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Can the U.S. Housing Market be Jumpstarted?

Ron DeLegge

Everyone, especially politicians, wants a quick fix to one of the biggest ecnomic issues (after jobs); the beleaguered housing market. 

President Obama's State of the Union speech, or pre-campaign pitch depending on your perspective, touched upon the fun subject of housing.

Buried in the president's lecture was something about helping homeowners with more mortgage debt than home equity to refinance to loans with lower interest rates. Will it be enough to jumpstart the housing market?

The Refinancing Proposal

The president's latest proposal to help the housing market focuses on existing homeowners with a mortgage.

According to the president, responsible owners would be given 'the chance to save about $3,000 a year on their mortgage by refinancing at historically low interest rates.' All borrowers, even those without government backed ones, would be eligible to participate.

The current rate on a 30-year fixed mortgage (NYSEArca: MBB - News) is a lowly 3.88%, but many borrowers have not been able to refinance their higher rate loans. Nationwide home prices (NYSEArca: XHB - News) have fallen roughly 40% from their 2006 peak, which has locked out homeowners, who have negative equity. Under the current system, refinancing would require coming up with more capital to pay down the existing loan. 

Where would the money come from to pay for the program?

Financial institutions (NYSEArca: XLF - News) with more than $50 billion in assets would pay a fee to cover the cost of the refinancing program. The president added, 'No more red tape. No more runaround from the banks.'

In truth, Obama's home refinancing plan is more of a proposal than an actual plan. Roughly 30 seconds after he officially submits the refinancing proposal to Congress, they will vote 'no.' That's assuming they haven't already voted.

Real Estate Bears Calpers, the nation's largest public pension fund, has been one of the biggest players in the residential housing market over the past ten years. It's also suffered massive collateral damage.

In just one botched deal called the Newhall Ranch in Los Angeles, CA, the pension fund vaporized $900 million. In another deal, Calpers wrote off a $500 million equity stake in Stuyvesant Town and Peter Cooper apartment complex in New York City. So much for the phony boloney that multi-billion dollar pension funds are the 'smart money.'

As a result, the Calpers is bailing on approximately one-fifth of its real estate portfolio, which includes housing communities in 11 different U.S. states. The portfolio includes raw land in undeveloped housing communities and it has a sale value in the neighborhood of $500-$600 million.

In April 2010, Calpers had total assets valued at $260 billion compared to $219 billion in September 2011. What happened to $41 billion? It was devoured by residential real estate - the best investment a person can ever make, allegedly.   

Real Estate Bulls

In its most recent data report, the S&P/Case-Shiller 20-City Home Price Index, a gauge of the national housing market, posted a year-over-year loss of 3.4% from October 2010 to October 2011.

Despite declining home prices, a new generation of real estate bulls is popping up everywhere. Interestingly, today's bulls are among the same group that contributed to or participated in the housing bust. 

Over the past few months, hedge funds run by Blackstone Group LP, Caxton Associates, and SAC Capital Advisors have been snapping up investments in residential real estate. Before you mistakenly think that hedge funds represent the 'smart money,' keep in mind the average fund fell 5% in 2011 compared to a 2.1% total return gain for the S&P 500 (NYSEArca: SPY - News).

Goldman Sachs (NYSE: GS - News) is another real estate bull. The firm projects that U.S. home prices will gain 30% over the next ten years, not counting inflation. The bank also sees home prices declining by 3% in 2012 before rising thereafter. In a December report, Goldman Sachs said, 'The housing price bottom is probably in sight.'

Conclusion Hedge funds and pension funds, as a group, have taken a bath on their investments in residential real estate. Is it logical to expect these same forces to accurately pick what the next move in property prices will be?

In 2011, foreclosure activity dropped by 34% but beneath the data, what was the real reason for the drop? And what does it mean for real estate prices going forward?

ETFguide's February ETF Profit Strategy Newsletter looks at foreclosure trends along with other factors that are shaping the housing market's future. We also evaluate ETFs like the iShares FTSE NAREIT Residential Real Estate ETF (NYSEArca: REZ - News) and others closely linked to the housing market and their performance outlook.

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