To borrow a phrase from former Secretary of Defense Donald Rumsfeld, the recovery in real estate has been a “long, hard slog.” And to cite an expression attributed to many throughout history, “Those who forget the past are condemned to repeat it.”
That’s where we could now find ourselves with respect to the recent revival in home sales. After the bubble burst, more than half a decade of declining home prices and the near elimination of new home construction left the housing industry hungry for renewed enthusiasm among both buyers and sellers. But, like a man without a meal for many days, the sudden cornucopia of tasty treats can lead to a short-term feasting that might make you sick. We don’t want to throw cold water on good news, but neither do we want to see the pot once again boil over. Whether it be the housing industry or the economy in general, this constant cycle of boom to bust doesn’t benefit anyone.
To review how we got in this mess, let’s recall what generated the housing boom, as well as the ultimate implosion. For the most part, it all started in the 1990s when, under the guise of something called the Community Reinvestment Act (CRA), the federal government decided to use the government-sponsored enterprises known as Fannie Mae and Freddie Mac to expand mortgage availability.
The Community Reinvestment Act dates to 1977. It had the noble goal of encouraging banks to increase lending in low- and moderate-income neighborhoods as a way to promote home ownership. But in 1995, the Clinton administration put the CRA into overdrive by instructing Fannie and Freddie to significantly lower mortgage lending standards. Since these lenders had the full faith and credit of the United States government as a backstop, the ramifications associated with making risky loans became all but irrelevant.
In what’s called the secondary mortgage market, Fannie and Freddie would also gobble up loans that originated with private sector banks. As a result, mortgage money was free-flowing, and home buyers who would not normally qualify to purchase property suddenly found that they needed little more than a signature to secure a loan. We were off to the races, and easy mortgage money fueled an explosion in demand for real estate. With that demand, prices rose to unsustainable levels.
Seeing this pot of gold, Wall Street further exacerbated what then Federal Reserve Chairman Allen Greenspan coined as “irrational exuberance,” by securitizing and leveraging mortgages in a way that turned billions of dollars in bad loans into trillions of dollars in bad loans. This “funny money” created a false sense of wealth and nearly brought down the entire economy.
Predictably, at least in hindsight, it had to collapse, and home ownership ultimately returned to historical levels, as those who really couldn’t afford the “big house” or any house at all were purged from the system. Over the past several years, and continuing to this day, government attempted to cushion the blow with tax credits and countless programs designed to maintain what was an artificially created run-up in real estate. Nevertheless, the laws of economics are a tide that cannot be deterred, and despite the best of intentions, the pain of returning to reality has been felt by all.
That brings us to today, where some of the suffering still continues, but we see light at the end of the tunnel and a real estate recovery is clearly underway.
So, will this be a sustainable recovery, or in our haste to make it all better, will we fall victim to some of the same bad decisions that created the problem in the first place? Of concern is a recent request by the Obama administration that lenders loosen qualification standards, bolstered by the promise that the government will make them whole should a loan go south. It’s true that getting a mortgage is exceedingly difficult, and, to some extent, banks may be overcompensating for sins of the past. However, the notion that mother government will somehow create money it doesn’t have to afford us all a shot at home ownership is precisely what first lit the match to this fire.
Good credit, a reasonable down payment and job security has, until recently, been the hallmark of what it takes to buy a house. Only via the government, aided by Wall Street shenanigans, did we thwart what was heretofore a successful system. For a real estate recovery to be credible and long-lasting, it will be necessary to make sure that everyone who wants to buy a house can actually afford a house.
It is also important to be aware that the hangover of boom to bust has created a number of anomalies that will affect the housing market for some time to come. First, we have an extremely low number of homes on the market. Many home owners are still upside down on their houses, making it difficult, if not impossible to sell, and new construction will be slow to play catch-up, after being decimated during the recession. Second, our economy still struggles with high unemployment and low growth. And third, both buyers and sellers of real estate are wary of getting back in the game, with so many being burned during a gut-wrenching roller-coaster ride.
As a result, we must keep a light hand on the tiller and not be in too much of a hurry to reignite real estate. As an important and vital component of economic recovery, housing is a prime target for government intervention and the promulgator of wealth building in the private sector. But, like a car stuck in the snow, hitting the gas will just dig you in deeper. We must remember to go slow and ease our way out.
In our little corner of the world, a recent headline in The Capital said: “Housing feeding frenzy predicted in Anne Arundel County.” As a couple of real estate agents, a feeding frenzy might momentarily keep our belly full. But we’re in it for the long haul, and most real estate agents will tell you they’d prefer a balanced market, rather than one that’s erroneously exaggerated by something other than the invisible hand of free-market forces. Real estate must not return to an ugly “get rich quick” scheme. To properly address the needs of society, it should grow in a slow and predictable manner. In that way, it will once again serve the primary function of creating community and family stability, along with the simple concept of shelter.
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.