A recent article published 2-17-2010:
The Causes of the Housing Boom & Bust 

The Housing Boom and Bust by Thomas Sowell exposes who inflated, then burst the housing bubble. If you are sick and tired of seeing mortgage bankers blamed for the lax lending standards that unleashed the recent financial tsunami you might find the correct answer in Stanford University professor Sowell’s book.  

Sowell lays out his case methodically, dispassionately and devastatingly to drive home two key points: 1. There was no such thing as an “affordability crisis” in U.S. housing before Bill Clinton and George Bush unwisely invited millions of unqualified buyers into the homeownership tent. 2. The loosening of mortgage-lending standards can be laid squarely at the feet of certain self-serving, unaccountable and largely unrepentant Congressional legislators — Sowell flays Rep. Barney Frank and Sen. Chris Dodd in particular — who coerced banks to make home loans to low-income buyers.  

But it is not just national government intervention in the free market which caused the housing bubble. Land-use restrictions in certain pockets of the country triggered an insane upward spiral in land prices in each enclave forcing housing prices to soar in lockstep. To drive home his point, Sowell contrasts San Francisco and its fellow “communities in which there were severe limitations on the building of housing” with “anything-goes areas such as Dallas and Houston.” He cites a sobering Coldwell Banker estimate that appeared in the journal Policy Analysis in October 2007: “A house that costs $155,000 in Houston would cost more than a million dollars in San Jose.”

Sowell states, “A fundamental misconception was that the free market failed to produce affordable housing, and that government intervention was necessary to enable ordinary people to find a place to live. Yet the hard evidence points in the opposite direction: Where the market was more or less left alone, housing prices took a smaller share of family income.

The problem of a lack of “affordable housing,” as conceived by many in the media and in politics, bore little resemblance to the situation in the real world. It was not a national problem but a severe problem in particular places. Washington politicians who set out to solve a problem that they misconceived contributed instead to the housing boom and bust.”

The real-estate scheme Sowell proves that began in 1977 is this: Liberal government agencies and officials, on a covert quest to bring about socialized housing, have exerted pressure both explicit (the 1977 Community Reinvestment Act and its ilk) and implied (veiled threats to withhold merger approvals) to force banks to degrade their mortgage-lending standards and embrace low-income borrowers in the name of Affordable Housing.

Despite the bitterness of his anti-Barney bromides, it’s hard to contest the objective facts the author trots out. Take his analysis of the net effect that HUD pressure, for one, had on Fannie Mae and Freddie Mac. In 1996, HUD set a “quota” that a staggering 42 percent of the mortgages Fannie and Freddie purchased that year would be for below-median-income borrowers. This meant riskier loans were being valuated as good loans and lenders assumed, could always be unloaded on Fannie or Freddie, with their implied guarantees of failsafe government backing.  

We are learning the folly of such government intervention into the market place and Sowell ruefully concludes that “the market (meaning us) learns — even if only the hard way — and adjusts with remarkable speed. The question is whether politicians and government bureaucrats learn, especially if they pay no price for being wrong.”  

PUBLISHED ARTICLE from January 13, 2010: 

RECALLING 2009 AND LOOKING AHEAD TO 2010 

Over all in the USA there was tremendous turmoil. The speculation by builders and individuals in some of the “hot” markets of 2003, 2004 and 2005 has led to disastrous results in those same areas in 2006 through 2009. The near collapse of the banking system has had tremendous negative effects on the real estate market. 

As I write this in early 2010 foreclosures are being reported as 68% higher then November 2006 and if the current forecasts are correct, the rate of foreclosures that peaked in August 2006 will go through another peak sometime later in 2010. Ohio has had one of the highest foreclosure rates and, as a percentage of population, Lorain and Cuyahoga counties are among the highest in the nation. 

In our primary market, Avon, Avon Lake and the Sheffields, 2009 has seen the monthly number of MLS sales increase after beginning at its lowest level ever in January, 2009. The fact that the monthly “demand” has gradually returned to about the same as recent past years was good news in our market but sales still remains about 25% below the peak years of 2005 and 2006. Sale prices began to fall in early 2006 because of our over-supply. This over-hang of “too may homes for sale” continues. Until the “months-of-inventory for sale” returns to the 2004 level, pricing will be depressed and almost everyone will continue to feel the negative effects of “working off” this excess inventory of homes.  

Those who have and who will continue to benefit from this continuing pricing pressure are buyers. Mortgage requirements have tightened and will restrict some buyer entry into what has become a wonderful opportunity to purchase a home in 2010 at 2003 pricing with rates still near 5% for 30 year fixed mortgages.  

It is sad that anyone has to loss their home for any reason but it appears that “only” about 25% of those who purchased using sub-prime rates will loss their homes. A large percentage, but sub-prime only represented about 12% of the total number of mortgages taken in 2004-07. This means that there are about 75% of sub-prime buyers who would not have been able to purchase, who did in fact purchase and who will not loss their homes. I mentioned in this space 2 years ago that this lack of sub-prime borrowers will cause a loss of buyers going forward. The Government has seen the same difficulty and has been encouraging first-home buyers through its continuing program of giving an $8,000 tax credit for contracts signed by April 30 and which title transfer by June 30, 2010. This program has been a definite assist to our market. Nationally it is estimated that first-home buyers represent about 40% of all buyers. 

What does all this mean for 2010? Local home buying should continue on its current pace as long as there is not a national second dip-recession. If the demand side retracts again, then our local pricing will fall further than the 5% I see happening yet this coming year as we continue to work off our over-supply. If the national economy stays strong, 4% growth is being forecasted, our local market should continue on the way to total recovery by 2012. Happy New Year To All! 

"74 MILLION YOUNG ADULTS WILL LEAD THE NEXT WAVE OF DEMAND!" 

I am excerpting these thoughts from an article recently written by Dave Liniger, Chairman of RE/MAX International in the Sept./Oct. issue of Real Estate Professional. “Overall economic recovery is likely to begin this year and continue through 2010. But we expect another foreclosure bubble in late 2010 and 2011 with unemployment rates still rising.” 

“After that, however, we are anticipating a sustained, healthy stretch of increasing home sales, values and homeownership rates.” These increases “will be based on a combination of pent-up demand and demographics. And the youngest group of adults, Generation Y, will provide much of the demand.” These young adults known as the Millennials, “are ages 14 to 29 now” and “comprise a block of 74 million potential buyers, nearly as many as the 80 million Baby Boomers born between 1946 and 1964.” Knowing the enormous affect the Baby Boomers have had on our society, “it’s fascinating to anticipate the impact of another wave that is almost as massive.” 

By comparison, the current household formation group of Generation X, born between 1965 and 1979) is only 48 million strong. Is this then another reason for our present over abundance of properties for sale?  

“Millennials are an interesting generation. As the children of Baby Boomers, they are on the verge of becoming the major consumer force. As a group they are less well off than their parents were at the same age and despite being burdened by steep college loans, higher prices for everyday goods and an uncertain job market, they tend to be extremely confident, mobile and positive about their futures. The oldest Millennials have already begun to enter the home buying market - drawn by the perfect storm of historically low interest rates, attractive prices and the $8,000 first-time buyer tax credit”. 

We see the pent-up demand locally almost daily in our Real Estate career. Many Baby Boomers who no longer need the large home have hunkered down and put off retirement and moving plans because they have lost 40% of their 401(k)s and a large portion of their home equity. Generation Y couples who because of the economy are content with renting or living with parents until their careers are more certain. Gen X families who have outgrown their homes but have to delay moves because of uncertain employment. . “Eventually,” Dave states, “in four years or so, all of these groups will feel secure enough to take the next step.” Until then the market we have locally is our new normal. 

Liniger continues “In 4 or 5 years the older Boomers, for instance, will come to grips with their partial financial recoveries and begin to make the moves they have delayed. But instead of heading for Florida or Arizona, most of them – perhaps 85% - will downsize locally and stay closer to their children, grandchildren and friends. Interestingly, many will move into urban or new-urban condos within walking distance of restaurants, theaters and stores – the types of homes Gen Xers and Millennials will be leaving as they become parents.” I could not have said it better myself! 

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Ken has published hundreds of weekly articles in The Avon Lake Press and has taken the time to do this as a service to his community over the past few years. We hope you find these articles interesting.

01 - 10 Good Reasons to Buy a Home Now!
02 - 100% Satisfaction Guaranteed
03 - Accentuating the Positive
04 - Anybody Ready for a Second Home?
05 - Best Home Improvement Projects
06 - Buyers Should Have Home Inspections
07 - Buyers' Earnest Monies
08 - Choosing Which House to Purchase
09 - Comparing Apples to Apples!
10 - Cut Out the Middle Man
11 - Cyberspace is Cool
12 - Decided on a home to buy? Don't worry,
13 - Details! Details! Details!
14 - Do Not Pay Those Extra Real Estate Fees
15 - Do You Have Money to Burn?
16 - First Impressions Count!
17 - Foundation Problems
18 - Give The Contract to the "Highest" Bidder
19 - Have You Decided to Move Out?
20 - Home Maintenance Tips
21 - Home Maintenance Tips for Winter
22 - How Long Will it Take to Sell Your Home?
23 - How Does the Internet Help Sell Homes?
24 - How to Know a Certified Mold Inspector
25 - Six Reasons Your Home is Not Selling
26 - The Holidays are Warmer in Your Own Home
27 - The Importance of the Title Company
28 - Why Won't My Home Sell?
29 - You Have Accepted an Offer, Now What?
30 - You're Moving Into Your New Home-Finally!
31 - THE RECESSION IS OVER”, NOW WHAT? 

If there are any other topics that interest you, please feel free to contact us and we will be more than happy to send a recent article which covers that topic.