Saturday, April 2, 2011

"Here's My Take On A Real Estate Comeback"

In the early 1990's we bought a town home in a nice gated neighborhood in North San Diego County, California.  We paid $125,000 for it; two years later the same town homes were selling for $65,000 as the housing market tanked.  Only two years after that the market recovered and by 2005 those same town homes were selling for $350,000 dollars.

Will we soon see a similar rebound in home prices?  Well, that is problematic.  Contrast the early 90's with the situation we have now.  Back then, the government allowed the free market to determine home prices; no government entity stepped forward to interrupt the natural cycle of the free market.  No government entity, in an effort to curry voter favor, beat up on the realtors, the mortgage brokers, the banks or the homeowner paying his mortgage payments on time.  We had no Congressional banking committee hammering banks to reduce the principle and interest rates to homeowners in an effort to keep them from walking away from their mortgage.  Most important, we still had the Glass-Steagull Act which mandated that commercial and investment banks be kept as separate entities.  The Clinton Administration's cancellation of Glass-Steagull set off an orgy of heavily speculated trades in mortgage-backed security futures.  Finally, we had no House Banking Committee forcing Fannie Mae and Freddie Mac to offer home loans to minorities regardless of their financial qualifications.

What this massive government interference has done is delay and disrupt the natural cycle of a market-driven housing market.  As a result, while the housing market should have recovered within a couple of years, we are now in a fractured real estate market five years after the correction began.  The feds are now saying at least two million more short sales and foreclosures are forecasted for the coming year.  It could be even worse since the number of homeowners delinquent on their mortgage payments for 3 months or more is increasing.  The latest rates of sales of new and existing homes are dismal as well, indicating further declines in home prices.

Further compounding the problem is the horrible unemployment rates.  Folks can't make their mortgage payments if they don't have a job.  Secondly, the fear of job security has hammered the "mobility factor"; many homeowners are so under water on their mortgages they cannot sell their house and move to another location where job prospects may be more favorable.

Has there ever been a better argument against government interference?  Had the government left Glass-Steagull alone we wouldn't have had these casino type mortgage futures trading, with the accompanying financial collapse.  If following that catastrophe, government had punished the guilty and left the rest of the housing market alone we would have been well on our way to a housing recovery.  A housing recovery would raise consumer confidence and boost economic activity and a couple of million Americans would be back to building housing!

As long as the government keeps poking their nose into the free market we'll continue to suffer and the housing recovery will continue to be long and painful.  If you don't believe that I have some swampland in Florida you may want to take a look at.

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