Market Recap

Yesterday’s housing bill is today’s housing law. Among the highlights, first-time home buyers will receive a tax credit of 10% of the purchase price of their home, up to $7,500. If you are wondering how Congress defines a first-time home buyer, it’s someone who hasn’t owned a house in the past three years. The validity and efficacy of the credit has to be questioned, because it’s really not a credit; it must be repaid in equal installments over the subsequent 15 years.

Another highlight helps people who have fallen behind on their mortgages and who owe more than their houses are worth. In such situations, refinancing is difficult, if not impossible. The law seeks to resolve this dilemma by encouraging lenders to forgive delinquent borrowers’ debt down to 87% of the property’s current appraised value. At that point the homeowner can than refinance under an FHA plan (though he or she will be expected to pay higher FHA insurance premiums).

The new law imposes few changes on Fannie Mae and Freddie Mac. Both institutions are a mess, yet the law oddly imposes no changes in management or business approach and no penalties on shareholders. Taxpayers instead are given two dubious protections: The first is that the treasury secretary will have the right to dictate terms if the government has to stump up equity capital for the firms. The second is the creation of a new regulator, whose effectiveness one must question, considering the effectiveness of past regulators.

Outside of the housing market, general economic health is waning. U.S. second-quarter gross domestic product came in below expectations, rising 1.9% versus expectations for a 2.2% rise. Slowing GDP, in turn, is impacting employment, and not in a good way. On Friday, the employment situation showed that payrolls declined by 51,000, pushing the unemployment rate up to 5.7%.

Lower Oil Prices, Higher Housing Prices

Congress is trying its darnedest to jump-start the housing market, but it’s too little, too late. The best medicine for housing, for the entire economy (housing doesn’t operate in a vacuum), is lower energy prices—lower oil and gas prices to be specific. Oil at $130/barrel and gasoline at $4/gallon are enormous drags on the economy. Both impact every facet of economic life, and current price levels are hitting middle-income families – the backbone of the housing market – particularly hard.

A drop in oil and gas prices would produce a corresponding rise in consumer confidence (a confident consumer is a spending consumer). So how do we lower prices? By increasing our supply. Market prices of oil and gas will fall on just the announcement of a likely supply increase because of the opportunity costs associated with keeping reserves in the ground. The impact to the economy would be immediate and salubrious.

We have all seen various housing districts rendered near-ghost towns because of exorbitant commuting costs, with gas prices being the primary contributor. Maybe if commuting weren’t so costly, the ghost towns wouldn’t be so ghostly.