The New Housing Policy – Will It Repair the Housing Market?

Recently a friend and colleague, Robert Hahn, encouraged the readers of his own blog to submit posts for his upcoming ‘Carnival of Housing Policy’, hoping to collect thoughtful discussion around the potential changes in housing policy.

I’ve been somewhat reluctant to participate so I’ll start with this disclosure:  Until recently, I have followed politics superficially at best, I have limited understanding of how housing policy is decided upon, and I generally think Hahn derives some pleasure from his consistent ‘sky is falling’ outlook.  That being said, I will credit Hahn with a breadth of understanding on the topic, and a careful consideration of the political underpinnings.  He inspires me to become significantly more aware of the way the political environment impacts the industry and overall economy.  Clearly, in today’s environment, a superficial understanding falls far short.Oklahoma Land Rush

And while I try to avoid politics here, the current market environment makes it unavoidable.  The current administration policies have pushed us closer to Socialism than we’ve seen before in our history -  whether it’s Wall Street, the automobile industry, or health care.  The housing market appears to be next.

Much of what I deal with on this blog tends to be local market considerations.  Yet, there is no question that the changes that are clearly coming down the pike have the potential to have a massive impact on the housing market – nationally, and locally, so I feel like it certainly has a home here.

Housing Policy Changes in the Air

July’s housing numbers rocked the nation.  They had been expected to be low given the expiration of the home buyer tax credit, but sales down 27%…that was a little steeper than had been anticipated.  In the days following, it created a tidal wave of response. I saw articles come out on, and offline, both indicating this was nothing to worry too much about, as well as those that would make one decide not to get out of bed again…ever.

There’s no question, housing policy is one of the most important matters impacting our economy today.  And certainly significant change is coming.  As Treasury Secretary Timothy Geithner states, “This administration will side with those who want fundamental change. It is not tenable to leave in place the system we have today.“  It’s the specifics of that change that are of interest and of concern to me.

‘Fundamental change’ is too ambiguous at this stage.  I’m interested in seeing change that reflects a solution to the existing problems.  What parts of the ‘system’ that got us here – are not ‘tenable’?  Let’s come from the three C’s of home ownership perspective:

  1. Capacity – the ability to repay the loan (employment history, salary)
  2. Credit – the history of how one has paid back debt
  3. Collateral – the value of your home (recently justified by overbloated appraisals brought about by easy lending practices)

What if we simply embrace these simple tenants:  make quality loans, with credit worthy individuals, on quality property.  In the past decade, had we not swayed from that simple idea, it’s highly likely, we wouldn’t be here.

No More Mortgage Interest Deduction?

Since Hahn has one more of the dismal outlooks, I think it’s interesting to examine it from his ‘worst case scenario’ environment.  In a recent post, he speculated on some of the possibilities:

1- The mortgage interest deduction will be eliminated, or at least sharply scaled back
2 – Fannie/Freddie will wind down participation in the single family residential market, and raise participation in multifamily housing (aka, rentals)
3- The 30-year fixed rate mortgage is headed to the ash bin of history; I rather expect the “new normal” will be something closer to a 10-15 year adjustable rate mortgages that adjust every year or even every quarter.
4 – Down payments are headed up, up, up from its current levels (some FHA loans are still requiring only 2-3% down); Bill Gross of PIMCO has said that if he were funding mortgages, he’d require a minimum of 30% down payment.  I think that’s where we’re headed.
5 – Some form of national regulation for rentals, in order to (a) encourage rentals by those who would otherwise be first-time homebuyers, and (b) protect renters from eeeeevil landlordz.  It may be as heavy handed as a national rent control regime, or (more likely) an expansion of Section 8 to include far more “middle-income” units.

Are These the Changes That Repair Housing?

There are some valid arguments for some of the preceding speculations.  As  Hahn states, “…the overall impact is to decrease the pool of buyers, drive housing prices lower, and have fewer transactions.“  This may in fact be a requirement of the overall recovery.  There were less buyers, lower prices, and less transactions when stronger lending practices were in place.

However, when the Housing Policy changes are considered I wonder about this simple statement of fact from Mark Zandi, Chief Economist for Moody’s Analytics, “…when housing values are falling, nothing really works all that well in our economy.“  Our economy cannot possible heal with a crippled housing market.  And some of these speculations from Hahn only seem to me as the types of things that can only further cripple the housing market, in an extreme way.

While Hahn is rather fluent in politics and rather adept at speculation, one area of expertise I have is in understanding the profile of today’s distressed homeowner.  I know what it’s like to sit across the kitchen table from someone that is faced with these very real and personal set of circumstances.

Lest the Pendulum Swing Too Far in the Other Direction

I will grant you, in the early days of this crisis, those faced with short sale scenarios or potential foreclosure, might have been the higher risk buyer profile.  They may have been the 100% down buyer.  They may have had the ‘Neg-am loan’ or some other questionable loan program.  They may have been the buyer that had borderline qualifications coming into this game.

However, the Orange County homeowner of today that sits across from me at the kitchen table is often the one that put a fair amount of money down, they may have been highly qualified, excellent credit, documented income sources, and yet, with the decline in values, personal circumstances (divorce, long term unemployment, relocation) they are forced into a financially devastating course they couldn’t have anticipated.  And these homeowners ask the same question nearly every time:  ‘How long do you think it will be before I will recover enough to be able to buy a home again?‘  They ask this because they value home ownership.  Remember, they were not in this market for a quick turn on their money.  While some bought houses, the short sale/foreclosures we are seeing today are the buyers that bought homes.

These individuals consider home ownership as part of their claim to middle class.  They certainly consider it part of their ‘American Dream’ and they fully anticipate their ability to reestablish that claim.   They are voters.  They have historically been high income earners.  And I highly doubt they will be interested in satisfying themselves with long term rentals as their housing solution.

And why, in the course of establishing a National Housing Policy, would we take measures that serve to cripple the ability for those individuals to own again, cripple the potential recovery, and cripple our ability to recover some economic stability – because clearly, they go hand-in-hand.

The Meaning of Home Ownership in The United States

It’s interesting to look at the psychology of home ownership in this country.  The big land rushes of the late 1800′s illustrate the deeply ingrained desire to own a chunk of dirt to call your own.  That desire is something you can’t simply legislate away, and I really believe voters’ voices will be heard when you start hacking away at their long term ability to grab that golden ring once again.  I think it will take more than a Time Magazine article to convince them that home ownership is not all it’s cracked up to be.

There was a time when home ownership was valued for the sake of owning a home, and not much more.  Then came the profit taking in the later 80′s as home prices soared with the onslaught of dual income families.  The late 90′s and early 2000′s brought easy money and get-rich-quick buying, leading to our current collapse.

But I still believe, most folks want to own their home, they will take a mortgage to buy it – maybe even without a mortgage interest deduction.  Prices may fall.  Maybe we’ll adjust our expectations.  Maybe we’ll begin to be satisfied with a slow appreciation over the life of a homeowner, rather than the promise of a lifetimes wages in a year or two of owning a home.

Kicking the Dog While It’s Down…

Some of the things Hahn is speculating may indeed come to pass, in one form or another.  But, I think there is value in considering the fact that kicking the proverbial dog while it’s down, may not be the answer.  Bill Gross, with PIMCO, states, “Policymakers should quickly re-engineer a refinancing opportunity for all mortgagees that are current on payments and are included in GSE securitized mortgages.“  There are some solutions that could be examined that help sustain those that are currently impacted and in turn further housing and economic recovery.

The pendulum may have swung too far in encouraging home ownership, but it would seem a mistake to me to have it swing so far the other way that we eliminate the ability for our middle class to recover and reclaim their ability to own once again.

BTW Rob – it may satisfy you to know, this may be one of the longest posts I’ve ever written.

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7 Responses to “The New Housing Policy – Will It Repair the Housing Market?”

  1. On at Jeffrey Douglass responded with... #

    Linsey, Good for you, as much as I wanted to post something another eye laser treatment and a way to boil the whole issue down to a post, prevented me from undertaking the task. Well done.

    As REALTORS® it is our job to promote home ownership, not a popular cause today, but after personally loosing a great deal of money, I still believe!

    Rob makes some good points but at the end of the day I don’t believe most will become reality.

  2. On at Linsey Planeta responded with... #

    Thx Jeff. I’ll be honest, I nearly chickened out. Big conversation, politics are unavoidable, and well, getting into a tangle with Rob? …approach with caution. My ability to ‘boil the whole issue down to a post’ could be up for debate as well. Longest dang thing I’ve written in a while. ;)

    I think I’m becoming more concerned that some of Rob’s predictions may in fact come to pass, in one form or another. We are certainly in uncharted waters.

    I think our job has become about helping our clients determine whether home ownership makes sense for their personal set of objectives — short and long term. And I agree, I still think there is tremendous long term value in owning a home, both financial and emotionally.

  3. On at Jeffrey Douglass responded with... #

    Well said and good luck with Rob.

    As always, not everyone should or want to buy a home.

    The crash came from politics wanting to increase the historical ratio of homeowners, loose guidelines, greedy banks, and a party like atmosphere of never ending appreciation, not to mention using homes at ATM cash cows.

  4. On at Mark Brian responded with... #

    As REALTORS, we are subject to the changes from politicians and policy makers, both on a local, state and federal level. Sometimes, we must fight against changes that hurt us and sometimes we must fight against changes that hurt the real estate buying and selling public, home owners and even the rights of tenants.

    In my opinion, if you are in real estate, it does not take long to realize that politics has a serious impact on our industry and the housing market.

    Fantastic article BTW and I am bookmarking so I can come back often to read more of your viewpoints. Keep up the excellent work and I hope you have a wonderful day!

  5. On at ken brand responded with... #

    Stephen King said, “Writing is refined thinking.” There’s plenty of refined thinking here Linsey. Thanks for sharing the good stuff.

  6. On at Linsey Planeta responded with... #

    Mark – You are certainly right. The political world has a direct impact on our industry – and there’s much to keep an eye on these days. Thanks for coming by and reading. Appreciate it!

    Ken – my friend… :) Thanks as always!

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