Editors note: This article was written for the November print edition of TNR for Real Estate Agents and Brokers, prior to knowing the 2012 presidential election outcome.
By Now We Know Who Our Next President Is:
As of the time of this writing, we are six days away from the election. By the time you receive this at your offices, we will know who our next president is. Will it be four more years of Obama, which has produced a central approach to federal governance and the highest levels of federal regulatory oversight ever placed on the private sector, or will it be Governor Romney, who is likely to sustain what Obama has put in place despite the campaign rhetoric? There isn’t a clear difference between the two candidates regarding the housing markets.
Obama was clear to further entrench the markets in regulatory agencies such as the Consumer Financial Protection Bureau (CFPB) that were created under his administration. Given the ambiguous charter and scope of reach of the CFPB, it is difficult to estimate the regulatory reforms that await the housing and other markets, and this is why: can you name a market that doesn’t include the exchange of monies? Since every industry from supermarkets, electronics, automotive, credit cards, banking, home building, mortgages, retail etc., all include a financial to service (or product) exchange, matters of disclosure, margin controls and supply chain distribution appear to all fall under the CFPB.
At present, the focus is on consumer credit and mortgages and other forms of micro lending; however, government agencies have a tendency to expand as they identify reasons for the existence of their budgets and staff salaries. While there is tremendous uncertainty regarding the future of government regulation, the one certainty economists can count on is the continued growth of government under President Obama, which depending upon your politics is a good thing. If you are in the mortgage industry, regardless of politics, it may also be a good thing.
With the implications that Governor Romney would eliminate the deductions on property taxes, a federal incentive for homeownership, many mortgage and housing professionals are rooting for an Obama victory. Obama has been very good to banks – at least to well-capitalized banks, which have benefited tremendously from higher regulations that have driven many less-capitalized firms out of business or into consolidation. This effect has only led to surviving banks becoming bigger, and with a federally involved central bank to keep interest rates low with the goal of making money cheaper for banks to lend, bank margins are at historic highs.
So, if you are a Republican banker, why not have another four years of Obama? Many of us in banking are deeply divided. While we cash our bonus checks because they are at historic highs, we know in our political minds and economic hearts that interest rates have to rise, margins will decrease and the market dynamics pertaining to the rent-vs-buy argument needs to take over. But the challenge for every economist or consumer is to be a student of Keynes or Friedman; either we hold a natural distrust for the disruptive forces of the private sector, which tend to behave erratically affecting production, employment and inflation, or we embrace the forces as being a combination of natural and behavioral laws that impact whether or not products and services are worthy of the purchasing graces of those who control the flow of money.
If you are Keynesian, you will advocate for a mixed economy – a private-sector-driven economy with the role of the central government to intervene to ensure we economically “draw straight with crooked (market) lines.” Otherwise, a Friedman approach rejects Keynesian government policies in lieu of monetarism, an approach that extols the virtues of the free market with minimal government intervention – although it is widely argued that Friedman was at the heart of Bernanke’s policy decisions on the Federal Reserve in the response to the 2007-2012 global financial crisis.
If you are like the majority of Americans, the answer will be – “it depends.” As consumers and members of the housing market, we want a little bit of Obama and a little bit of Romney, to put in today’s political calculus. In today’s election cycle, we are forced to make a decision of one over the other, while pondering whether or not one will govern more like a combination of the two. This is largely the question we are facing as we vote with our economic minds and our political hearts.
We all know we generally live in a state of contradiction. We want to be environmentally conscious while we drive our SUVs; we want to conserve electricity but we leave our AC units on throughout the day; we want to conserve water but we water our lawns. We live in a constant state where there are certain beliefs and principles we either embrace fully or do so with certain limits, understanding that there will be times when we simply cannot comply with our own principles; politics is the worst or best (depending upon your perspective) illustration of this behavior. We wince at terms such as ‘redistribution’ of wealth, however we expect our roads to be in good condition, our schools to be the best in the world and public services such as police, fire, and medical services to have the latest technology, and be responsive with the best talent available. We are a conflicted populous struggling to reconcile the role of elected governance with the role of personal freedoms, especially financial freedoms.
The Republican response to 9-11 was the largest expansion of the federal government in a generation to elevate our nation’s ‘readiness’ in light of the war on terror. The Democratic Party’s response to the collapse of the housing market was yet another expansion of the federal government in the creation of the Consumer Financial Protection Bureau and the passing and application of the Dodd-Frank Act of 2010. One controlled the personal security of Americans, and the latter is intended to protect the financial security of Americans.
The Accurate Economic Forecast Award Goes To……:
Economists Dr. Berner, counselor to the Secretary of the U.S. Treasury, and David Greenlaw, Morgan Stanley’s chief economist, were awarded with the prestigious 2012 Lawrence R. Klein Award for their forecasting accuracy. What makes this noteworthy is their accuracy in their predictions across the 2008-2011 economic cycles and their uneasy glimpse into 2013. It is widely accepted that 2013 and the recovery of the housing market looks like a ‘sub-par’ recovery due to the aforementioned policy certainty related to taxes and the overall government/fiscal outlook. The fiscal cliff, which reflects several current tax policies expiring and a number of new spending cuts to take effect, along with the uncertainty in Europe and its impact on the U.S. GDP growth, still falls below a forecasted 2percent – which will act as a drag on the recovery.
While optimism remains very high by builders in the new housing starts – reviewed below – the prospects for a recovery remain tepid. Since exports make up 15percent of the U.S. GDP and the European markets make up a large percentage of this, should demand fall off due to a deepening of the fiscal challenges in Europe, it will create a headwind for the growth of U.S. exporters.
What does this mean to you as the Realtor, builder or mortgage professional? Quite honestly, everything. The goal is to have a strong enough grasp of these economic factors so you can build the right level of confidence for your borrowers and/or referral/lead sources. By understanding these factors and then articulating the forecasts and re-forecasts as new numbers are released, you become a central resource of information for these companies. This is largely how Barbara Corcoran started her real estate company in New York City. She established a market update newsletter that referral partners grew to depend upon for market updates. These updates are both macro and micro interpretations of what the housing market meant to borrowers and Realtors alike. It was a smashing hit that fueled the growth of her real estate enterprise – and the same strategy can work for you today.
Housing Starts: A Surprising Bright Spot
While the housing market is largely responsible for ushering in this era of financial restraint for a majority of Americans, the housing markets are poised to be a strong source of optimism in 2013. House prices and sales activity remain consistent, and new home construction permit issuances are on the rise. There are several reasons for this, both good and bad. First the good: today represents the best time to buy a home. With low interest rates, cheap inventory and a market full of motivated sellers, it is the best time to purchase a home, which reflects a “bottomed” out market. For first-time buyers, home prices are at their lowest and reflect a great time to buy at the bottom of the market. For investors who are interested in sitting on some properties, it represents a fantastic investment landscape. If you can afford to buy a home – do so; if you can afford to buy two or three, do this as well. There will be no better time for another generation, than to purchase a home in today’s housing market. Inventory levels remain at the lowest level since 2006.
This has driven the housing inventory to reduced levels, which has fueled a rental market to those consumers who can’t qualify for a loan. The word of caution to this is, these improvements are more ‘perceived’ than real since we are at depressed levels. Even with a 25 percent improvement in housing starts, we are still 60 percent below the pace we saw in 2006. The present new construction housing start-rate only makes up approximately 2 percent of the U.S. GDP, so the housing market will have to improve exponentially in order to have the same impact seen in the mid-2000s.
Foreclosures still loom as there are still 4.2 million homes in late-stage delinquency or that have entered foreclosure. HAMP programs to actively modify loans or to prevent principal reductions have largely failed to serve the demand. 31 percent of first mortgage are still underwater, and with unemployment still at economically uncomfortable levels, which undermines consumer confidence, either candidate has yet to present a plan to expedite principal or payment reductions or spawn a growing economy; either path forward is unclear at this point.
There are a number of sociological and economic factors that can fuel new housing starts. Simply put, we need an economy that can place new college graduates into places of employment, and marriage policies that will support the creation of families, both of which will assist in the process of placing new families into homes. This is a cyclical process, and through good public policy and economic planning, the housing market can and will be very strong. Immigration assists this trend but once again, an economic plan that creates jobs needs to be in place in order to hire new immigrants to the U.S. Both candidates have struggled to either articulate or implement this plan. With the hope and optimism of a newly elected or reaffirmed President, lets us hope such ideas materialize in defining a clearer path for 2013.
Any questions or feedback on this article, email Rick Roque, Managing Editor of The NicheReport Real Estate Edition, at rroque@thenichereport.com or call him at 408.914.5895.
