It actually scares me when economists push housing as a panacea to ending the recession. What short memories they have – the housing market was the primary driver of this recession.
If we continue to emphasize the housing market as one of the key legs of our economy, we run the risk of recreating another devastating bubble in the long-run. Such an emphasis will almost assure a return to the mindless policies that pumped the market to an unsustainable level.
The increased mortgage underwriting vigilance we are seeing today will eventually dissolve as long as housing is promoted as an economic activity generator. The same types of policymakers, developers, investors and financiers that tanked the real estate market will be drawn back into the game like moths to a flame. We cannot allow that to happen.
How to unwind the debilitating effects of foreclosures and negative equity, along with defining what role housing should play in the economy going forward, must be the primary focus of our leaders and lenders. By contrast, too much time was wasted on a health care overhaul instead of fostering business growth, and stimulus money for “shovel-ready” projects was handed out like mortgages during the bubble expansion.
Allowing mass foreclosures amounts to a losing strategy. Mass foreclosures will continue to depress prices and leave vacant homes rotting in the sun. Some regions are more susceptible than others to this type of economic and social decay.
In all but the worst of cases, lenders should agree to allow the current owners on the verge of default to rent the properties and even allow a repurchase option if their circumstances change for the better. It would entail signing over the homes to the banks, but the alternative is worse. Renting back might even offer a path to solvency and stability for some.
Both the lenders and investors (including the government), need to bite the bullet, book the losses and move on.
How actual foreclosures are resolved depends on location. It pays for the lenders to fix and maintain properties in desirable markets with an eye to selling or leasing them.
Properties in undesirable, over-built markets, such as exburb subdivisions that never should have been constructed, need to be bulldozed. The cost to undo deterioration and maintain vacant homes does not make sense in weak markets. There is little chance a largely abandoned single-family tract on the outskirts of Victorville will ever attract prices adequate to recover repair and maintenance costs. The land should be rezoned to commercial use. Manufacturing should be encouraged to fill the vacuum, especially where infrastructure was established to support large housing tracts.
There will be pain, so get it behind us sooner than later.
Owners who have the resources to keep current on their mortgages despite being underwater are prisoners of their own homes. They can’t unload them unless their lenders agree to do shortsales, but that will leave sellers with no cash and a scarred credit rating – hardly the foundation to start anew.
However, there is hope for these owners. It requires patience and resolve.
Consider this example. A home purchased for $625,000 five years ago during the height of the boom. The buyer financed 80%, or $500,000, at 5.5% interest for thirty years.
The value declined 40% to $325,000 and is underwater compared to its outstanding mortgage balance of $462, 303 (the borrower is current).
If the housing market where the property is located makes a very modest recovery – assume 2% annual average annual appreciation – the equity and the value will be almost equal in another five years. OK, it’s still a loss, but once a property is above water, equity will build faster than most would imagine. Leverage will then be working for the owners; not against them.
This scenario would be better if lenders were to re-finance owners who have kept current into lower rate mortgages. There is at least one such program, but it is limited to loans owned by FNMA and FHLMC. How long the program will last is uncertain (Chase was part of the program and might still be. You have to be current and the loan must still be serviced by the original lender. Income documentation is minimal).
There should be a requirement to force lenders to re-finance their non delinquent portfolio loans. It’s just good business and it is far preferable to having those borrowers walk away out of frustration.
What about the future of housing and the role it should play in the economy?
The most important step before any housing strategy is developed is to eliminate the notion that most people should own homes.
It’s a goal everyone should consider, but whether you should depend on many factors, any one of which could make purchasing a home an unwise decision.
But don’t count on the lenders and government officials to know what is good for you. Even with today’s tougher underwriting standards, the personal circumstances of the buyers will never be addressed by loan officers fixated on debt to equity ratios, incomes and credit scores.
Government officials have always been obsessed with the increased consumer spending activity that accompanies home purchases. However, the correlation might not be anywhere close to what it was in the past. The “wealth effect” of the boom years may take decades to re-establish itself. Homeowners will likely clutch their wallets and save more as a reserve against another downturn. Also, many new homes are smaller, which means less furniture, accessories, carpets, paint, etc.
Even if you can manage the mortgage, tax and insurance payments, the utility costs will continue to rise. If you are a customer of the Los Angeles Department of Water and Power, you will appreciate that. It took Prop 13 to rein in real estate taxes. However imperfectly it accomplished that, it did bring relief and some predictability. But there is no equivalent of a Prop 13 on the horizon for utility costs.
Then there are the prospects of employment. The ability to advance careers, increase the size of paychecks or just stay employed may require more geographic mobility. If you own a home, unloading it in a reasonable amount of time might not be possible. Goodbye job opportunity. Renting, then, might be the sensible option for most people.
As gloomy as all of this sounds, in the long-run an economy less dependent on housing will be healthier.
Houses will return to what they were in the post World War 2 era – a roof over your head and a source of pride; not a commodity to be traded for a fast buck.
Saving, while it diminishes consumer spending, helps stimulate investment in plant and equipment. Restoring some of the lost manufacturing segment would help improve our exports and create lasting jobs rather than the boom and bust employment from home construction.
If we want to compete with China, Brazil, India and other emerging economic powers, we must return to a more balanced economy backed by production capacity, not an economy built on buying and selling homes to each other.