Why this Housing Crisis is Different

Over the past 75 years this country has weathered many housing cycles.  However this current crisis is much different and the fallout will be felt for many years to come.  Here is why.

First:  Homeownership was once a privilege, but over the past 20 years it was turned into a right like free speech.  The government through its incessant tinkering has perverted the entire housing industry.  Today, millions of homes are in various stages of foreclosure and it will be years until they are worked through the system.  In the meantime, this shadow inventory of homes will continue to be a cloud over home values.

During the housing bust of the late 1980’s, if you could not make your mortgage payment, your house was foreclosed and the Resolution Trust Corporation was set up to dispose of the asset.  The market found the bottom and the housing market eventually recovered.  However, it took almost 10 years.  No so with today’s crisis as we have endless taxpayer-funded help programs and mortgage modifications.  In the banking world they are commonly referred to as “Pretend and Extend” and will only prolong the misery for everyone.    We need to let the free market cure this crisis.

Second:  The Baby Boomers are retiring and downsizing their large homes. These are sitting longer on the market because there is no one behind them who can afford them or wants to take on the responsibility.  Those homes in high personal and property tax locales will face additional price pressure.  Baby Boomers viewed homeownership differently.  Your home was not only a place to hang your hat, but a reflection on you as a person.  It was a visible sign of your success and status in a community.   

Fourth: The economy is different.  We have become a service economy and in many cases service economy jobs cannot support homeownership.  Our government leaders need to understand what is takes to create quality jobs and end their war on capitalism with higher taxes and regulations.  For housing to fully recover unemployment needs to get under 5% and those with jobs need to feel secure in their employment? 

Fifth: Housing needs new blood.  The generation coming out of college today is saddled with huge college debt and limited job prospects that will prevent them from getting a mortgage for many years.   In addition, most will be changing jobs more frequently, and renting makes better sense. 

Sixth: The Government Sponsored Enterprises (GSE) Fannie Me and Freddie Mac an important part of the mortgage industry, have wandered from the mission of their original charters.  They provided the fuel for this current crisis via their quest to expand homeownership with little or no down payment and lower credit scores.   This coupled with the implied loan guarantee gave investors a false sense of security.  Today only the FHA is permitting down payments as low as 3.5%.  In many ways the FHA has become the lender of last resort, a mission it was never intended to take on. 

In addition, our political leaders have enacted several so-called reforms including Frank-Dodd and the new CFPB.  These new regulations were written by the same individuals who were responsible for safeguarding the mortgage agencies when they imploded costing taxpayers billions of dollars. 

Lastly, blame needs to be placed on the irresponsible homeowner who purchased more home then they could afford or thought that values only went one way, up   A mortgage is a contract, an obligation to repay.  The bank makes a commitment to you and you need to honor your end of the deal

The United States has a wonderful housing industry and nowhere else in the world can you put down 20% and a lender will loan 80% at a low interest rate for the next 30 years.    Unless we change course this current crisis may put this in jeopardy for future generations.