Housing Still Needs A Big Fix

The New York Times this morning quoted 30 year conforming mortgage rates at 4.22%. The ten year Treasury yield fell after today's trading to 2.24%. The 30 year mortgage spread over the ten year Note is then 198 basis points.

A 2009 paper by Glenn Hubbard and Chris Mayer of the Columbia Business School shows that the normalized spread is 160 basis points. Although the spread has come down from the intra-crisis peaks, it is still above the normalized level. In their paper, the excess spread raised the cost of owning versus renting by 10-17%.

We've noted before that banks have gone from drunken sailors to Scrooges, and mortgages are being denied to even a bank's good customers. Appraisers were complicit in the U.S. housing debacle, and in my state of Minnesota, the ability to fog a mirror can get you an appraiser's license. That industry is still out of whack, and it is complicated by the appearance of Web sites like Zillow which purport to show estimates of residential value which are based on their proprietary models. What I've seen of Zillow has been nonsensical though it has been improving. Their database on individual properties has gaps, inconsistencies and errors.

We have not come up with a solution for the tens of thousands of homeowners with negative equity in their homes. The worst ones are in the mill but the homeowners are staying put, not making payments, while it's unclear who holds the mortgage and who can dictate the new terms. The Obama administration seeking ideas to turn these homeowners into renters seems to be a blunt instrument which leaves lots of implementation questions unanswered.

The Government is still insuring more than $6 trillion in mortgages, and we can't expect anything from this sector for a long, long time unless it gets a pretty big fix, which should involve shared pain for the banks, investors, homeowners, and the taxpayers, unfortunately.