July 25, 2011 04:08 PM UTC

Obama's fate may turn on housing

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• by: allyncooper

( – promoted by c rork)

As the political rhetoric heats up for the  2012 presidential election, there’s little doubt the overriding issue will be the economy.  Presidential candidates live or die by the state of the economy and by the perception they can do something about it or are ineffective in economic matters.  Nobody knows this better than Obama, who was swept into office by a rapidly deteriorating economy.  George H.W. Bush found this out the hard way when he woke up the day after his re-election bid and belatedly acknowledged James Carville’s astute observation – “It’s the economy,  stupid”.

The recession has been “officially” over for months, with the stock market up , most large corporations making good earnings, and the tech and auto industries rebounding.  But on main street , unemployment remains stuck above 9%,  state and local governments continue to layoff workers and cut services, many small businesses are struggling,  and consumer confidence remains anemic.

Housing continues to be the major drag on recovery.  Four years after the bubble burst,  housing prices are continuing to decline fueled by a continuous supply of foreclosures , and more and more homeowners find themselves “underwater”, owing more on their mortgage than their house is worth.  Since the market peak in 2007, the total value lost in the residential market is a whopping  $9 trillion.  Nothing has hit the middle class harder, because the bulk of its wealth was in the roof over their heads.

 

Historically,  a housing recovery has led the way out of previous recessions. Housing has a multiplier effect triggering the purchase of other major consumer products, like appliances and furniture.  But the indices simply aren’t there to indicate any turnaround in housing anytime soon, certainly not by the election next year, and perhaps not for years after that.

It’s been said the three most important words in real estate are “location, location, location”.  But three other words are becoming increasingly important – “inventory, inventory, inventory”.  Gary Shilling, the housing consultant who predicted the housing bust and has been right more often in his pessimistic outlook on the market, recently said housing prices will likely drop another 20%. Moreover, the percentage of homeowners with loans underwater may increase from the current 25% to 40% –   a wave of “strategic foreclosures”  could be on the horizon – people who still have jobs and can pay their mortgage but walk because they no longer see the value of paying on a house not worth the note.  Shilling even predicted this could lead to a new recession in 2012.

Inventory is the important indicator.  “Normal” inventory nationally is about 2.5 million units.  Current inventory is 4.0 million, and going up.  The “shadow inventory” refers to the number of loans in foreclosure or 90 days delinquent, and that number currently totals 4.3 million loans, representing units that will be dumped on the market at some point in the future adding to the already huge inventory glut.  In addition to this “shadow market”, there is yet another “shadow market”, owners who would put their houses on the market but aren’t because they are underwater or simply can’t see the value of trying to sell in a depressed market.

Adding to housing’s woes is the fact there is simply a smaller market for housing now.  Credit and finance restrictions put in place by Dodd-Frank have culminated in what’s known as a Qualified Residential Mortgage requiring a 20% down payment, a provision the National Association of Realtors and the NAHB is fighting tooth and nail.  Because of this and other credit restrictions on mortgages, the number of eligible buyers is dwindling while inventory is increasing.

The Obama administration initially launched the HAMP program in February 2009  to help struggling borrowers refinance and stay in their homes, but it’s been a big disappointment. It also failed to address what is now the bigger problem – underwater loans.  FHA launched the  $ 8 billion  Short Refinance program in September in which underwater borrowers can refinance into an FHA insured loan if the lender writes off the unpaid principal balance of the original loan by at least 10%, but as of June only 246 borrowers took advantage of it .

In the past few weeks, Obama has turned his attention back to housing,  no doubt aware of the bleak situation and the ramifications it may have on his re-election. At a Twitter town hall meeting two weeks ago, Obama said he would put more pressure on banks to pursue principal reduction, acknowledging property devaluation as the crucial issue.  HUD has accelerated implementation of a $1 billion mortgage assistance program to the unemployed mandated by Dodd-Frank, but it could be a drop in the bucket given the enormity of the problem.  Last week on Meet the Press, Treasury Secretary Timothy Geither admitted the administration may be running out of options “to engineer artificially a stronger recovery” in the housing market .

The economy will be the overriding issue in the presidential election next year. Obama is a smart man and doesn’t have to be told, “It’s the economy, stupid”.   But he may be running out of options to “fix” the housing crisis, not through lack of trying, but simply because the problem is so systemic little can be effectively done by government.  But politics is perception and the pain is real with that $9 trillion in wealth gone predominately from the middle class.  The election could very well hinge on who gets blamed for that pain.