As I noted in part one of this two part commentary, the U.S. Housing market is not one big market, but rather a large collection of individual markets with individual problems which will respond best to individual solutions customized for a specific local market.
With this fact in mind, I'd like to list some ideas for how to address housing problems at the local level. Ideas which can be implemented locally by the local groups who are most affected and have the most to gain by implementing these solutions.
First, let's address the over arching government solutions being attempted now, and from there we'll move into a localized approach.
As I write this, media reports indicate that the Federal Reserve is considering taking action that will reduce interest rates further. While low interest rates have been the traditional way to spur housing sales in the past, the problems this time are much more systemic. Unemployment and under-employment are preventing a housing recovery. Lowering interest rates further is not going to make any significant difference in housing sales, if buyers can't afford to buy or don't qualify to begin with.
The low interest rates are taking a different toll this time, by eroding the income of seniors and those who expected income from savings and investments to carry them into retirement. We are seeing a big trend towards reverse mortgages.
Low interest rates have wiped out that income to a great degree, and as a result, we are seeing a new wave of reverse mortgages as seniors “pawn” their homes to the bank, to generate additional income. This trend will soon become another housing crisis waiting to happen if it continues unabated.
Further, the secondary mortgage market has little incentive for new investment when interest rates are virtually at zero. The risk is simply not worth the paltry rewards. While I realize that there would be some near term pain to allowing rates to increase slowly, I believe that housing would benefit in the long term, because rising interest rates would provide seniors and other savers with more income from their investments, and would generate more investment in the secondary mortgage market, which would make more capital available for mortgage lending. This could in turn, lead to more sales in housing, leading to more jobs, and help speed an economic recovery without unhealthy increases in housing prices. But this is highly unlikely under Ben Bernanke, so the local players are left to take constructive action to help their local markets.
Realtors must take more of a lead role in helping identify local market problems, and develop local market solutions. No industry group has more “boots on the ground” than the National Association of Realtors. Real estate agents are the one group that has the data and the man-power to address local real estate market issues throughout the entire U.S. Yet they don't take advantage of this power. Most agents are kept busy worrying about the latest rule changes related to earnest money handling or fair housing laws. But it's agents who know their local market better than anyone else. They know what is selling and what isn't. They know where the problem areas in their market are.
Local Realtor boards should be organizing a local task force to identify their local market issues, and come up with creative solutions for those local problems. Then coordinate their efforts with the lenders, attorneys, builders and local government development authorities or planning and zoning boards in their local market to help formalize real solutions at the local level.
Builders are another group that has suffered tremendously from the housing down turn, yet their lack of attention to fundametals in supply and demand, as well as median local income was one of the primary problems leading to the housing crash. Uncontrolled building without regard for buyer demand and local affordability is a recipe for disaster.
Local Home Builder Associations should make an effort to keep their members abreast of the key market fundamentals that will directly effect builder success. Primary among those are the overall supply of new homes available for sale, relative to buyer demand, and local income levels, which will dictate what local buyers can actually afford to pay for housing. Builders must learn to maintain a balance between supply and demand, and build homes that their local market can afford to buy.
Otherwise, they will be doomed to repeated boom and bust cycles.
The last building boom was a feeding frenzy that got out of control and left a stripped out, dead carcass of half finished neighborhoods in it's wake. If the local builders take a more balanced approach to building, and manage the supply of new homes more effectively, they won't have to worry about going belly up and taking their local bank with them. The supply-demand-affordability fundamentals must be managed to insure that the construction industry does not have a continuing boom-bust cycle every few years.
Real Estate Investors can contribute as well, by taking up the over-supply that exists now in the form of foreclosed homes and distressed properties that are sitting on the market. Investors should act responsibly as well, by not engaging in shady or questionable tactics that may be taught at high priced seminars, but are simply not beneficial to their customers or their overall business stability.
Investor Associations should focus more on investing with integrity and honesty, and a customer service attitude fitting of any american business enterprise that wants to be successful for the long term. Allowing seminars that promote big money at the expense of distressed sellers and ignorant buyers is not only irresponsible, but it contributed significantly to the housing market crash. I know. I'm an investor, and I've been a member of a number of investor associations. I know first hand how many seminars there were that encouraged irresponsible behavior for the sake of quick profits. Millions of investors went broke following the so-called “gurus”. Many of the biggest gurus themselves have gone bankrupt with the schemes they were allowed to teach to others.
Real Estate investing is a great way to build a small business, contribute to employment in the construction sector, and build real wealth when it's done correctly. Investor Associations should emphasize the fundamentals of the housing market, so that investors can understand how to make better investing decisions and build stable businesses. Promoting get rich quick schemes may “sell better” but it was poorly trained or inexperienced investors following the irresponsible advice of greedy gurus and promoters who were the first to feel the effects of the housing market crash.
Today investor association participation is at an all time low, and it's primarily because they ran their members into the ground with shoddy investment advice and gimmicks that simply did not work while ignoring the market fundamentals. There are still investor associations in virtually every large city in the U.S. They have the capability to influence investors for good, but the question is, will they do it?
Finally, if Congress really wants to do something to help the entire U.S. Housing market, they should reinstate the home buyer tax credit, with NO requirement to pay that credit back. The one bounce we've had in housing sales data was during the months when the home buyer tax credit was in effect. As soon as it expired, housing continued it's downward slide. It's funny how the government can't seem to get rid of bad programs that waste taxpayer money, but when it comes to a tax credit that actually did help, they have no problem at all with getting rid of it.
While there are many other potential ideas for helping generate a housing recovery, the bottom line is that the fundamentals will always dictate the best choice of strategy for maintaining a healthy and vibrant housing market. The long term solution is to pay attention to the local market fundamentals and make adjustments to your business or investing strategy accordingly. Ignoring the fundamentals is what got us here. Knowing the local market fundamentals and working with those fundamentals is what will get us out of this funk, and keep us out.
The old saying is true, pigs get fed, hogs get slaughtered. The housing market crash was nothing more than a slaughter house for real estate hogs in lending, building, investing and buying, who tried to take more than their local market fundamentals would allow.***