JEFFREY BROWN: The troubled U.S. housing market got a bit of good news today with word that some prices are rising, but full recovery remained a long way off.
Four cities, Chicago, Minneapolis, Washington and Boston, posted the largest increases in the latest Case-Shiller home price index. But prices in Detroit, Cleveland, Las Vegas and Phoenix were selling at the same levels as January of 2000, more than 10 years ago.
What's more, the survey of 20 cities found overall home prices have actually fallen over the last 12 months. And home sales for this year are on track to be the worst in 14 years. And things could get worse yet, once banks pick up the pace on millions of foreclosures, as expected. They have been delayed by a government investigation into mortgage lending practices.
PROTESTERS: Prosecute the criminals! Attorney generals, prosecute the criminals!
JEFFREY BROWN: Amid anger over the banks' handling of foreclosures, 36 state attorneys general and the Obama administration have been trying to negotiate a settlement with the five largest mortgage servicers. It could include a lump sum settlement of more than $20 billion that states could then use to modify mortgages.
Meanwhile, the futures of mortgage giants Fannie Mae and Freddie Mac are still to be determined, with a new plan from the Obama administration reportedly in the works. Fannie Mae and Freddie Mac still back most home loans in the U.S.
And for a closer look at all this, we turn to Nicolas Retsinas, who teaches housing finance and real estate at Harvard Business School, and Guy Cecala, publisher of "Inside Mortgage Finance," a housing industry research publication.
Nic Retsinas, we will start with you.
So what do you see in the latest numbers? Is there any sign of hope there?
NICOLAS RETSINAS, Harvard Business School: Well, there's always a sign of hope, but the signs are very slim.
It's amazing. Interest rates are at a 50-year low, and yet we have such a tepid housing market. And, yes, prices have gone up in a number of cities over the last couple months, but they're down from a year ago and really down from where they were almost at beginning of the decade. So it's still a very difficult, sort of shaky time in the housing market.
JEFFREY BROWN: Guy Cecala, the uptick, such as it is, was -- or came in the second quarter. The quarter was up, but the year is down. I mean, that's why the -- it was a little -- it was interesting to read the reports this morning, just to parse it.
GUY CECALA, "Inside Mortgage Finance": Yes, it's a little bit -- and emphasis on little bit -- of good news.
Most people would say the real number to look at is the year-over-year change. And as long as we keep declining, that's bad news. I think, cumulative, we have already seen a 30 percent or so decline, according to the Case-Shiller index. So, this is just more bad news.
JEFFREY BROWN: And just to help us with it a little bit more, this seasonal adjustment idea, explain that concept, because that plays in to how we read these numbers, rights?
GUY CECALA: Well, if you look at -- typically, the housing season is the summer months, so you would expect to see an increase in the summer months if it was just not adjusted. So the difference between the first quarter and the second quarter, the second quarter would generally always be more active than the first quarter.
When you factor in the seasonal adjustment, it tends to flatten out the differences a little more.
JEFFREY BROWN: Now, Nic Retsinas, fill in the picture a little bit behind the big numbers. Talk about -- you mentioned some of the differences in regional and in different cities. What do you see there when you look out?
NICOLAS RETSINAS: Well, it's a big country.
And some markets are in better shape than other markets. Clearly, in the markets such as the Southwest, south Florida, parts of California, there was such substantial overbuilding that we have a huge excess inventory. In other parts of the country, like the Upper Midwest, that have faced severe economic problems, you have struggles on the demand side.
So while there are some silver linings, parts of Texas, parts of the Northeast, where you think we're probably at or near a bottom, as long as this foreclosure cloud is hovering overhead, a recovery is going to be in the distance.
JEFFREY BROWN: But just to fill us in a little bit more, Nic, do you -- is it correct to talk about a national housing market at this point, or is it better to think in terms of regional housing markets?
NICOLAS RETSINAS: Well, it's better to think in terms of regional, because people buy homes in particular neighborhoods, not in the United States of America.
However, we do have a national housing finance system. And that national housing finance system is tightening credit, requiring higher down payments. So it is discouraging people who might want to buy. And for those who have the means to buy, they're discouraged because what they see is a possible downfall in prices.
JEFFREY BROWN: What do you see in terms of looking at regionally vs. the nation?
GUY CECALA: Well, generally, there's a lot of difference, as Nic pointed out, between different regions of the country.
I guess what's so disturbing about the housing trends now is, we're seeing no region of the country posting any increases. And it's just a question of which are posting the largest declines year over year? And, also, as Nic pointed out, it tends to be the areas that had the boom and now they're having the bust. Some of the other areas are a little bit flatter in terms of slower declines, but generally every area has seen a decline, and they have seen a decline this year.
JEFFREY BROWN: Now, we have all mentioned the foreclosure issue.
Let me start with you, Guy Cecala, on this. It seems as though it's somewhat in limbo at this point, given what the attorneys general are doing, what states are doing, legal proceedings. What's going on?
GUY CECALA: Yes, backing up a little, one of the things that is pushing housing prices lower is the fact that we have so many distressed property or foreclosed properties that make up housing sales. They tend to have lower prices.
And if you compare those to what we saw several years ago, it's naturally going to result in price declines. The issue going on now is that foreclosures have slowed down. And you might think, gee, isn't that good news? But it's not slowing down because unemployment has improved and a lot of people are catching up on their mortgages. It's slowing down because there's this big settlement that the federal government and mostly the state attorney generals are trying to work out with the largest mortgage servicers in this country.
And it's bogged down the whole foreclosure process, to the point where legitimate foreclosures are being kept out of the market. And that's going to create a backlog going forward.
JEFFREY BROWN: And the point is that we need this process to take place. As painful as it's going to be, we need the foreclosures to go forward.
GUY CECALA: Yes. We have somewhere in the neighborhood of four million distressed properties out there. Those are either seriously delinquent mortgages or ones already in the foreclosure process.
And most of those loans have to be pushed through the system at some point. And the longer we take to get through that, the longer the housing market is going to take to recover.
JEFFREY BROWN: So, Nic Retsinas, what is the holdup with the -- in trying to resolve this issue, particularly with what's going on at the state level?
NICOLAS RETSINAS: Well, the state attorney generals are suggesting that, because of malfunctions and a dysfunctional servicing system, banks have to be held accountable, have to modify loans and make payments.
And the banks on the one hand are willing to do that, as long as they know that's the end of the litigation. But there are some attorney generals, like the attorney general of New York, who suggest, no, it's not just the robo-signing, it's not just the bad paperwork, but there are other issues, and we should be able to follow up on those issues also.
All of that leads to stagnation and sluggishness. And as Guy said, the pipeline isn't clear anymore.
JEFFREY BROWN: And, so, Nic, staying with you, what difference would it make once a settlement comes through? What difference would it make to consumers and to these banks?
NICOLAS RETSINAS: Well, in the short term, it would probably even more properties on the market. And in the very near term, it might further depress prices.
But once we're through with this, we can start dealing with the excess inventory. And when we clear the excess inventory, we can have a supply-demand balance. And that's when you can see a recovery begin.
JEFFREY BROWN: Now, Guy, the administration also has talked about its sort of hoped-for plan for new foreclosure settlements. What's going on with that?
GUY CECALA: Well, they're also trying to work this through. And I think there's a of pressure on the administration now to do something to revive the morbid housing market.
One of the few things they see as necessary is resolving the foreclosure crisis. As we said, everybody is sort of in agreement now that there's a huge pipeline that has to start moving through the process. And if you keep that backlog, you're not talking about a recovery for two or three more years.
So the sooner you can do it, the better. And that's why I think the administration is trying to goose along this settlement as much as they can. They just haven't had a lot of luck.
JEFFREY BROWN: Are there things they can do beyond the settlement, various proposals they're looking at?
GUY CECALA: Well, keep in mind that they have to -- any proposal they look at can't cost much money -- or any money -- which makes it very difficult.
One of the few things you hear a lot of talk about these days is utilizing Fannie Mae and Freddie Mac, and particularly all the mortgages that they control, and somehow creating an environment where borrowers who are current on their mortgages, but can't refi because of tough underwriting or a lack of equity, could suddenly be allowed to capitalize on historically low rates.
That would pump some more money into the economy and certainly help tens of thousands of people lower their mortgage payments.
JEFFREY BROWN: Nic Retsinas, what are you hearing in that regard in terms of what proposals might be on the table for dealing with the - for dealing with the foreclosure settlements?
NICOLAS RETSINAS: Well, a couple weeks ago, the administration put forth a request for information, a request for ideas dealing with the foreclosed properties.
They seemed to indicate they were open to investors buying large pools of foreclosed properties and perhaps convert them into rental housing, somewhat similar to the Resolution Trust Corporation over 20 years ago. So that's what they're looking at because they too come to that same conclusion. Until we get the foreclosures through the pipe, we're not going to be able to establish what the market clearing price is.
JEFFREY BROWN: Now, Nic, one last big issue hanging out there -- and we just heard you mention Fannie Mae and Freddie Mac. Clearly, the administration -- there's a lot of conjecture about their future. But clearly, Nic, the administration is treading carefully here as well, right?
NICOLAS RETSINAS: Absolutely.
And, in some ways, ironically, there is consensus on both sides of the aisle that Fannie Mae and Freddie Mac can't continue in any way, shape or form similar to their current structure. But on the other hand, the housing finance system and the housing market is so fragile, these entities are providing life support. So they're between a rock and a hard place in determining how to proceed and when to proceed.
JEFFREY BROWN: Is that what you see happening, Guy?
GUY CECALA: Yes.
In the first half of this year, we tracked numbers, and Fannie Mae and Freddie Mac were accounting for 70 percent of all new mortgages being made.
JEFFREY BROWN: Still that high?
GUY CECALA: Still that high. And when they're doing...
JEFFREY BROWN: Even after all these years of the problems?
GUY CECALA: Exactly. And when they're doing that, you really can't talk about dialing them back or changing them dramatically.
And I think it really puts that -- a serious debate on that on hold for a year or two. There's really nothing you can do.
JEFFREY BROWN: So -- but are there serious proposals on the table, or, literally, at this point, it's just got to get to the next step before we can think about that?
GUY CECALA: I think we have to get to the next step. Also, when you talk about serious proposals, the biggest complaint is what Fannie and Freddie did in the past.
I don't think anybody is complaining what Fannie and Freddie are doing now. And so do we want to create new entities or authorize private companies to do what Fannie Mae and Freddie Mac are doing well right now? It makes it a very difficult decision.
JEFFREY BROWN: So, Nic Retsinas, just to bring it full circle here, now we're looking -- now we're in the fall season. What do you look at normally in the housing market? What is supposed to happen? What do we need to happen next?
NICOLAS RETSINAS: Well, I need -- again, I go back to foreclosures, foreclosures, foreclosures. As long as foreclosures, distressed sales, short sales are 30, 40 percent of the market, there is going to continue to be downward pressure on prices.
So, I'm afraid the silver linings we saw in the numbers today may only be temporary.
JEFFREY BROWN: Closing word?
GUY CECALA: I agree 100 percent with what Nic said. You know, the foreclosure situation is the real nut that has to be cracked. And that's going to take time to do it. And we're not making any progress on it. In fact, we're delaying it.
JEFFREY BROWN: All right, Guy Cecala, Nic Retsinas, thank you both very much.
GUY CECALA: You're welcome.
NICOLAS RETSINAS: Thank you.