This is my column for this week from the Arizona Republic (permanent link).
How the new president is going to prolong the housing bust
I’m writing this before the election, so I don’t know who will have won by the time you read this. But here’s something I do know: The forty-fourth president of the United States, whomever is chosen, will prolong the housing bust.
How do I know this? Because both candidates have promised to implement programs that will artificially buttress home prices above their market value. John McCain wants to refinance failing mortgages. Barack Obama wants a freeze on foreclosures. Congress and the fifty state legislatures have ideas of their own.
To make matters worse, lenders are putting a friendlier spin on the foreclosure process with elaborate workout schemes. If you qualify for a loan workout, instead of liquidating the home as a non-performing asset, some lenders will roll your existing loans into a new interest-only loan. You would make small payments for the next two or three years, and only then resume your full obligation.
What’s wrong with all these ideas? They’re simply delaying the inevitable. If you’re not making your payment now, you probably won’t make it after a refinance, after a foreclosure moratorium or after a three-year workout. Some people may find their salvation in these programs, but most of the affected homes are going to end up in the lender-owned inventory — later rather than sooner.
And that’s the problem. Our only way out of this mess is to clear the resale homes pipeline of foreclosure inventory. By delaying eventual foreclosures, we are preventing the real estate market from finding its bottom-dollar price. But we will see renewed appreciation only after the market has absorbed this glut of foreclosed homes.
The good news — for buyers: Homes are going to be selling very near their bottom-dollar price for the next few years. The bad news — for sellers: Homes are going to be selling very near their bottom-dollar price for the next few years.
The alternative is to let markets operate freely — a short, sharp pain followed by a robust recovery. But nobody ever won an election by promising to bring voters pain.
Technorati Tags: arizona, arizona real estate, investment, phoenix, phoenix real estate, real estate, real estate marketing
Marlow says:
If banks want to renegotiate loan terms with individual borrowers, that would be a great idea that would help both the homeowners and the banks. Even if they reduced the interest rate to 4%, the banks would make more money than taking the home back in foreclosure and that might be enough of a savings to keep people in their homes. But for this or some other convoluted bail-out scheme to be mandated by the government would be a bad idea.
November 10, 2008 — 12:12 pm
David says:
Greg,
But nobody ever won an election by promising to bring voters pain.
Amen. That’s why my candidate (Ron Paul) lost.
November 10, 2008 — 1:02 pm
J Boyer Morristown NJ says:
I don’t know what to think anymore. I just know that something needs to be done. A failing housing market, Failing financial system, and a failing industrial base is just not acceptable.
I do think we are going to end up dealing with some nasty inflation in the future, for all the money the government is going to be printing.
It sure would be nice though if we could all move on to happier topics.
November 10, 2008 — 2:38 pm
Edge - The Credit Crunch says:
David, you hit the nail on the head.
On Larry King Live, Paul was interviewed (though it only aired on the web as Paul was still in “soft-censor” mode by the media for whatever reason) and it kind of shocked me when he said:
“Americans don’t have a right to housing”
At first I was in shock and thought, wow, what a jerk. Who would say that?
And then he went on to say that we pretended they did, gave out crappy loans just to get them into their houses, and look what’s happening now?
Massively stagnant year plus inventories of foreclosed homes.
Candidates definitely do not get elected by promising a couple years of tightened belts and pain. It’s a shame too…
It’s like giving lollipops to cancer patients.
Sure, you get candy…
But you’re still dying =/
November 11, 2008 — 10:59 am