The U.S. Housing Market Goes Back Into the Tank (and Some Suggestions on How to Achieve a Sustainable Recovery)

The news this week on the housing front was not good at all.  Despite amazingly low mortgage interest rates, sales of previously occupied homes fell last month to the lowest level in 15 years .  Even more ominous, another news story  reported that 1 in 10 homeowners face foreclosure, and the government loan modification attempts have done little or nothing to stem the crisis. 

I have previously written on this blog  and elsewhere  about the root causes of the housing bubble and bust; namely, the government, the government, the government.  Simply put, 30+ years of Federal government intervention in the U.S. housing market in the name of providing more affordable housing has put us where we are now, with many owners unable to afford to move from their current home which is worth less than the mortgage taken out to purchase it.    It is for these reasons that I predicted that the long term effect of the homebuyer tax credit and the Making Home Affordable (MHA) program would be a second plunge in sale numbers and property values.

So, you ask, what do I foresee as the solution to the housing crisis, if it’s not government intervention?  The answer, I believe, lies in the removal of barriers which are artificially and adversely affecting the supply and demand equation when it comes to housing.

Here’s three easy steps that may not lead to a quick recovery, but they will do more than the current government efforts:

• Repeal the FHA’s 90 day seasoning rule :  this rule, which requires properties being purchased with the help of FHA insured financing to be held by the seller for at least 90 days.  This rule discourages investors from purchasing, repairing and selling properties quickly and it puts them into a position of having to carry significant holding costs until the sale.  These burdens deter many investors from purchasing properties, and thus banks are left holding these properties for long periods of time.  Eventually, the banks – spurred on by their government regulators – “fire sell” the properties and the downward spiral continues.

• To the extent that there exist any government incentives for lenders to reject a short sale in favor of a foreclosure, these incentives have to go.  When a lender forecloses, the property sits during the redemption period as the lender is not legally able to sell it.  Nonetheless, available loss reimbursements from the Federal government incentivize lenders to sit tight and wait out the foreclosure rather than approve an available short sale offer.  Again, the government intervention is responsible for the bottleneck in the property pipeline.

• End the Making Home Affordable  program.  Let’s face it, this program was doomed to failure.  I’ve heard countless horror stories – one of which I’ve detailed here  – about the runaround homeowners face when trying to go through MHA.  Once you accept the fact that the cause of the housing crash was the government’s insistence that lenders make mortgage loans to people who could not afford to repay them, then you can see that the MHA program is simply a variation on the same theme.  Note, however, that if the barriers to approving short sales, combined with the removal of barriers to investors’ entry into the market, these homeowners may be able to save their homes through a short sale to an investor combined with a contract for deed or rent to own (of course, in Minnesota, our equity stripping statute  will have to go as well to make this happen).

In short, the misregulation of the housing market needs to stop now.  The government created this mess and it now needs to step out of the way and let private individuals lead the way on a full and sustained housing recovery.