Housing Market – We’ve Been Down This Road Before

Housing Bust

I’ve said it many times before:  My opinion on the root cause of our current housing bust started back with the Clinton administration. The thinking was to make housing more affordable for the masses. A noble idea, but as usual, the government’s implementation was based on easing of the traditional mortgage qualifying rules.

If banks wanted to expand their operations there was an understanding in order to get government approval they had to comply with the easing of mortgage qualifying rules. Further, the government told the lenders not to worry about because the two semi-government agencies, Fannie Mae and Freddie Mac, would purchase all these substandard loans.

That is my brief, and a sure to be debated explanation of how we ended up in this horrific housing situation.  I’m sure many of you reading this are thinking “Why at this late date, am I again repeating, what I’ve said many times in the past?” It’s because the Wall Street Journal came out with an article speculating that the Obama administration was once again contemplating new initiatives to help solve the sagging housing market.

Government Housing Programs

Considering that the majority of the prior Obama housing initiatives were total failures, to say I’m a little skeptical about any additional government ideas to stimulate the housing market, would be an understatement.

At a recent White House town hall meeting, President Obama stated that housing was the “most stubborn” problem facing the country and conceded that a raft of federal mortgage-aid programs were “not enough, and so we’re going back to the drawing board.”

Keep in mind that back in 2009 through 2010, the Obama administration’s big fix for housing was an $8,000 home buyer credit fashioned along the lines of their cash for clunkers program that preceded it. Just like the cash for clunkers program, the $8,000 housing credit caused an initial uptick in sales activity, and was soon followed by a continuation of the downward trend once the free money program ended.

Currently, with the House of Representatives showing some modicum of fiscal restraint, it is unlikely we’ll see another home buyer credit. There is some talk about lessening restrictions for investors to buy homes. An idea for this approach that would be far better than leaving homes vacant to deteriorate was outlined by me in an October 1, 2008, blog post entitled  #1 EZ Fix to The U.S. Housing Market.  This was a simplistic, and in my opinion, totally effective way, to stop the declining home values that would build a base for future housing appreciation.  Further, we can do it without direct government expenditures. To see that the government may finally be embracing one of my “non-buckets of money” ideas is gratifying.

What is troubling are two other ideas that seem to be under consideration by the administration. One, which some believe is being implemented right now, is the Obama administration’s push for federal lenders to ease restrictions on home borrowers. Does making it easier to qualify for a home mortgage sound like a good idea?  After all, wasn’t that the government thinking that got us into this mess in the first place?

The second troubling idea being discussed now is instead of trying to sell the hundreds of thousands of foreclosed properties that Fannie Mae and Freddie Mac already own, and the hundreds of thousands more that are about to be taken back by them, the government should turn these properties into rentals. The thinking here is that by turning a large portion of these properties into rentals, it would ease the pressure on home values caused by putting more foreclosed properties on the market.

Once again, government interference in the free market may come back to bite the taxpayer in the rear. The concept of the government being the largest residential renter in the country is not one that I want to see implemented. Perhaps, in our current politically correct environment, reporting of late rent payments could be considered more palatable than reporting missed mortgage payments.

Home forclosure to government home rental

Another factor in this “foreclosure to rental” program that no one seems to be talking about, is what affect will hundreds of thousands new rentals being placed on the market have? The one bright spot in the current real estate environment has been, and continues to be, a brisk rental market. With the government and big banks being able to rent at or below their actual carrying cost, and also just the sheer number of units that may be available for rent, the housing rental market will deteriorate.

Will the government be capable of maintaining hundreds of thousands of rental properties? Perhaps more important, will the government be capable of collecting monthly rents when due? Will lax government policies result in renters living rent free for many months because the government wants to avoid reporting huge numbers of rental evictions?

With the presidential elections fast approaching, I’m somewhat fearful that the government may push this foreclosure to rental policy in the hopes of creating a temporary, albeit one that should extend through the presidential election, feel-good opinion, that Mr. Obama has come up with a real cure for our housing malaise. I’ll conclude with a quote by Milton Friedman, American economist, statistician, academician, and author who taught at the University of Chicago for more than three decades. He was a recipient of the Nobel Memorial Prize in Economic Sciences. “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”

Bob Schwartz, San Diego California real estate broker