This post first appeared in the SPECIAL EDITION: Cirios Trends: A Decade in Flux

<< PREVIOUS

The aforementioned warning about historical analogues notwithstanding, let’s take a look at how the housing market recovered the last time there was a persistent decline in home prices.

As an aside, one of the most challenging aspects of analyzing the current housing recession is how infrequently home prices have fallen for an extended period of time. Since 1965, this is only the third time the US housing market has experienced two or more consecutive months of year-over-year price declines.

The most recent such decline occurred in 1991 as the housing market reeled from the Savings and Loan debacle. For those unfamiliar with the S&L crisis, banks and thrifts found themselves overleveraged to residential mortgages as home prices fell. Clearly, we learned our lesson.

(click to enlarge image)

The peak of the 1980s real estate boom, as measured in year-over-year appreciation, registered 28 months earlier than the top in prices, not a dissimilar tally as our the most recent boom. On the way back up, from the bleakest moments in 1991, it was 18 months until we saw a meaningful pickup in home prices.

Of important consideration in examining this historical example, however, is the way in which government action affected the cleanup of each respective housing bust. The Resolution Trust Company, or RTC, was created in 1989 to liquidate distressed real estate assets gumming up the country’s banking system. And while many argue this strategy ushered in a de-facto policy of moral hazard that culminated in our recent financial crisis, others widely hail the strategy as cordoning off the damaged segments of the banking system so the rest of the industry could heal on its own.

We have no RTC2 to clean up this mess, but we are certainly flush with government schemes to prop up the housing market. The relative effectiveness of these programs will go a long way to determining when the good old days of steady home price appreciation will be back again.

NEXT >>

By ANDREW JEFFERY

This post first appeared on Minyanville.

Treasury Secretary Hank Paulson is hoping he’s found the magic bullet to solve the US housing market’s seemingly never-endless woes.

He hasn’t.

By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% – well below the current market rate of around 5.75%.

Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.

According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes.

In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments – the lower rate amounts to savings of $150 per month on a $200,000 loan — precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.

Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values.

This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.

The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.

By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.

These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.

The silver lining — for those brave enough to uncover their eyes and look – is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.

A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.