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Housing Market Expected to Recover in Short Term

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''Accelerated adjustment in the U.S. housing sector...will drag down growth to low levels in the near term but will not trigger a recession and will only modestly push up unemployment.''

That's what the global, Paris-based Organization for Economic Cooperation and Development (OECD) predicted in a report distributed on the same day as President Bush's progress report in early December on his plan to prevent mass home mortgage foreclosures.

In his address, Bush announced that the Federal Housing Administration has helped more than 35,000 people refinance and is expected to help more than 300,000 families in the coming year. The Bush administration has partnered with Hope Now Alliance to assist borrowers in one of three ways:
  • By refinancing an existing loan into a new private mortgage
  • By moving them into an FHA Secure loan
  • By freezing their current interest rate for five years
"We should not bail out lenders, real estate speculators, or those who made the reckless decision to buy a home they knew they could never afford," President Bush stated. "Yet there are some responsible homeowners who could avoid foreclosure with some assistance."

Homeowners who will qualify for the aid cannot already be in foreclosure, cannot have already refinanced their homes, and cannot be more than 60 days delinquent on more than one payment over the last year. In addition, individuals will not qualify if they are deemed able to afford the higher interest rates scheduled to replace their introductory rates over the next two years.

Some were concerned that the plan would only be a temporary fix to the subprime loan imbalance.

"The evidence suggests that even when troubled borrowers receive a generous reset on their mortgage payments, as many as 40% of those borrowers still eventually default," the Wall Street Journal stated in an opinion piece. "The refinancing plan might only delay the day of reckoning and lead to bigger losses in a falling market."

Secretary of Treasury Henry Paulson, Jr., in a statement, discussed the Bush administration's approach to assisting the economy. "It is in everyone's interest — homeowner, servicer, investor — to develop a market-based approach to avoid foreclosures that are preventable. And the current system for working out those problem loans would not be sufficient to handle the anticipated 1.8 million owner-occupied subprime mortgage resets that will occur in 2008 and 2009."

The Decline of REITS

Real estate investment trusts (REITs) have struggled in response to the subprime loan foreclosures, something the U.S. commercial real estate market has been subjected to, in addition to the U.S. housing market.

"The 128-member Bloomberg REIT index returned 78% with dividends in the two years before its February 8 peak, the day before New York-based Blackstone Group bought Equity Office Properties Trust for $23 billion, or $39 billion including debt, in the U.S. real estate industry's largest leveraged buyout," the International Herald Tribune reported.

"Since then, the index has fallen 16.5% after dividends as commercial mortgage rates climbed as much as 2 percentage points above the 10-year Treasury note," the Tribune continued. "The last time the REIT index declined more than 10% in total return was in 1998 when investors were diverting funds to high-flying Internet stocks."

Pensions and Investments reported that many institutional investors are opting for the global real estate market these days to reduce risk.

"For the first time, more REITs are based outside the United States than inside, as the U.S. market shrinks due to privatizations and mergers," the newspaper reported.

REITs provided superior performance, growing 350% in just seven years. However, such growth usually does not last in the long term. Investors took advantage of the markets while they lasted, but now investors are balancing out their portfolios with the next hot thing. Global real estate investments capitalize on the need to develop infrastructure in Asian countries such as Singapore and China, which are quickly growing in response to the bustling manufacturing and now outsourcing fields, which Asian countries, in particular, can do for so much less than their American counterparts.

Presidential Politics and the Economy

In his address in early December, President Bush described Hope Now as "an example of government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies or without government mandates." However, some have criticized the government intervention.

"Most of the loans that will reset in the next two years were long ago bundled into securities and sold to investors. The value of these securities has already fallen," National Public Radio reported. "A freeze in interest rates would reduce the value of these investments even more. So some investors will consider going to court in order to stop the plan to freeze rates. Other investors have decided that fighting the freeze will only lead to more foreclosures — and an increased chance of recession. And that, they have concluded, isn't good for anyone."

Are the presidential actions meant to simply delay the perhaps inevitable decline?

"Right on time, Hillary Clinton weighed in with the truly awful idea of freezing subprime mortgage rates for five years — presumably, through the end of her re-election campaign in 2012," the Wall Street Journal criticized.

"Many in the Bush administration and mortgage industry privately agree that this is dubious policy, but they plead that it's better than the alternatives being offered on Capitol Hill," the Journal continued. "These include 'antipredatory lending' laws and new bankruptcy provisions that are punitive and would delay any recovery in the mortgage market...[T]he Bush administration would be better off politically opposing anything that smacks of a 'bailout.'"

The OECD predicts that a recession can be avoided by preventing inflation and by stabilizing consumer confidence.

"Well-anchored inflation expectations have allowed a number of central banks to respond flexibly to the financial turmoil, through provision of liquidity to interbank markets as well as through lower interest rates than markets had previously expected," the OECD report explained. "Expectations of low inflation also help the adjustment to higher oil and commodity prices and allows for a monetary policy response to cooling housing markets where necessary. Overall, the confidence that inflation will remain low, built up through a long and sometimes painful process of disinflation, constitutes a major policy asset."

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 institutional investors  loans  FHA  New York  Internet  United States  real estate industry  interest rates  payments  Wall Street Journal

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