survey in 2010. And 19%, also the largest percentage yet, said that now was a good time to buy a home. What’s more, according to the poll, consumer confidence about the economy in general is on the rise – with 41% saying the economy is on the right track, an 8% rise compared to last month’s survey. These statistics don’t show the public to be very confident about the economy or the housing market, but they do show that the public is more confident than they’ve been in several years.
Another piece of good news out yesterday was from analytics firm CoreLogic, which said that the so-called “shadow inventory” of homes in the U.S. fell to 2.3 million homes in July, down more than 10% from a year ago. These are properties that owners would like to sell, but can’t or won’t because of market conditions. These could include homes that are stuck in the foreclosure process, are already bank-owned, or are seriously delinquent. This shadow inventory is troubling to real estate analysts because these homes will eventually be sold, putting downward pressure on prices, but it is unclear when they will hit the market. The orderly working through of the shadow inventory is crucial for continued recuperation of the real estate market — and that seems to be happening.
So what’s behind the strength in the housing market? Part of it is just the passage of time. Housing prices have fallen so far and consumers have unloaded enough personal debt that housing is becoming a good buy once again in many areas of the country. But another key to the housing markets strength is the extraordinary actions the Federal Reserve has taken to stimulate the economy. For years, the central bank has been propping up asset prices by purchasing U.S. Treasuries and mortgage-backed securities, and the announcement last month that it would stage an indefinite program of $40 billion monthly purchases of mortgage-backed securities has had an appreciable affect on the housing market. Following the Fed’s announcement of QE3, mortgage rates hit all time lows, and refinancing activity increased significantly. According to a report in Bloomberg BusinessWeek:
“Borrowers are refinancing at an annualized rate of 22 percent, according to Lender Processing Services (LPS). At this rate, more than one in five borrowers will refinance over the next year . . . Refinancing is normally not an option for borrowers who owe more than their home is worth. But they have been getting into the act this year, thanks to the Obama administration’s Home Affordable Refinance Program, which rewards banks for working with underwater homeowners. Since the start of 2012, there’s been a 65 percent increase in refis for borrowers who owe at least 20 percent more than their homes are worth; HARP now accounts for about a quarter of all refis.”
This is good news for Ben Bernanke, who aimed to increase such activity as a means to stimulate the economy. Without Federal Reserve support of the housing market, it’s unlikely that housing prices would have stabilized in the manner they have. But will the housing market continue to recover? Not everyone is convinced. Paul Diggle of Capital Economics told CNBC, “More recently, MBS yields have made up nearly all of their initial drop. If sustained, that suggests that mortgage rates may not fall much further, and could even rise.”
It’s not certain that continued Fed action will keep spurring the current pace of refinancing activity, but at least for the time being there is one sector of the economy that’s showing signs of life, and one arm of the government that’s helping it get there.