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For bailout to work, housing market needs to mend
NEW YORK — Washington's financial bailout plan is now law. So the credit spigot will start flowing again, banks will resume lending, and an economic recovery can begin, right?
Wrong. Experts say the most important thing that needs to happen before the $700 billion bailout even has a chance of working: Home prices must stop falling. That would send a signal to banks that the worst has passed and it's safe to start doling out money again.
The problem is the lending freeze has made getting a mortgage loan tough for everyone except those with sterling credit. That means it will take several months or longer to pare down the glut of houses built when times were good — and those that have come on the market because of soaring foreclosures — before home prices start appreciating.
Housing is a critical component to the U.S. economy and by extension the availability of credit. Roughly one in eight U.S. jobs depends on housing directly or indirectly — from construction workers to bank loan officers to big brokers on Wall Street. A turnaround in housing prices would boost confidence in the wider economy and, experts hope, goad banks into lending again.
"Housing traditionally does lead the economy through a recovery. I think it's going to be critical for a sustained recovery in this cycle, too," said Gary Thayer, senior economist at Wachovia Securities.
In the meantime, people like Alicia Elliott are adjusting to a new American reality: Life without credit.
The 21-year old Morgantown, West Virginia, resident just bought a used mobile home, borrowing $4,000 from friends and family because she couldn't get a bank loan.
"I tried to. Couldn't do it. It's just hard to get a loan," said Elliott, who works as a cashier at a Lowe's Cos. store.
She used to get bombarded with offers for credit cards. Now she can't even get one. "I get denied one after another after another. It doesn't matter if you have a co-signer or not," she said.
Trey Simmons, a 31-year-old barber at a Dallas hair salon, said he worries tighter lending standard will squash his goal of buying a home next year.
"Credit is a privilege everybody can't get," Simmons said. "I had credit at a young age and messed up."
He now operates on a strictly cash basis. "If I don't have it," he said, referring to cash, "I don't spend it."
The dilemma boils down to a matter of trust.
"Credit, by definition, means trust and faith, and for many reasons trust and faith have been damaged," said Sung Won Sohn, an economics professor at California State University, Channel Islands.
Sohn said the near certainty of a recession makes it too risky for the thousands of small and medium-sized banks across the country to lend to people like Elliot.
"Banks know the economy is getting worse, so ... they will keep being cautious," said Sohn, a former banking executive.
Still, the government hopes that by scooping up billions of dollars in bad mortgage debt and other toxic assets, banks eventually can clean up their shaky balance sheets, crack open the vaults and send money washing through the system again.
The rescue plan also raises the federally insured deposit limit from $100,000 to $250,000, a move that could boost banks' reserves and further grease the lending wheels.
Rep. Barney Frank, the Financial Services Committee chairman and a key negotiator over the past weeks, said the measure was just the beginning of a much larger task Congress will tackle next year: overhauling housing policy and financial regulation in a legislative effort comparable to the New Deal.
In the meantime, the Treasury Department is moving swiftly to get the plan started. Treasury Secretary Henry Paulson said Friday he did not wait for final approval of the measure to begin preparation. He has been lining up outside advisers as his staff works out details on a multitude of complex issues.
But several hurdles could trip up the plan. For starters, even when the Treasury starts buying bad assets, some banks may hoard the cash they receive in return until they see how the plan pans out. That has the potential to make the lending logjam worse, said Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division.
"They may sit on the sidelines and wait to see (the bailout) get some traction. The problem is if everybody sits on the sidelines, nobody gets in the game. It's a risk," he said.
It also creates a vicious cycle: No trust means no lending; tight credit means it's harder to buy a home; the more difficult it is to buy or sell a home, the further home prices will fall; and the further prices drop, the more foreclosures there will be.
U.S. home prices — down 20 percent from their peak in July 2006 — still have further to fall, and must hit bottom before demand picks up. The long-awaited bottom in prices could be a year or more away.
But Jim Gillespie, chief executive of Coldwell Banker Real Estate, said he hopes that lower prices, combined with the government's actions will jump-start stagnant demand. The federal bailout plan, he said, "will give people reassurance that mortgage money is available."
Jobs are another big concern. The stranglehold on credit has choked companies big and small that depend on regular inflows of borrowed money to pay employees and stay afloat.
The Labor Department said Friday that employers cut 159,000 jobs in September, the fastest pace of losses in more than five years. Experts say that number will grow as the effects of the credit gridlock course through the economy in coming days and weeks.
The U.S. unemployment rate is now 6.1 percent, up from 4.7 percent a year ago. Over the last year, the number of unemployed people has risen by 2.2 million to 9.5 million.
The unemployment rate could rise to as high as 7.5 percent by late 2009, economists predict. If that happens, it would mark the highest since after the 1990-91 recession.
Boosting employment is critical to kick-starting lending because "if jobs are growing, then incomes are a growing, and if incomes are growing then people are consuming," Reinhart said.
Consumers and businesses have retrenched so much that some analysts fear the economy stalled or shrank in the third quarter that ended last week. The Labor Department report Friday showed wage growth for workers is slowing, meaning they'll be more hard-pressed to spend, especially for something as expensive as a home.
Many economists predict the economy will contract in the final quarter of 2008 and the first quarter of next year. That would meet the classic definition of a recession — two consecutive quarters of a shrinking economy.
___
Associated Press writers Madlen Read in New York, Vicki Smith in Morgantown, West Virginia, Joe Milicia in Cleveland, Ryan J. Foley in Madison, Wisconsin, Jeannine Aversa, Alan Zibel and Jim Abrams in Washington and Linda Stewart Ball in Dallas contributed to this report.
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Home prices are still way overpriced. They need to come down to move affordable levels.
#1 Posted by Sanity on October 4, 2008 at 10:35 p.m. (Suggest removal)
The overpriced houses are what caused this mess to begin with. Like I have said before, you can not charge $400,000 for a house that is really only worth $150,000.
Didn't anyone else see this comming? It's common sense people! It would be like Ford charging $125,000 for a F-150!
#2 Posted by boone1 on October 5, 2008 at 2:03 a.m. (Suggest removal)
Congress just paid the government's Visa Card credit debt with their Mastercard. Priceless.
#3 Posted by tootsie on October 5, 2008 at 4:56 a.m. (Suggest removal)
You got that right boone1 and if the rodeo clowns in Washington want to know the root of the problem, they need to go to the NDN home page and look to the right at so called TOP JOBS..the same two jobs have been there for the last year. Go ahead call them and ask how much they pay, you might be able to live in that flooded mobile home park in Bonita but thats about all. Its like that all over the country. ITS WAGES STUPID! The government has brought in illegals and out-sourced till you can't even afford to live in your own country...I say let it crash, clear out all the rubbish and build it back for the American people and not the international bankers!!
#4 Posted by almostdone on October 5, 2008 at 5:08 a.m. (Suggest removal)
great idea frank, and move the hard working folks from marco who are struggling to port royal.
#5 Posted by islandman4now on October 5, 2008 at 6:53 a.m. (Suggest removal)
#7 You can't respond to the moronic comment made by #5. #5 just doesn't get it.
I said this before it was passed -- The bailout will not do a thing for main street. They lied to us again, stuck in a bunch of BS, and we pay for it. The problem will only be solved when those who profited, or are still profiting from over valued housing, go under. There will be a lot of pain, but that's what it takes.
#6 Posted by thedudesview on October 5, 2008 at 8:30 a.m. (Suggest removal)
Re: #8.
If "they" do it right, the mis-named "bailout" could actually turn a MAJOR profit, reduce the foreclosure overhang and make the holders of those toxic mortgage-backed securities take their lumps (losses). That's a benefit to Main Street.
The question, of course, is if "they" do it right. Otherwise, #8 is right on.
#7 Posted by beachbob on October 5, 2008 at 8:36 a.m. (Suggest removal)
I love the people they use as examples in the article. Ms. Elliot, a cashier at Lowes, who can't get a loan and continues to apply for credit cards. Mr. Simmons who made some mistakes with his credit and now only uses cash. Both people making choices that hurt their credit rather than improve it.
Mandatory financial education! Let's start there. What high school senior or college student wouldn't benefit from this? I know I would have years ago.
#8 Posted by teachurkids on October 5, 2008 at 8:37 a.m. (Suggest removal)
Listing prices won't come down to where they need to be as long as Realtors are setting them.....they don't want the public to see that the market is on the downturn in Naples. They try to pretend that Naples isn't affected by the economy.
So, the realtors sit while these homes linger on the market at their overinflated listing prices to keep the local Naples market looking the way they want it to look....unaffected.
They wait for the uneducated buyer to come along and purchase their grossly overpriced houses...
....and then when that doesn't happen after many months, or years in some cases...
...they sell to someone sooo extremely low in comparison to their listing price....all the while having kept that lisiting price right in line with all the other realtors whose prices are also overinflated.... making Naples look sooo unaffected.
So if as this article states....
"Experts say the most important thing that needs to happen before the $700 billion bailout even has a chance of working: Home prices must stop falling."
.....well, they won't stop falling here in Naples....
...not while the prices are being set and overinflated by the greedy realtors of NABOR who want to disguise reality...
....and then try to place the blame on their sellers for being uncooperative.
This bailout won't even touch the problems in Naples.
#9 Posted by hollywood on October 5, 2008 at 10:31 a.m. (Suggest removal)
#12 - What you said -- you the man.
That said, to put some realism to it - prices in Naples will stop falling in Naples, but (without exaggeration)it realistically won't be until we substantially deplete the unsold inventory and that could be, based on the sellers mindset and difficulty in getting mortgages, 10 years or more. There will be a lot of pain. This will be the worst real estate depression in US history.
#10 Posted by thedudesview on October 5, 2008 at 11:09 a.m. (Suggest removal)
Hollywood:
A Realtor doesn't set a price, the home seller does and eventually the buyer and seller agree on a price which establishes the true value of that home on that day.
Realtors simply assist buyers and sellers in the entire home sell/buy process.
Prices will stop falling in Naples, but not until most of the short sales & foreclosures are bought up. And they are being bought. Activity is up over last year, inventory has come down some.
I wish I knew how many were out there, but I don't, so there's no way to predict the bottom in terms of price. But with a median price at about $240's, down from a high above $400's, how much more can we go?
Joe Ballarino
#11 Posted by ballarino on October 5, 2008 at 11:19 a.m. (Suggest removal)
Hey Joe #15,
There's a website that shows the short sales and foreclosures that are known and they increasing at alarming numbers. The unknowns are predicted by well know economist to be huge. If I can find the site, I'll post it. Home prices will dip below what they were before this began. Below what you can imagine. That's the way all bubbles end.
#12 Posted by thedudesview on October 5, 2008 at 11:32 a.m. (Suggest removal)
To #12 and #15,
There you go again, blaming the seller....
So realtors continue to hang onto these overpriced listings month after month after month9or years, lately) without reducing the price because of their seller!....don't think so!
If that was the case, the realtor who would be in disagreement with the seller over the price, could just drop the listing and move on!
You say "... and eventually the buyer and seller agree on a price which establishes the true value of that home on that day.
What text book did you read that over generalized theory in...not the Naples text book....that's not the way it works here!
Here, the buyer and seller never agree on anything ....the sale only happens when the sellers and their realtor truly WAKE UP and SMELL the COFFEE!
#12... what happened 'last month', in this market is now irrelevant 'today'.
#15.... you just want the short sales and foreclosures to go away..as if they have no effect on the future appraisals...and then you can get bcak to asking whatever you like again!
Suggested NABOR slogan----Naples... a paradise not effected by our economy...come experience it for yourself....like no other place on earth1
#13 Posted by hollywood on October 5, 2008 at 11:59 a.m. (Suggest removal)
#16 Try http://www.foreclosure.com/search/FL_...
In short over 5,000 foreclosures & 3,100 Pre/Short in Collier alone; Over 8,000 properties in play.
hope it works / helps
#14 Posted by maxpup on October 5, 2008 at 12:26 p.m. (Suggest removal)
The vast majority of homes selling today in Collier County are pre-foreclosures and foreclosures. This will continue to drag median prices down, probably for quite some time. Many in Naples don't understand the correlation between median income and home prices. They think that we are somehow immune to the income-home price ratio. True, there is a segment of high net worth homeowners that come into play, but many of them are not buying right now either. The way I see it, we as a country can not keep continuing to lower our wages and quality of life to that of developing countries in order to compete in the global market. We've been trying that for more than 20 years now and the result is a drop in wages when accounting for inflation, and a nation that has only survived because of credit. This has caused much of the illegal immigration problem. By the way, the blame for perpetuating the illegal problem lies on the shoulder of business. They wouldn't be here if someone didn't employ them. Post #4 is correct...when 90% of the jobs in this area may get you into Manna mobile home park...this area has a big problem to overcome before things get better.
#15 Posted by swfljim on October 5, 2008 at 12:28 p.m. (Suggest removal)
I just looked for this site today; therefore I cannot provide the delta change of any given time. I will however be watching to see subsequent numbers so we can see for ourselves.
#16 Posted by maxpup on October 5, 2008 at 12:30 p.m. (Suggest removal)
my response was actually for #14....
Oh and about your brain comment..taking my cue from #11....I don't mind 'cuz you don't matter!
Way to go #11!
In final...Naples has a loooong way to correct before it will "mend" thanks to NABOR.
#17 Posted by hollywood on October 5, 2008 at 12:39 p.m. (Suggest removal)
maxpup: many thanks
#18 Posted by thedudesview on October 5, 2008 at 1:15 p.m. (Suggest removal)
here's the site I was referring to: www.realtytrac.com/
#19 Posted by thedudesview on October 5, 2008 at 1:27 p.m. (Suggest removal)
This article makes no sense for the NDN. There are no realtors providing incorrect, incomplete, or misleading information. No Larry Yun cheerleading. That is until post #15, when our favorite cheerleader, Joe Ballarino, speaks.
Joe, how much inventory is available in Collier County? How many months inventory does this equate to (don’t lie, some of us know math)? The truth is you will not see the housing market stabilize until the inventory issue is corrected. My guess (as I’ve not seen reputable numbers) is that we are at least 24-30 months from anything close to a correction. And now there other economic issues complicating the correction. Nice job realtors, and nice job government.
#20 Posted by rasputin on October 5, 2008 at 5:13 p.m. (Suggest removal)
rasputin,
I agree. Why do Realtors insist that we are on the road to recovery because sales are up? Most of the sales are in foreclosures, short sales or in the <300K range. Get a clue Realtors! don't list a house at these rediculous prices when you know they will not sell.
Does something magical just happen next year where everything is fine?
When asset bubbles form and burst, the only thing that makes that asset attractive or affordable again is much lower prices.
I took a stroll through some developments this weekend and was absolutely blown away by the asking prices of some people and builders. Let me tell you, there are some people living in denial in Naples.
#21 Posted by Sanity on October 5, 2008 at 5:44 p.m. (Suggest removal)
"But with a median price at about $240's, down from a high above $400's, how much more can we go?"
Ask Fannie Mae shareholders.
Good Grief.
Give it time, and for those of you who want to stay in Naples, you'll scoop up a nice 2 acre place in the Estates in the $60k's or $70k's. It will happen. The number of Estates foreclosures in the pipeline is staggering.
#22 Posted by 37inches on October 5, 2008 at 6:54 p.m. (Suggest removal)
Naples is so far out of touch. I have been to a lot of places and Naples is by far living in an OZ world. Wake up Naples! And the TRUMAN Show continues....
#23 Posted by boone1 on October 5, 2008 at 10:15 p.m. (Suggest removal)
There's no place like home...
#24 Posted by sheryld on October 5, 2008 at 10:58 p.m. (Suggest removal)
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