It is unlikely Federal Reserve Chairman Ben Bernanke — set to speak Friday from Jackson Hole, Wyo. — will relieve the struggling credit markets with language prophesying a third round of quantitative easing.
That's not to suggest QE3 isn't coming. Jim Vogel of FTN Financial puts the chance of future economic stimulus around 50%.
Paul Dales, U.S. economist at Capital Economics, said any such intervention in the secondary market would have a limited impact.
"Even if Bernanke does flag up the possibility of QE3, with Treasury yields already very low it would not significantly boost the economy," Dales said. "Moreover, the markets are increasingly aware that QE is not a silver bullet. Any resulting gains in equity and commodity prices should therefore be smaller than under QE1 and QE2."
So while it may seem the Fed is running out of these less-than-silver bullets, it is important to clarify that the U.S. government is not necessarily running low on ammo. Indeed, much more could likely be done to fix housing from the ground up, if it weren't for the lack of political will and the current stagnation-favoritism being displayed by many elected officials.
On Wednesday, Deutsche Bank suggested the resurrection of similar housing initiatives the government deployed after the Great Depression.
As DB analyst Steven Abrahams notes, of the 100 largest U.S. housing markets, more than half have 10% or more mortgages in distress. Fannie Mae and Freddie Mac hold the largest inventories of foreclosed properties.
If Washington could find a way to move these houses into buyer's hands, then the nation's economy would experience a bump much larger than any form of quantitative easing could offer.
After long conversations with the CEOs of both government-sponsored enterprises, it is clear that Freddie's Ed Haldeman and Fannie's Mike Williams are dedicated to owner-occupancy.
But both men are realistic. They also want to protect taxpayers as much as possible. In the real world, both acknowledge these homes need to go into the hands of someone, and right now, the largest untapped market for this is the cash investor base.
But this population is actually extremely cash-strapped. Numbers from the Federal Reserve Bank of Minneapolis show that the nation's banks are becoming more illiquid as they seek to shore up capital levels. Net loan growth lessened by 2.32 percentage points from last year, while the risk-based capital ratio increased by 84 basis points. As the nation's bank restricts credit, so goes the buying power of mom-and-pop type investors.
These are the types of buyers who should be incentivized to rent out the properties, along with private equity and hedge fund investors.
Abrahams states that the Home Owners’ Loan Corp., a government agency created in the ashes of the Great Depression acquired 198,000 foreclosed homes.
"The HOLC usually financed its own acquisition, refurbished the homes, often rented them out first to establish a rental value and then slowly sold them off," said Abrahams, who believes a similar system would work even better today, with our more developed credit markets.
"It would help clear the market of distressed property, increase the supply of rentals, stop and probably reverse the slide in home prices and lift the value of one of consumers’ most important assets," he added, noting that a great place to start would be at the GSEs.
He also suggests that the government create public-private partnerships where investors take most of the equity risk and manage operating costs while the agencies finance 50% to 70% of the price.
This would also help meet the surging demand of rentals. Given the opportunity, families would prefer living in single-family dwellings, which also helps tenants visualize their own eventual ownership more clearly.
Critics will no doubt say that the federal government should not play a part as a pseudo-landlord. However, the current half-socialized nature of housing is untenable. Something has to be done, and the private markets are not prepared for moving to less government backing.
So while QE3 may still be up in the air, the government should not wait to get more involved with housing. It is clear Washington is looking to relieve the housing market, and thereby boost the economy.
A look at where the greatest demand is, in rentals, would be the best place to start.
Write to Jacob Gaffney.
