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How to rescue housing?- The Obama administration doesn’t have a plan — or, more accurately, it has only half a plan. It presupposes that preventing or minimizing home foreclosures is a formula for revival. It isn’t.

Almost everyone agrees that a housing recovery is essential for a broader economic upswing, in part because housing’s collapse brought on the recession. Mortgage delinquencies triggered the financial crisis. Tumbling home prices (down 26 percent from their peak) ravaged consumer confidence, borrowing and spending. Since late 2007, housing-related jobs — carpenters, real estate agents, appraisers — have dropped by 1 million, a quarter of all lost jobs.

Housing’s distress is too much supply chasing too little demand. Huge inventories of unsold homes have depressed prices and construction. Given that prices rose too high in the “bubble” — homes were affordable only because credit was dispensed so recklessly — much of this painful adjustment was unavoidable. But that process should be mostly complete.

Here’s a little-known fact: Housing may be more affordable now than at any recent time, thanks to lower prices and falling mortgage rates (now about 5 percent). The National Association of Realtors has an “affordability index” that estimates the family income needed to buy a median-price house, assuming a 20 percent down payment and monthly mortgage payments equal to 25 percent of income. Affordability is now the highest since the index’s start in 1970.

Unfortunately, demand hasn’t followed affordability. In January, sales of new and existing homes continued prolonged declines, dropping 10.2 percent and 5.3 percent, respectively, from December. There’s a buyers’ strike. Why? Shouldn’t lower prices spur demand?

Well, yes. There are many theories as to why they haven’t. Perhaps prospective buyers can’t get loans. Or people are so gloomy that they’re afraid to buy. But the most important explanation is probably deflationary psychology. If yesterday’s $250,000 house is now $200,000, it may be $175,000 by June. Waiting is better.

Unless such deflationary psychology is broken, it becomes self-fulfilling. The more buyers wait, the more prices fall; and the more prices fall, the more buyers wait. The Obama administration essentially ignores this problem, though it can be addressed.

The simplest way is to bribe prospective buyers not to wait. For example: Give them a 10 percent tax credit, up to $15,000, on the purchase of a new home. Anyone who bought a $150,000 home would get a $15,000 tax break. The credit would expire in a year. Waiting would be costly. Buyers would delay only if they thought home prices would drop as much or more.

Precisely this proposal comes from the National Association of Home Builders. Normally, it would be an atrocious idea, because it would reward people who would buy anyway and would be skewed toward wealthier buyers. But now it’s worth trying.

Somehow, we need to cut bloated inventories (13 months of supply for unsold new homes), curb falling prices and stimulate new construction. The hope is that once buying improves, it would feed on itself. People would join from the sidelines. The NAHB says its plan would create 250,000 jobs and cost $40 billion — big money, but tiny compared with the hundreds of billions lavished on recovery programs. The Senate included the plan in its stimulus, but it was later dropped.

It wasn’t an Obama priority. Some administration proposals, focused on foreclosures, are desirable. It’s sensible to allow Fannie Mae and Freddie Mac to refinance older mortgages, at lower interest rates, even if homeowners’ equity has dropped below today’s requirement of 20 percent. This would reduce defaults and increase borrowers’ spending power.
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Other ideas seem more dubious. For $75 billion, another proposal would subsidize homeowners so their monthly mortgage payments dropped to 31 percent of their income. Because that’s still high, many of these homeowners would probably default anyway. Even worse is the “cramdown” proposal, backed by the administration. This would allow bankruptcy judges to cut mortgage payments. If passed, this would probably raise future mortgage costs because lenders would have less access to collateral.

In any case, minimizing foreclosures alone won’t revive housing. If the recession and unemployment worsen, foreclosures will increase, because people without jobs and income can’t make their monthly payments.

The best way to limit foreclosures is to promote an economic recovery by stimulating home buying. It’s true that the recent “stimulus” plan included a tax credit of up to $8,000, but that was restricted to first-time buyers and made “refundable,” meaning people could receive the money even if they didn’t owe taxes. These are younger and poorer buyers — the weak credit risks of today’s crisis. They won’t rescue housing.

All this is telling. The administration and Congress, though pledging to restore economic growth, care more about protecting foreclosure victims and promoting homeownership among the young and poor. Politics trumps economics.

A new housing development in Las Vegas, a market like several others in the U.S. where the cost equation has shifted in favor of homeownership.

The relative cost of owning versus renting is swinging back in favor of homeownership in some U.S. markets, buoyed by several quarters of sharp declines in home prices.

At the height of the housing boom, as home prices surged, demand for rentals started to rise as the gap between owning and renting widened significantly. Even after the housing market soured, apartment demand grew as former homeowners became renters, allowing landlords to push healthy rent increases.  Now, after two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.

In more than half of the top 50 U.S. housing markets — including Los Angeles, northern Virginia and Las Vegas — the ratio is now below its 18-year average. In Los Angeles, for example, mortgage payments averaged 60% more than rent payments between 1990 and 2008. Now, those payments average 30% more than rent.

“We’re not saying on an absolute basis that it’s cheaper to own a home, but on a relative basis…owning is looking much more attractive than it has in a long time,” said Andrew McCulloch, a Green Street analyst. While the shift doesn’t mean that renters will rush to buy homes soon, “it’s not a ‘no-brainer’ anymore if they’re going to rent versus own,” he said.

If mortgage rates fall to 4.5% — and some economists have called for the government to push rates to that level to ease the housing crisis — mortgage payments would average 14% more than rent payments, a level last reached in 1998.

While lower rates could further boost home affordability, that may not be enough to overcome a psychological barrier for many would-be buyers who believe homes will become even more affordable. “One of the challenges in the housing market is not only affordability but also willingness to buy,” said Nicolas Retsinas, the director of Harvard University’s Joint Center for Housing Studies. “People are still worried about falling prices.”

And lending standards are much tighter than they were during the housing boom, when less-creditworthy tenants left apartments in droves to take advantage of no-money-down financing. At the housing market’s peak, nearly one in four renters left to buy homes, said Richard Campo, chief executive of Houston-based Camden Property Trust. That rate fell to near its historical norm of around 12% by the end of 2008. “The nonqualified renters are not moving out this time,” said Mr. Campo.

A separate report by Moody’s Economy.com also finds that home prices relative to rents are more in line with their historical relationship. Using data that measure average home prices and rent payments for 54 metro areas between 1984 and 2004, Moody’s Economy.com estimated that eight markets are “undervalued.” In those eight markets, home prices relative to rents are below or within 5% of their historical levels. “The bottom is coming into view,” said Mark Zandi, chief economist at Moody’s Economy.com, “But we’ve still got a ways to go.”

The report notes that home prices relative to rents remain well above historical levels in 30 markets, including Philadelphia; Portland, Ore.; and Virginia Beach, Va.

Lower prices and interest rates are spurring some buyers to get off the sidelines. Jason Schanta, 37, an independent contractor, has been ready to buy for three years, but he said he waited because Southern California home prices had become “outrageous.”

“I’m not an economic guru but I knew the bubble was going to burst,” he said. He is ready to buy a $500,000 home if Bank of America Corp.’s Countrywide Financial unit approves a short sale on the property in San Juan Capistrano, Calif. (In a short sale, the lender agrees to sell a home for less than the value of the mortgage.) Mr. Schanta currently rents a three-bedroom house for $2,250 a month, and says that he will pay just $150 more in mortgage payments and taxes for a house that has an additional bedroom and 350 more square feet. “Renting now costs just as much as buying,” he said.

Others are finding that they could pay less on their mortgage than they would on rent. Carla Zeineh, 22, and her husband recently began shopping for a home in Irvine, Calif., and discovered that with a 5% mortgage rate, her monthly payment on a $350,000 two-bedroom home with 20% down could be less than the $1,800 month that they pay in rent on their two-bedroom condo.

Several indices confirm what homeowners know: It was 4 quarters of misery. But for buyers with stable jobs, plummeting prices and low interest rates have created a sweet spot.

A slew of indexes confirm what every homeowner knows: 2008 was 4 quarters of misery. But for would-be buyers with stable jobs, plummeting prices and low interest rates have created a sweet spot.

Two home-price surveys released today showed a fourth quarter unmatched in its misery for homeowners:

• The Federal Housing Finance Agency’s House Price Index showed American homes losing an average 3.4% of their market value in the fourth quarter, worse even than the third quarter’s record-setting 2% drop. The fourth-quarter losses were the worst in the 18-year history of the government’s price survey. In all of 2008, prices fell 8.2%; 9.6% when adjusted for inflation.
• The S&P/Case-Shiller U.S. National Home Price Index, also out Tuesday, reported prices dropping 18.2% for the year. It was the greatest loss recorded in the report’s 21-year history. Prices dropped in every one of the 20 cities studied.

In a third report, out earlier this month, the National Association of Realtors showed the U.S. median house price falling to $180,000 — a 12% loss in 2008.

The surveys differ in their results because each uses different information. The housing finance agency doesn’t include jumbo loans, for example, but surveys 292 cities rather than 20. All, however, show the same record-breaking declines in values.

Some analysts had predicted an even worse performance for 2008, noted James B. Lockhart, the director of the agency. “We are hopeful the housing initiatives announced last week by President Obama will begin to provide much-needed stability to the housing markets,” he said in a prepared statement.

The government’s index, considered the broadest, shows prices falling last year in 44 states and Washington, D.C. In eight states, they fell more than 10%. Losses were worst in the disastrous housing markets of California, Florida and Nevada. In Merced, Calif., prices fell 16.29% in the fourth quarter alone and nearly 50% in all of last year, the worst decline in the country. The other bottom 10 cities included:

• Stockton, Calif. (down 40.2% in 2008)
• Modesto, Calif. (-37.8%)
• Vallejo-Fairfield, Calif. (-34.4%)
• Riverside-San Bernardino-Ontario, Calif. (-34.3%)
• Cape Coral-Fort Myers, Fla. (-32.9%)
• Naples-Marco Island, Fla. (-32.9%)
• Las Vegas-Paradise, Nev. (-32.6%)
• Salinas, Calif. (-32.2%)
• Punta Gorda, Fla. (-29.7%)

Prices actually rose in six states last quarter, however: North Dakota (1.9%), Wyoming (1.5%), Alaska (0.4%), Texas (0.3%), Hawaii (0.3%) and South Dakota (0.2%).

Ah, but if you’re a buyer . . .

In this rain of economic misery, it’s understandable if you missed the lone scrap of good news: Putting a roof over your head is growing more affordable by the day. “It’s the one thing that’s getting better,” says Daniel McCue, a research analyst at Harvard University’s Joint Center for Housing Studies.

In fact, housing is likely to grow even more affordable, at least for those who have still have jobs and can take advantage of plummeting prices and low interest rates.

The monthly payment on a $160,000, 30-year fixed-rate loan at today’s average rate of 5.34% is $892. A year ago, at 6.37%, that loan would have cost $997 a month. If, as at least one economist predicts, rates drop to 4.5% this summer, that same mortgage will cost just $810 a month.

The spoiler is, you’ll need a job to profit from this opportunity. A stable job. With the economy shedding a half-million or more jobs a month, that leaves out plenty of people. You also may need a loan, not a simplest thing while lenders are being extremely cautious.

“There’s just not a lot of action at all,” says McCue. “The market has frozen up due to a lot of uncertainty.”

You can see the banks’ point: With home prices still dropping, lenders can’t pin down a home’s value with any certainty. With sliding home prices, their collateral could end up worth less than the loan.

“Even a healthy bank would be much more cautious in this environment, and it is unrealistic to expect battered, rescued institutions to behave very differently,” economist Ian Shepherdson wrote in his High Frequency Economics newsletter recently.

Who’s best positioned to profit

As if those weren’t enough obstacles, here’s another: Even if you’ve got a down payment saved, do you dare spend it? “Are you willing to use your savings for a down payment when you could need it for living if you take a hit on your income?” McCue asks.

Who’s left to capitalize on this window of affordability? “People who were lucky enough not to lose a lot of equity in their homes or had been unable to participate or were priced out from the get-go,” says McCue. For them, “this is a chance to potentially have some more stable, more affordable housing.”

Those best positioned to enjoy the discount:

• Buyers who have good credit, stable employment and a down payment saved, including younger, first-time buyers who have been waiting for prices to drop so they can get into the housing market.

• Sellers who still have plenty of equity in their homes, so they can afford to drop their selling price and use their equity to trade up to a better house.

• Homeowners who can afford to wait out the bad years and feel no pressure to turn a profit anytime soon.

Renters get a boost, too

Already, falling prices spell opportunity for renters with stable incomes. Apartment rental prices fell in the third quarter of 2008 in nearly all of the 31 metro areas tracked by RealFacts, a Novato, Calif., company that analyzes apartment rent data. The biggest reductions: Miami‐Fort Lauderdale, Fla. (down 2.4%); Riverside‐San Bernardino, Calif. (down 2.4%); San Jose, Calif. (down 2.0%); and Oxnard‐Thousand Oaks‐Ventura, Calif. (down 1.8%). Other areas with substantial rent declines: Los Angeles, Orlando, Fla., and Phoenix.

Nationally, the average rent dropped to $993 from a high of $1,002 in September 2007. Foreclosures and other financial pressures are keeping some people from launching households. Others are bunching up to save costs.

“Some people who’ve gone out on their own have gone back home, or they’re going back to sharing an apartment with somebody,” says Caroline Latham, the CEO of RealFacts.

For renters, what this means is, if you shop around in your city, you can lower your housing costs by moving or by using price comparisons to negotiate a drop in rent with your current landlord.

Affordable? Or ominous?

Housing will remain affordable, at least for those in the right position, as long as prices and interest rates stay low. If government stimulus efforts work — and there’s no guarantee they will — house prices should start rising slowly in mid-2010, hitting levels in 2013 last seen in late 2003, according to Economy.com. Mark Zandi, the company’s chief economist, predicts prices will probably get back to their 2006 peak 11 years from now.

He’ll watch for these signs that the stimulus has begun to work: consumer confidence rising by early this summer and job losses dropping from their current rate of a half-million a month.

Here are the reasons for Zandi’s guarded optimism:

• While enormous numbers of foreclosed houses will remain on the market for years to come, the “inventory” of these distressed properties seems to be stabilizing, not growing.

• Mortgage rates are low and could fall. Zandi predicts they’re about to dive again, with government monetary programs pushing rates as low as 4.5%, causing a refinance boom in the second quarter this year.

Read another way, the tea leaves show diminishing chances that the turnaround will begin soon. When rents and home prices fall simultaneously in the same market, that’s a sign of continuing declines, warns economist Danilo Pelletiere, the research director for the National Low Income Housing Coalition. Rents are a kind of weather vane, Pelletiere says, pointing which way a local economy is headed. Stable or rising rents provide a floor for house prices, enabling investors to jump in.

“Declining rents and declining home prices is a sign of a market in trouble,” Pelletiere says. Right now, that’s the case in most major cities in the U.S. “That’s not a situation you want to buy into, assuming you are buying for investment purposes and not because you’re buying into a house you love,” he says.

Bottom line: If you buy at this point, be prepared for the home’s value to continue falling for a while. Even if the worst is over soon, Zandi’s prediction of prices reaching 2003 levels again in 2013 is a forecast for values nationally and on average. That means some cities could see price growth sooner and others could lag badly, depending on when the housing bust hit town, how hard it hit and the strength of the local economy.

Washington is trying to ease the mortgage crisis by helping people refinance into home loans with better terms. But one group is being left on the sidelines: borrowers with loans too big to qualify for government backing.

President Barack Obama’s housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country, though they can run as high as $729,750 in certain pricier markets, such as parts of California, New York and Hawaii.

Neil Littman, who lives near Boulder, Colo., says conforming-loan limits in the area are too low.

Anything bigger is called a “jumbo” loan — and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.

That’s hurting borrowers like Pete Zipkin, who’s the kind of affluent customer that banks once coveted. The 35-year-old technology executive — who says he has a spotless credit record and at least 20% equity in his home — has come up empty-handed in his search for a jumbo mortgage of more than $1 million for his recently built five-bedroom home in Alamo, Calif., near San Francisco.

Unable to find a fixed-rate mortgage when his construction loan expired last fall, Mr. Zipkin now has a variable-rate loan that adjusts monthly. The rate is currently 5%, but it can go as high as 12%. He says banks have turned him down in part because they are worried about falling home prices in California, even though price declines in Alamo, where the median home price is $1.3 million, have been less severe than in the rest of the state.

“If somebody has the income, the equity and the credit rating,” they should qualify for a loan, Mr. Zipkin says.

‘Buying Down’ a Mortgage

Many homeowners in high-priced markets are experiencing similar difficulties, and are left with few options other than to raid their savings or retirement accounts and use the cash to “buy down” their mortgages. In some cases, home buyers need to put up a large down payment, often 25% or more, to qualify for a jumbo mortgage. Others are bypassing jumbos altogether and putting up enough cash to become eligible for a lower-rate conforming loan.

“Every single day I’m talking to people who have a jumbo loan, and I can’t do anything for them,” says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.

ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.

“If you have been able to … save for a down payment, that to us speaks volumes about your character,” says Bill Higgins, ING’s chief lending officer.

Like most jumbo lenders, ING offers mainly “hybrid” adjustable-rate mortgages that carry a fixed-rate for five or seven years and then reset annually to an adjustable rate. ING is offering initial rates as low as 5.5% for a seven-year adjustable-rate jumbo mortgage. Last week, the average for a 30-year conforming mortgage was 5.22%, according to HSH Associates, a financial publisher.

Jumbo borrowers have always paid slightly higher rates than conforming-loan borrowers, in part because luxury homes can be harder to sell quickly for their full price if a homeowner defaults. But the gap between jumbo and conforming loans, historically around 0.3 percentage point, is now about 1.55 points, with jumbo rates averaging about 6.77%.

Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Mr. Lazerson says.

Frustrated Buyers

That is frustrating potential buyers like Brandon Steele, a vice president of marketing for a food-products company, who was approved by his credit union for a $990,000 loan last year to buy a home in the Sherman Oaks section of Los Angeles. He had hoped to move his growing family out of the single-family house he has rented for the past four years and into a larger one. Those plans fell through when his credit union told him in December that they were getting out of jumbo lending.

“We thought we were being prudent by not jumping into the housing market when it was overinflated,” he says. “It’s a catch-22. Now that we want to purchase, we cannot get financing.”

Mr. Steele says that he and his wife have high incomes and a solid credit rating, but that the money he had planned on using to make a larger down payment was lost in the stock market. He says his only option now is to wait for home prices to fall another 20% or to save an additional $100,000.

“Short of moving into a two-bedroom apartment or not funding my 401(k), I can’t save that kind of money in a year,” he says. “If you live in a high-cost area, there’s a whole different standard. Everything’s a jumbo loan.” Mr. Steele says that for now, he’s hoping his credit union, where he’s been a customer for 10 years, will reinstate his pre-approved status and fund the loan.

The lack of financing is particularly acute in markets where rising home prices have made jumbo loans a necessity for even middle-class borrowers, such as New York City, coastal California and Washington, D.C. “If you own a $650,000 home in many parts of this country, you’re not a wealthy person by any stretch, and you’re being cut out of any relief,” says Guy Cecala, publisher of Inside Mortgage Finance.

Around 4% of all borrowers have loans that exceed conforming limits, according to an estimate by First American CoreLogic. But that share rises in high-cost states such as California, at 17%, and New York, at 8%.

Some jumbo clients — enticed by historically low conforming rates — are willing to dip into their retirement savings to lower their balances. Neil Littman, for one, estimates that he’d save $300 a month if he paid $25,000 to bring his loan down to the $417,000 limit in Erie, Colo., a bedroom community about 30 minutes east of Boulder.

“Right now I’m trying to conserve cash, but to get the savings on the interest rate, I’m willing to put more money down,” says the 38-year-old, a commercial real-estate broker.

Mr. Littman, who purchased his four-bedroom home in April 2007, laments the fact that the Boulder area doesn’t have a higher conforming-loan limit. Median home prices in Boulder are nearly $650,000, though median prices for the county are much lower, at around $360,000.

Raiding the 401(k) Account

Other borrowers are raiding their 401(k) accounts in order to qualify for a cheaper mortgage. Jon Eisen, a San Diego mortgage broker, says that one of his clients — a dentist with a $1 million jumbo loan — is considering pulling $450,000 from a retirement savings account to pay down his “interest-only” adjustable rate mortgage, in which principal payments are deferred for a set period. That would allow him to refinance into a fixed-rate conforming loan.

Randy Kobata, who lives in Santa Monica, Calif., says he’s considering taking $70,000 out of his savings to pay down his mortgage in order to get to the conforming limit. He isn’t able to refinance his adjustable-rate jumbo loan from Washington Mutual Inc., now a unit of J.P. Morgan Chase & Co., because the value of his two-bedroom home has declined by $100,000 in the past two years. Meanwhile, the 31-year-old, who works in commercial real estate, has asked the bank for a rate reduction.

Rather than dip into savings to get a better rate, some advisers say, clients are better off holding tight. “If your home has lost 15% in two years, why pay down just to refinance?” says Craig Vogt, a mortgage broker in Brooklyn, N.Y. “It’s like losing money two times.”