October 1, 2009 — A year ago today, Lehman Brothers had just filed for bankruptcy, AIG had just been bailed out by the fed (introducing the notion of “too big to fail”) and Fannie Mae and Freddie Mac were “rescued” with enormous cash infusions from the government. Countrywide Savings was gobbled up by Bank of America and Washington Mutual was absorbed by J.P Morgan. Hot new buzz-words echoed through the media — subprime, housing crisis, credit crisis, derivatives, credit default swaps or CDR’s, bailouts, too-big-to-fail, meltdown and Meredith Whitney (banking analyst who gained prominence by accurately predicting the subprime crisis.) Jim Cramer, television personality and stock market analyst, recommended people pull everything out of the stock market that they might need in the next five years, and all real estate sales activity throughout the entire USA pretty much just ground to a halt.
Today, a year later, the stock market has retraced roughly 50% from the lows it eventually found in March of this year, and real estate activity, though still seriously curtailed, is none-the-less beginning to show signs of life. Today’s headline says that 30-year mortgage rates are at a one-year low. Another headline from Reuters reads, “Pending Home Sales Surge; Construction Spending Also Up.” Case-Shiller’s monthly report released September 29 shows that the annual rate of home price decline was “less bad” (another new buzz word.)
So what has happened in this one year interim? In a word – bailouts – massive governmental infusions of billions of dollars into financial institutions at risk of collapse, followed by billions more in economic stimulus injections. And the bailout/stimulus approach has not been just a U.S. phenomenon; the U.K. and Europe, China, Russia, India, Canada, Australia, and other nations world-wide have all engaged in opening the floodgates. To combat the lagging housing market, the government raised FHA (government guaranteed) loan limits and provided a tax credit for first time buyers. There are government efforts to forestall foreclosures at national, state and local levels. Banks in California for example cannot foreclose on a mortgage until they either renegotiate the borrower’s loan or else give the borrower three months notice. There has also been debate about the so-called “cramdown” legislation which would force banks to forgive billions in outstanding consumer debt in an effort to reduce foreclosures.
This is not to minimize the challenges that remain to the real estate market. Unemployment is pushing double digits and this continues to shrink the buyer pool. Meanwhile, for buyers purchasing in price ranges beyond the FHA limits, tighter credit guidelines require higher incomes for buyers to qualify as well as larger down payments, further squeezing the buyer pool. An $8000 first time buyer tax credit is set to expire November 30th unless legislation extends it. And Meredith Whitney remains on the buzz-word list with dire warnings that more bank failures are on the way and that the credit crisis is still in full swing.
But buyers are out there and some of them are in fact buying! Perhaps some are buying just for expedient purposes. Others may believe that that the housing market has bottomed and that now is the time to take advantage. Or they may want to grab today’s artificially low interest rates which will surely be a thing of the past in time.
Other savvy buyer may see that beyond historically low rates and a bottoming market, that real estate has value because land is in fact a hard asset. Like gold, silver, and oil, land is finite in supply. If such assets are valued in dollars, and if, all things being equal, the value of the dollar decreases, then the value of such hard assets increases. Most economists agree that the federal reserve’s monetary policy of increasing money supply to bail out financial institutions and to stimulate the economy will eventually cause inflation. If the value of the dollar goes down as a result, the hard assets pegged to the dollar should go up. Real estate may be destined to become the single best hedge against the immanent inflation that is certain to be an economic signature of the next decade.
In the words of Will Rogers (American folk humorist, 1879-1935), “Buy land – they ain’t making any more of it!”