Stephen Foley: US housing market need not be a hopeless case

 

US Outlook: Roll up, roll up. Bargain prices, everything must go. Roll up, roll up. Please, will somebody roll up?

US banks are having no easier a time shifting their backlog of foreclosed homes, despite year-on-year declines in prices and mortgage rates that haven't been this low for generations. The glut of repossessed property means that ordinary homeowners, too, are unable to get out from under their homes to pursue work elsewhere, or to downsize, or to escape their spouse. Anecdotes abound of American couples trapped in unhappy marriages and taking to opposite wings of their McMansions rather than attempting to sell into a weak housing market, or to crystallise their losses if they bought at the peak.

Just this week, there was another shocker of a report on pending home sales, which were down in September by 5 per cent, when many economists had been expecting a rise.

So what hope, then, for Barack Obama's much-hyped intervention in the housing market, which he unveiled on a trip to foreclosure-hit Nevada at the start of the week? With Congress refusing to let the President pass any significant economic aid, he has grabbed the levers he does have, namely control of the housing finance giants Fannie Mae and Freddie Mac, which were nationalised in 2008.

These own or guarantee most of the mortgages in the US (including all new ones), so they are uniquely powerful. Except that they are being run only to minimise their own losses, which run into the tens of billions and are now on the taxpayer.

The measures announced this week cut Fannie and Freddie fees on re-financings and to open the option of government guarantees to borrowers even if they have negative equity in their homes, but they do not diverge from the Administration's policy of loss-minimisation and gradual shrinkage of the two companies.

To really stop the rot in the US housing market, Fannie and Freddie have to become more creative tools in the housing market, as Fannie Mae was originally designed to be during the Great Depression. Banks have to write off portions of borrowers' loans if their home value has collapsed, so they can spring free of the trap of negative equity. Until then, foreclosures will continue to chill the market, and to chill potential buyers' expectations for the market. Only Fannie and Freddie can be used to incentivise the banks to do this.

President Obama has spent $2.4bn of the $50bn he promised to aid struggling borrowers. Little wonder. They don't tackle the problem. Homeowners have too much debt relative to their earnings potential in the current gloomy jobs market, and too much debt relative to an asset that is declining in value. Most state-sponsored refinancings only put off foreclosure. The Tea Party will have conniptions, and maybe it would have to be financed by a counterveilingly populist tax on banks, but taxpayer-financed debt forgiveness really is the only way out.

Just ask Greece.

Start your day with The Independent, sign up for daily news emails
Sport
football
News
Hillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
Sport
wimbledonScot will face Ivo Karlovic next
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test