Housing Market 2011: A Spirited Dialogue
My sense closely reflects your sensibilities when it comes to 2011 being a lost year. I'm even leaning toward a lost decade, and inclined to agree in many ways with Paul Krugman. But I'll split the difference and call it a lost 5 years. Anyway, back to 2011 for real estate.
We're not going to see a 20 percent drop in values across the nation. Certain localities may indeed experience true appreciation while others may suffer 20 percent-plus declines, you know the old adage regarding real estate: Location, Location, Location. Being from Buffalo, N.Y., I was surprised to discover that there is a bullish outlook within their market while the agent you spoke with in California can expect to experience an 8 percent drop, at least. Talk about a bizzaro world of real estate compared to a few short years ago. Check out this interesting Buy vs Rent ratio chart from the New York Times. It's imperfect since only home prices are figured and not interest rates, taxes and insurance, but it's telling nonetheless.
Shadow inventory is an interesting and important factor in all of this. By most accounts, the distressed inventory banks are holding on their books is pretty staggering (again, dependent on location), growing and thus prolonging the
As far as the fate of the MID, I've stated what I think happens there in my previous note -- it stays but in a limited capacity.
Back to foreclosure reform, the industry is broken in the sense that this is what happens when you introduce modern innovations (like securitization, MERS) to 130-year-old English land law. The violations at the core of the issues at hand are far more procedural rather than substantive, but that won't stop a sea of attorneys from chirping in politicians' ears, convincing them that class-action lawsuits and the such are in the best interest of (ex) homeowners and consumers, in general.
So let's get down to your last statement/question...
First, 2011 is a great time to sell if you're prepared and can afford to take less than what you paid. Otherwise rent, like you're currently doing. If you can buy, be prepared to hold for at least 5 years or risk taking a loss.
Second, most mortgage, title and real estate professionals are not on top of issues like this because of the prevailing mindset of 'I have to close business today, I'll worry about Government, macro issues tomorrow.' This is truly unfortunate, since kicking a problem down the street never solved anything. And these are the same folks who will complain the loudest when shift happens to them. Granted, just because you work in the industry doesn't make you qualified to address and help solve the issues that encumber it. But there exist an objective, untainted few who can be real change agents. Ironically, this usually requires someone with tangible experience to step outside of the industry to truly lead it to a better place. As is stands, we have the misaligned leading the blind.
You're not being too gloomy, my friend -- yet I feel the signs of hope reside in time. As lame at that may sound, a series of systemic problems of epic proportions will require time to thoughtfully work their way out of these industries, well past 2011.
Consumer confidence needs to be restored from multiple fronts, starting with the actions and relative education levels of those professionals on the front lines.
Since you've been recently home (err, rent) shopping, what was your agents view on the market? It would be interesting to compare their 'expertise' and perspective against some empirical data.
This whole conversation is driving me to drink. And I don't mean Diet Coke.
In hopes of surviving into the new year, let me try to swing the topic towards what we all can do about this. There are things that consumers can do, that industry players from realtors to mortgage brokers to banks can do, and that government – and only government – can do. I'm actually going to take them in reverse order.
I'm as big an opponent of government intervention into free markets as the next Tea Party member. But looking at what we're facing with the housing market over the next who-knows-how-long, and looking at how we got here, I think there are three things that the government, local, state and Federal, must do. These are things that only the government can do:
Prosecute Criminal Fraud
First, some bad guys have to go to jail. You asked in your last letter how we can go about restoring consumer confidence in real estate and mortgage industries. Fact is, there has been systematic fraud at virtually all levels, from the unscrupulous mortgage broker on the street (and I know you've witnessed them firsthand) to the shady servicing operations to the boardrooms of major banks. Robo-signing is fraud, pure and simple; it is an organized attempt to deceive the courts and the other litigants. Some of the other anecdotes about abuses by servicers, many of which are owned by our biggest banks, suggest that these were not isolated bad apple cases. No one truly knows how bad this thing is, and unless and until there is a criminal prosecution, I don't know that the true story will fully come out.
But the American people, I think, have justly lost confidence in the entire system. They think, and not without cause, that people who have lied, cheated, and committed massive fraud and abuse are not only getting away scot-free, but actually getting bailed out by taxpayers. Meanwhile, the average citizen and homeowner are just getting the shaft. With no Vaseline.
That has to change. Putting the worst abusers, who have actually committed criminal fraud, behind bars would go a long way towards restoring confidence in our system.
Legislate Greater Transparency
Second, the state and Federal governments are going to have to work together to figure out how to create more transparency in the whole real estate system. So much of the fraud happened, I think, because there is so little daylight, so little standardization in the real estate industry. MERS, whatever its flaws, was created because our existing system of recording dating from the 18th century was still following 18th century processes in many cases. The laws and regulations simply have not kept up with financial innovations, like RMBS, that have provided trillions of dollars in financing to make homeownership a reality for millions of responsible homeowners. We have to recognize that despite abuses, not everything the finance industry did was horrible.
Rather than throwing out the baby with the bathwater, we need the government to encourage more transparency and more information, while cracking down hard on the bad elements and bad practices.
Prevent Collapse of the Global Financial System
Third, as unfortunate as this may be, the government is going to have to swallow a bitter pill and do something to prevent a full-blown meltdown of the financial system. That does mean retroactively validating, through legislation, the RMBS trusts. Whatever collateral damage flows from that – nationalizing the big money-center banks, a giant global settlement pool, putting the worst abusers in jail, regulating the mortgage broker industry out of existence, whatever – has to be accepted. We simply cannot have the entire securitization industry be found to be an empty shell game.
I would hope that the "smartest administration evah" can find a way to get some of our global partners to share in the burden. If the American securitized trusts are knocked out, it isn't as if the German pension funds who have money in those investments are going to be in great shape. Good or bad, the U.S. housing market is at the epicenter of the international finance crisis. And if there's going to be a massive bailout that makes TARP and Porkulus seem like small potatoes, and I think there will need to be at some point, then I'd like to see the rest of the industrialized nations share in the pain too.
This is getting long, so let me ask you what you think the industry – from banks to mortgage professionals to real estate brokers to title and appraisal people – can do to deal with the problems we've raised.
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