A Propped Up Market Is Better Than No Market At All

"The best thing about the market today is that it’s not the market yesterday," said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies. While that could hardly be called an upbeat assessment, it wasn’t gloom and doom either.

And it pretty much captured the mood at the "Realtor® Town Hall Meeting: Strengthening and Stabilizing the U.S. Mortgage System" which took place as part of the National Association of Realtors® Midyear Legislative Meetings & Trade Expo that was recently held in Washington D.C.

There, Realtors® heard a variety of outstanding panelists and participants discuss the real estate market, mortgage financing, and what needs to happen to ensure a recovery. Sessions were moderated by Forest Sawyer, former anchor of the ABC programs Day One and Turning Point, and by Ron Insana, senior analyst and commentator for CNBC.

If any theme emerged from all the discussion it had to be something like this: the increase in sales and prices has certainly been encouraging (it’s not yesterday’s market), but those appear to be in large part, if not entirely, a result of various government efforts to prop up the market. We just don’t know if a real market has yet been formed. (The latter being a nice way of saying, "we don’t know if we’ve reached the real bottom yet.")

The real estate market has been propped up on both the demand and the supply side. David Stevens, assistant secretary of the U.S. Department of Housing and Urban Affairs, said that increased homebuyer demand was brought about by the homebuyer tax credits and the federal government’s purchase of mortgage-backed securities. No one disagreed; but many shared Retsinas’ concern: "I’m not quite ready to say the market is recovering, because it’s still being supported by the government. In the first quarter of 2010, 90 percent of mortgages were backed by the government."

Not only have government programs helped to increase demand, they have also helped to stabilize the supply side. Hard as it is to believe sometimes, there might have been a whole lot more foreclosure inventory for sale than has been experienced. However, while panelists agreed that the decrease in foreclosures have resulted from government regulations, pressures, and programs, they expressed concern that the "second wave" of foreclosures hasn’t been prevented, just forestalled. Panelist Tom Deutsch, Executive Director of the American Securitization Forum, estimated that 60% - 80% of home modifications will re-default. No one disagreed.

John McCrocklin, President of John McCrocklin Real Estate and Associates, and a former consultant to both the House and Senate Banking Committees, argued that the financial institutions have been propped up as well. This, to a great extent, is a result of the suspension of the rule (FAS 157) requiring them to value their assets on the basis of their true market worth.

While this accounting move has allowed banks to improve their liquidity and balance sheets, the downside is that "It lets banks put off recognizing their loan losses, which gives regulators and investors an inaccurate picture of their financial health; prevents ‘toxic’ assets from being sold and taken off the banks’ books for good; and inhibits the recovery of the real estate market which cannot find a floor without the disposition of foreclosed and non-performing assets."

So, yes, the market numbers look better than they have for a while, but to most of the panelists it was pretty clear that these phenomena are a result of a lot of activity to prop up the market in a variety of ways. Not that this has been a bad thing. Tom Deutsch observed that the government agencies had a choice of letting things go off a cliff or down a steep hill. They chose the latter. There may even be more downward slope to go; but it could still wind up better than it might have been.

Source: Realty Times