As the U.S. "housing crisis" drags on, it's time to take stock of where we're at and take a closer look at what's really going on out there. There are several points I'd like to make about this market to add some balance to the discussion about what to do and how to "fix" the housing market.
When trying to solve a problem, the first step is usually to define the specific problem that needs to be solved. This has really been the crux of the issue for the federal government. In their struggle to "fix" housing they've identified a range of specific problems that cover a wide variety of issues. But the "one-size-fits-all" approach to housing has led to much confusion about what to do, and how to do it.
The broad-brush measures being implemented or discussed under the Dodd-Frank bill are somewhat like using a bazooka to hunt squirrels. In their frantic attempts to be seen doing something about housing, the government is engaged in overkill, and is threatening to blow the housing market to pieces, instead of addressing the individual problems with specific, local market solutions. This simply is not possible at the federal level. And under our constitution, it was never intended to be a role for the federal government. Individual markets require local solutions and answers that are specific to that local market's needs.
The U.S. housing market is made up of regional, state, county, city, and neighborhood markets with unique needs and fundamentals. Market issues can vary from city to city, and block to block within that city. Housing is unique in this regard. There is no single "housing market". While everyone is aware that there was a "housing bubble" and a "housing boom" the fact is that much of the U.S. did not experience a dramatic run-up in home prices, and in many areas such as Texas, housing prices remained pretty moderate. In short, every area has it's own fundamental issues that dictate what strategy is needed to fix that specific market. Some markets do not need a fix, and will only suffer more problems under the new Dodd-Frank rules.
Areas like Detroit have severe housing problems. But the problem in Detroit developed not so much because of a collapse in housing, but largely because of years of dwindling employment in manufacturing and the resulting loss of population growth. The problems in Detroit won't be solved by requiring 20% down payments and tighter qualifying guidelines for borrowers. They need meaningful job growth not more regulation of the housing industry.
Atlanta on the other hand, was one of those cities that saw the extreme side of the housing boom both in terms of price increases, investor activity, over-zealous borrowing and mortgage fraud. There was a lot of over-building of new homes in the Atlanta market, as there was in areas like Phoenix, Arizona and Las Vegas, Nevada. In those cities, the land was plentiful and relatively cheap, leading to uncontrolled over-building of subdivisions for buyers who simply didn't exist.
Predatory lending AND predatory borrowing were a problem in Atlanta and the other boom cities. Mortgage fraud was a big problem in those cities as well. It makes sense to tighten standards for lenders and appraisers, but that won't get rid of the roughly 30% of housing in those markets, for which there is no legitimate buyer to be found.
Investors are both a part of the problem and a part of the solution. Today, most of the all-cash purchases, which account for roughly half of all current foreclosed home sales, are bought by investors to put back into service in the housing market as rentals or resold to owner occupants. But investors who were caught up in the heady days of the housing boom were also part of the problem.
Investors were recruited by the millions at local investor associations all around the U.S. This industry really ramped up after 1996, and between '96 and 2008, "newbies" paid millions of dollars to "gurus" for training to become real estate investors. At the peak of the housing boom, investor activity accounted for roughly 33% of all home sales.
General housing sales data does not distinguish between owners who are buying to occupy and investors who are buying to rent or resell. The high rate of investor activity during the boom years also contributed to the problem of too much housing inventory, and helped drive prices sky-high in the cities that were most affected by the housing boom. It's no coincidence that those states and cities with the greatest foreclosure problems are also those cities that boast the most and the biggest of real estate investing clubs and groups. Successful real estate investing must be supported by the market fundamentals, and even most real estate gurus failed to recognize those fundamentals and deal with them effectively.
But that being said, investors who now recognize that their local market fundamentals are favorable for investing are getting back into the market, and are helping deal with the blight of foreclosed homes. The Dodd-Frank rules are threatening parts of the investing business as well. There are few, if any financial incentives being considered for real estate investors, though at this point the fundamentals of local markets in the high foreclosure states have become more favorable for investing.
General media writers and commentators are of the opinion that this is a bad time to buy a home. This message has been communicated over and over in the media. But the fact is that it's the fundamentals of the local market, combined with the individual resources and goals of the potential buyer that determine whether it is or is not a good time to buy.
In 2006 the general media had been plugging the housing market for several years as if it were the only game in town. After the tech bust, real estate was credited with saving the economy. As a result, the media sang the praises of real estate in magazines, on TV and in practically every news show that aired. But if you bought in 2005, 2006 or 2007, and paid what were then peak market prices, you already know how bad the media's advice turned out to be.
Even the National Association of Realtors fell prey to the media hype, and damaged their own reputation by continuing to hype housing even further, while failing to see what should have been obvious signs of major problems with over development and over-pricing in housings fundamentals.
In 2006, then Chief Economist of the NAR, David Lereah wrote a book entitled "Why Housing Will Never Crash". When housing tanked just two years later, he became the object of vehement ridicule and scorn, and it was a major blow to the credibility of the NAR, who's endlessly positive spin on housing became highly suspect.
Housing is a unique commodity in that it has intrinsic value as shelter, a fundamental human need. You can't live under a pile of stock certificates. Housing holds a special status. A normal house under normal circumstances simply cannot lose all of it's value. Like water, it always finds it leveling point.
Actually the housing market bubble needed to burst. We needed a return to "level". Those markets that were affected by the housing boom simply became too high priced for the local median income level. That is the ultimate reason why housing tanked. It was not as much because of sleazy mortgage people, though there certainly are some of those. It wasn't so much because people were not paying high enough down payments, though higher down payments are best as they reduce the monthly mortgage payment.
Housing's collapse resulted from a simple fundamental problem - personal income was eroding throughout this whole time. The real estate boom hid the fact that our economy was undergoing drastic changes towards globalization. Home prices became unsustainable as property values rose, but the median income level didn't. Local governments deserve a piece of the blame as well. Rapidly rising property taxes during the boom made local governments flush with extra cash, while pushing mortgage payments ever higher.
Fundamentally, the housing collapse meant a return to affordable pricing, as painful as that may be for those who bought at the peak. And the loss of jobs that resulted from the housing crash were the icing on the cake. Lost jobs are lost income, resulting in more homes that suddenly became unaffordable for their once prosperous owners.
Tomorrow: In part two of this series, Donna will discuss why the government is taking the wrong approach, and what we must do to restore sound fundamentals to the U.S. housing market.