Association of Realtors reported January existing home sales sank to 4.890
million from 6.380 million a year earlier, and the average price was $201,100,
down from $210,900 or 4.6, percent from a year earlier. In December, sales were
4.910 million and the median price was $207,000. The large price drop from
December was particularly disturbing.
These numbers were
hardly surprising. The National Association of Realtors tracking statistics for
new sales contracts have been sinking precipitously in recent months. Buyers
are scared, and recent actions by the Federal Reserve, the Bush administration
or the Congress offer little hope for better times soon.
The U.S. consumer
faces a constant drumbeat of bad news. Housing prices are falling, gas prices
are rising, good new jobs are getting scarcer than hen's teeth, and credit card
terms are getting tougher, even as the Federal Reserve makes credit to banks
efforts to increase liquidity and bank lending have not made mortgages
adequately more available, especially in the Alt-A and subprime categories.
Alt-A loans are for homeowners offering good repayment prospects but either
less-than-perfect credit or recent income records. Fannie Mae, generally, only
takes prime lenders, and does not finance most upper-end, more-expensive homes.
strategy has two components. The Fed has lowered short-term interest rates by
slashing the Federal Funds rate 1.25 percentage points since January 22, and
the Fed has permitted banks to use subprime-backed mortgage securities to
borrow from the Federal Reserve. The latter is the so-called term auction
These policies do
not solve the basic problem, because these policies do not provide banks with
opportunities to write many new non-Fannie Mae conforming mortgages.
provide the housing market with adequate amounts of mortgage finance by taking
deposits, writing mortgages and keeping those mortgages on their portfolios.
Bank deposits are not nearly enough to carry the U.S. housing market. Much the
same applies for loans to businesses.
In normal times,
regional banks bundle mortgages into bonds, so-called collateralized debt
obligations (CDOs), and sell these in the bond market through the large Wall
The recent subprime
crisis revealed the large banks were not creating legitimate bonds. Instead,
they sliced and diced loans into incomprehensibly complex derivatives, and then
sold, bought, resold, and insured those contraptions to generate fat fees and
million dollar bonuses for bank executives.
discovered, insurance companies, mutual funds and other private investors will
no longer buy mortgage-backed bonds. Banks can no longer repackage mortgages
and other loans into bonds and are pulling back lending.
Home prices tank,
consumers spend less, businesses fail, and jobs disappear.
have taken massive losses, and the large banks have taken about $150 billion in
losses on their books. This left the banks short of capital and in liquidity
crises. The banks turned to foreign governments, through sovereign investment
funds, to sell new shares and raise fresh capital, and to the Fed to boost
sovereign investment funds nor Ben Bernanke have required the banks to change
their business models, which essentially pays bankers for creating arcane
investment vehicles that generate transactions fees, rather than writing sound
mortgages and selling simple, understandable mortgage-backed securities to
changes in business practices, the bond market remains closed to mortgage
finance, other than CDOs offered by Fannie Mae, and it is inadequate to supply
the volume and array of mortgage products necessary to support a full housing
stimulus package tax rebates, interest rate cuts and administration help for
distressed homeowners are palliatives. The $168 billion stimulus package is
less than the losses taken by private investors and the banks on CDOs
Getting the housing
market going and the economy growing will require Ben Bernanke to aggressively
pursue banking reform. Without genuine changes in the way Wall Street handles
mortgages, the economy can�t get back on track.
Morici is a professor at the University of Maryland School of Business and
former Chief Economist at the U.S. International Trade Commission.