As we wind down 2011 and start thinking about the new year, many of us take pause to reflect on past events, in hopes to better prepare for that which is yet to come. With a severe and stubborn recession still dragging on, and an equally nasty rollercoaster ride in real estate, most Americans are beginning to wonder just how long it’s going to take before we’re securely on the road to recovery.
It’s a good question, and there are no easy answers. The only comforting thought is that despite political intervention with respect to the economy, and the subsequent unintended and often negative consequences those efforts usually spawn, the economy is so large that no amount of meddling will deter it from ultimately purging excessive and abnormal financial activity.
Nevertheless, this is one economic hangover that just doesn’t want to go away. Part of the problem is the sheer magnitude of the party that brought this on. The real estate bubble, which lasted from approximately 2004 to 2008, dwarfed all previous bull markets in housing.
In the last half century, the only run-up that came close was during the late 1980s. At that time, mortgage rates fell from a high of almost 19 percent to a relative bargain of around 10 percent or 11 percent. As interest rates went down, home prices went up. But, compared to what we’ve recently been through, the housing binge that lasted from 1987 to 1990 was of little consequence.
To date, there have been numerous government based attempts to get the real estate markets back on track. The Federal Reserve has been keeping interest rates artificially low though something called quantitative easing.
Fed Chairman, Ben Bernanke has been behind the curtain, pulling all the levers in an attempt to stabilize housing and keep the economy as a whole from imploding. But, try as he might, some are a bit skeptical at Bernanke’s ability to make the right play. After all, it was Bernanke who in February 2006 (at the peak of the housing bubble) said, “We expect the housing market to cool but not to change very sharply.” Subsequent to his comments, home prices and sales embarked on a historic downturn that equaled its meteoric rise.
Similarly, the Obama administration and the vast resources of our federal bureaucracy have been hard at work drafting an endless supply of government programs designed to circumvent the relentless inertia of our massive economic. To just name a few of the many attempts to fix the housing market, we’ve had:
-TCEP: Tax Credit Exchange Program
-TCAP: Tax Credit Assistance Program
-PRA: Principal Reduction Alternative
-2MP: Second Lien Modification Program
-HHF: Hardest Hit Housing Fund
-HAUP: Home Affordable Unemployment Program
-HAFA: Home Affordable Foreclosure Program
-HAMP: Home Affordable Modification Program
-HARP: Home Affordable Refinance Program
We especially like the eloquent use of acronyms created by the Home Affordable umbrella that gave us HAUP, HAFA, HAMP and HARP. Somebody must have been smoking a lot of HEMP to come up with all of that.
In the end, none of these programs really accomplished much of anything other than to substantially increase the national debt. The federal government set out to help homeowners in trouble with a goal of modifying more than 4 million home loans. But, after all the hoopla over HAUP, HAFA, HAMP and HARP, less than 15 percent of those loans were actually modified, and of those that were given a modification, 11 percent still ended up in foreclosure. By any measure, these government programs have been a colossal failure.
Then, we have those two darlings of the mortgage industry that gave birth to much of this mess, the government sponsored enterprises known as Fannie Mae and Freddie Mac. So far, taxpayers have had to backstop $145 billion in losses by these organizations. In the last quarter alone, they’ve requested another $6 billion in bailouts.
But fear not, it’ll still be a cheery holiday for the management guiding Fannie and Freddie to these results. The Federal Housing Finance Agency has approved $12.79 million in bonuses for 10 executives at the two firms.
Granted, it’s easy to take shots at the government flailing about in an effort to remediate something over which it has little control. Nonetheless, some criticism is warranted, since it has done little to fix the problem, and may have actually only prolonged the pain.
You see, the laws of supply and demand will always eclipse any law passed by Congress. The principles of economics are based in the same universal truths that guide both physics and the psychology of human behavior. What goes up must come down, and people will always act in their own best interest.
Consequently, the unwinding and painful deleveraging of the mortgage markets, as well as the associated adjustment in housing prices, are things that just had to run their course. A certain degree of government intervention may have helped cushion the blow, but in doing so, it probably also made the event last longer than was necessary.
Fortunately, if you look at a graph of new home prices, the trend line would indicate that despite all this “help,” we may have finally made the round trip from boom to bust.
Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is McWilliams@BobDonna.com.