Pimco’s Simon: There Was Never a Housing Recovery

Are You Ready For 6 to 7 Million More Foreclosures. Politicians criticize Fannie Mar & Freddie Mac out of one side of their mouths. (by Joe Vera)

Pimco’s Simon: There Was Never a Housing Recovery
By Dawn Wotapka

Bearish outlooks on housing aren’t hard to find these days, but one stands out even for this market.
Scott Simon, a managing director and head of global asset-giant Pimco’s mortgage- and asset-backed securities teams, is credited with foreseeing the housing crash and helping his firm dodge losses that plagued Wall Street.
In a lengthy Q&A posted on Pimco’s website today, Mr. Simon discusses everything from foreclosures to Fannie Mae and Freddie Mac. Calling his outlook “dour” would be generous—home prices could fall more and the pain could drag on for a decade or more.
Excerpts are below. (Both the questions and answers are from Pimco.)
Q: Could you begin by framing the current state of the housing market? Do you see a double dip market?
A: We are seeing signs of what we have long suspected: There never was a housing recovery. In fact, I argue the market is in a fragile state that is far easier to break than to fix. If policy makers alter the government’s current approach to housing and unwittingly break the market, they may not be able to repair the damage within the foreseeable future. … We anticipate an average decline from here of about 6% to 8% in prices across the country.
Q: Are more foreclosures expected to hit the market?
A: We see potential for a substantial number of foreclosures over the next three years – as many as 6 million to 7 million additional foreclosures, on top of the roughly 2 million we estimate have already occurred. Foreclosures may peak in about two years, but the numbers could still be high for a few years after that and then likely taper off.
Q: Let’s switch gears to discuss housing finance. Is the home-loan market still reliant on government support?
A: Yes, government is essentially considered the mortgage market today, but this needs to be put in context. Government has been involved in housing for some 70 years with pro-housing subsidies of all sorts, from homebuyer tax credits to guaranteeing loans to mortgage interest tax deductions. … If we ended government support in all forms, mortgage rates could rise significantly, because home loan investors would need to be compensated for greater credit risk, and loan availability could decline. Higher rates and less mortgage availability would put downward pressure on home values, with potentially negative consequences for the market and also for the economy as a result of wealth destruction and consumer confidence declining.
Q: What are politicians and policy makers proposing to do about Fannie Mae and Freddie Mac? Are there serious alternatives being discussed to provide liquidity to the market?
A: From what I have observed in visits to D.C., when the conversation comes around to Fannie and Freddie it is very easy for people to get irrational. Fannie and Freddie seem to draw negativity like giant lightning rods because they lost so much money. But what is often overlooked is that the majority of losses have not come from their core business: 20% down-payment, prime mortgages. They got in trouble because they expanded beyond their core business to maintain market share. …But politicians from both parties look at the losses of Fannie and Freddie and think, “I’d better say Fannie and Freddie stink and we should shut them down and that they are evil.” But the market still relies heavily on Fannie and Freddie. If policymakers err in tinkering with that support while the market is so fragile, the unintended consequences could be extreme.
Q: And when do you expect action on this issue?
A: Despite the heated rhetoric, there appears to be no rush to kill Fannie and Freddie, from what I have observed. Initially, we heard talk of getting the government out of housing in two years, and lately the talk is five to seven years. I think in Washington-speak, five-to-seven years more likely means 10-to-15 years, which is actually a more realistic timeframe in my opinion – by then the housing market should hopefully be on firmer ground.