It’s finally begun to sink in—we’re realizing that there will be no quick solution to emerging from this economic morass. And at the root of our problems is the still desperately sick housing market, which bumps along bottom, seized by rising foreclosure rates in many markets. Indeed, three years ago this summer, the economic slide and financial market collapse began with the first inklings of the subprime mess.
Housing represents all that’s gone wrong—overleveraging, overbuilding, lack of underwriting discipline, under regulation, and the ensuing requirement for massive government bailouts. If you could breathe you could get a mortgage and buyers at every income strata took advantage, counting on ever rising values to give cover. Politicians of every stripe were eager to talk up the American Dream—using ample tax incentives as well as Fannie Mae and Freddie Mac to fuel home buying and backstop what turned into egregious lending practices. In the wake of inflating housing prices, we all eagerly transformed our nests into nest eggs, and now those shattered nest eggs offer little financial security today, especially as companies reduce or eliminate pensions with states and municipal governments readying their axes on public employee benefits.
The unemployment picture is bad enough, but the vast majority of Americans of working age remain employed albeit with raised uncertainty about staying that way. When the 66% of us who own homes see their values slashed by 25% to 40% or even more in the worst markets, that’s where consumer confidence really takes a hit. Regaining all that lost value will take a long time, especially in commodity neighborhoods, and many underwater borrowers won’t get the opportunity to recoup. It doesn’t matter how low mortgage rates go (and right now they are about as low they can go), would-be buyers now need to put down significant equity stakes to get home loans and more Americans have come to understand the associated costs and burdens of homeownership. They now realize renting can have its advantages.
The government continues to prop up Fannie and Freddie to prevent housing from further crashing. But at some point, probably next year, Congress and the President will have to confront what to do about reforming a system of implicit government guarantees that clearly failed. Are Americans who want less government in their lives, ready to eliminate Freddie and Fannie guarantees? Should we also eliminate tax incentives and mortgage write-offs for homebuyers? Should banks be required to hold onto significant stakes in loans they securitize? And should various exotic mortgage instruments be outlawed?
I was up in Canada last week where there is no Fannie or Freddie, no special tax incentives for homeowners, and where banks never got into the exotic mortgage game and continued to require significant borrower equity before issuing loans. Home values have continued to increase there. Consumer confidence is up, and the government has begun to raise interest rates again, a sign of economic stability emerging from a relatively shallow recession.
Maybe we can learn some lessons from our neighbor.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
