As we close in on the end of 2011 we can reflect on what has transpired this year and look forward to 2012.
The equity markets performed fairly well in the first half of the year. The Dow Jones Industrial Average was up over 7 percent and the S&P 500 was up 5 percent. Then we experienced the "Arab Spring" as freedom movements rolled across the autocratic governments in northern Africa, Egypt and Syria. Coupled with the financial crisis in Greece and now Italy, the markets have sought out safety and avoided risk.
The DJIA is now up only 4 percent and the S&P 500 is flat on the year. U.S. Treasuries have continued their bull market run as capital continues its "flight to safety". The 10-year Treasury yield has fallen from around 3 percent at mid-year to approximately 2 percent today.
Housing and unemployment continue to plague the U.S. economic landscape and will factor prominently in the 2012 election cycle.
The National Association of Home Builders claims that each new single-family home that is built creates three jobs. The jobs are created in those industries that not only provide the raw materials for construction and furnishing but also for real estate and insurance agents, lawyers and bankers that provide services to the homebuilders and the buyers.
Further, the NAHB extrapolates that each new single-family home that is built generates a total of $90,000 in government revenue ($67,000 in federal taxes and $23,000 in state taxes). So it seems fair to reason, all we have to do as a country is to rejuvenate the housing industry and we will be well on our way to improving the unemployment and federal deficit issues.
The Fed is doing everything possible to keep interest rates -- in particular mortgage rates -- low so that more homebuyers will be attracted to the market. Unfortunately, the Fed's efforts to rejuvenate the housing market are failing because many home mortgage prospects no longer qualify for a mortgage, regardless of how low mortgage rates move.
According to Zillow, year-over-year home values were down 4.4 percent. This means that the largest single asset for most Americans, their home, has fallen 28.8 percent since the peak in June 2006. To make matters worse, 28.6 percent of all single-family homes with mortgages -- up from 26.8 percent in the second quarter -- in the country have negative equity. The mortgage balance is higher than the market value of the home. Home prices don't look like they are going to firm up any time soon as foreclosure resales made up 18.9 percent of all sales in September.
If the Obama administration or the Republican challenger for president is serious about improving the housing market to spur the economy, they need to face some unpleasant realities that are challenging the American consumer.
If you have negative equity in your home, you can't refinance because you don't qualify on the loan-to-value ratio. You also can't sell to either buy the next larger house or downsize into a smaller house because you will owe money at closing and have no down payment for the new house.
If you are one of the 9 percent of Americans that are currently unemployed, you don't qualify for a mortgage because you don't have any income.
If you are part of the labor pool that is "underemployed," you were laid off and your new job pays less than your old one, you probably don't qualify to refinance your mortgage because your debt-to-income ratio is too high.
And lastly, if you had any meaningful stretch of time where you, your spouse or perhaps both of you, were unemployed ... then you may have fallen behind on a bill payment or two. This means you don't qualify for a mortgage because your credit score is too low.
The housing bubble was created by lax underwriting standards in the home lending market in an effort to have a greater portion of the population realize the "American dream" of home ownership. Given lax credit underwriting got us into this mess in the first place, it is difficult to expect regulators or legislators to actively push banks to ease their mortgage underwriting standards again to spark a housing recovery.
So for now, the 4 percent 30-year residential mortgages are nothing more than a mirage for the homebuilding industry because so few prospective buyers qualify for a mortgage.
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Robert J. Swartout is a vice president at Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully's Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.
Published: Thu, Nov 17, 2011
