Why the National Housing Market is so Important

Yes, I know that I am a commerical investment property sales broker, so why do I track the national housing market so closely? The answer is that this market has the most profound impact on our financial system, which affects our capital availability, which in turn affects our commercial real estate markets. Let’s look into this dynamic.

The most recent housing bubble that we experienced has upended our financial system. History helps us to understand where we are today. Since 1970, there have been two other major housing bubbles, with peaks in 1979 and 1989.

The most recent bubble started in 1997, ignited by rising houshold income which began in 1992 in concert with the 1997 elimination of taxes on residential capital gains up to $500,000. Investors are attracted to markets with rising values and the early stages of this cycle had this usual, self-reinforcing feature.

The dot.com collapse, which created the recession beginning in 2001, could have ended the bubble but unusually expansionary monetary policy was implemented by the Fed to counteract the downturn. As the Fed increased liquidity, money naturally flowed into housing which was the fastest expanding sector. Both the Clinton and Bush adminestrations aggressively pursued the goal of expanding the homeownership rate. They encouraged Fannie Mae and Freddie Mac to purchase just about any mortgage in sight and lender’s credit standards eroded.

Lenders and the investment banks that securitized the mortgages used ever increasing housing prices to justify loans to buyers with limited income and assets. Rating agencies accepted the supposition of ever increasing house prices and issued investment grade ratings which lured buyers for these securities from around the globe. Mortgage loan originations increased an average of 56% per year for three years – from $1.05 trillion in 2000 to almost $4 trillion in 2003! This trend continued.

Home prices started to decline in late 2006. The latest Case-Schiller index, which tracks housing prices in 20 major metropolitian areas, fell by 19% for the three months ending January 31, 2009. This is a new record low for this index. Many of the buyers of houses in this bubble had far less than 19% equity in their homes, some with 3.5% or less. According to First American CoreLogic, 10.5 million households had negative or near negative equity in December of 2008.

The result of all of this was: Bear Sterns, Merrill, Lehman, AIG, Fannie, Freddie, IndyMac, Countrywide and the dozens of other bank failures and general distress in our financial system. Government intervention we are seeing at every turn. The FDIC has asked for and received access to an additional $500 billion in government funds in anticipation of future needs.

Not many people are talking aobut it but rising mortgage defaults could force the FHA to seek a taxpayer bailout for the first time in its 75 year history. The Obama administration will have to decide whether to ask Congress for taxpayer money or raise the premium it charges to borrowers. Roughly 7.5% of FHA loans were seriously delinquent at the end of February, up from 6.2% a year earlier. The FHA’s reserve fund fell to about 3% of its mortgage portfolio in the 2008 fiscal year down from 6.4% the prior year. By law it must remain above 2%. A strong FHA is essential for a recovery in housing.

We have seen reports recently that the housing market has bottomed out. It is difficult to believe this is the case as we are not close to seeing unemployment peak, which will be critical for housing to bottom.

The lack of equity in homes has greatly effected consumer confindence and consumer spending both of which effect corporate earnings which effects demand for office space, retail space and apartments. As housing prices stabilize and begin to rise, the wealth effect will be tangible and the downward spiral will reverse. Housing got us into this mess and housing must pull us out of it. Let’s hope it is sooner rather than later.

8 Responses to “Why the National Housing Market is so Important”

  1. 1 A - April 10, 2009 at 9:12 am

    Good Morning Mr. Knakal-

    I find it very interesting that many brokers/owners don’t want to admit what is transpiring within the market.

    As a an owner and agent, do you feel it is a duty to portray this picture to the public, being real to yourself and firm, instead of masking such statistics only benefiting yourself financially?

    A number of people want to paint a rose, so vibrant that creates an allure from the portrait itself, and that bouquet of flowers you thought would indefinitely last, fizzles quickly.

    Thank you.

  2. 2 pam m April 10, 2009 at 9:59 am

    Bob, absolutely right on. The housing market may be giving signs of searching for the bottom, but it has definitely not found it yet. I do agree with the idea that when unemployment peaks, the housing bottom will be reached because as long as people are losing jobs, the foreclosure rate will continue at an elevated level and housing demand will stay in the doldrums. Too much supply, depressed prices and lack of consumer confidence will plague the housing market until the economy (jobs) starts to stabilize.

  3. 3 rknakal April 10, 2009 at 10:10 am

    Hi A-, I assume your questions were prompted by my reference to the reports I have heard about housing bottoming out. Clearly, I think these reports are premature as there are several fundamental things which must occur before we hit a bottom in housing.

    With respect to the positions that professionals take about the condition of the market, it is critical to be as truthful as possible as the more accurately you depict the market, the more credibility you will have on an ongoing basis.

    You must also consider the source of the information. An individual broker may claim the market is booming if they were able to sell 3 properties last week. Another agent, who may not have sold anything for months, even in a good market, will claim that things are slow. You must consider the statistical sample that the pundit is dealing with. I feel confident in the positions that I take relative to the New York City investment sales market because I am processing information gathered based upon a market size of 125,000 properties and from the 150 employees that Massey Knakal has which provide feedback on market conditions.

    Additionally, if we look back on the track record people have in their postions, it also lends credibility, or the opposite, to that person’s positions. All things become clear in the long run.

  4. 4 rknakal April 10, 2009 at 10:13 am

    Hi Pam, thanks for your comments. Theses indicators are so closely tied to the housing market that they cannot be ignored.

  5. 5 Paul April 15, 2009 at 9:18 am

    I absolutely agree with your position on Jobs vs housing bottom. If I lost my job and could not make payments I bet it would take 6 months or more for the bank to take my house and market it. If every job lost puts every other mtg in default and we just lost 5M jobs in the last few months… not to mention other causes of default…..

    I am wildly speculating that the bottom might be 6 months from the time that we get down to losing say… 100k jobs per month?. Maybe by then job creation will equal layoffs?? How far do the official job loss numbers trail the layoff? Thoughts?

    It would be great to some historical data on the relative position of housing recovery to employment recovery.

  6. 6 rknakal April 15, 2009 at 9:27 am

    Hi Paul, Thanks for your comments. I believe layoffs are reflected in the governments statistics at different times depending on circumstances. Most people file for unemployment benefits shortly after losing a job. Others, who receive severance packages, may wait to file for unemployment benefits until some later time. A graph showing employment recovery as it relates to housing recovery would indeed be very interesting.

  7. 7 Zoran April 27, 2009 at 10:47 pm

    knakalstreetwise.wordpress.com – The best. Keep it going!

  8. 8 rknakal April 29, 2009 at 8:03 pm

    Hi Zoran, Thanks for the post.

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