Free Market Lends Federal Housing Stimulus a Hand

Economic experts overwhelmingly agree that before the United States financial crisis finally comes to an end, declining housing values must be halted so that real estate will once again provide adequate security for lenders to make loans comfortably. The prospect of imminent declines in housing prices has continuously inhibited banks from making loans as the increasing fear of borrower defaults, coupled with the steadily diminishing value of the properties that serve as security for loans, has caused banks to lend less freely and keep credit woefully tight. Prospective home buyers are also prevented from purchasing as the fear of their new home dropping in value immediately after closing escrow keeps them on the fence. Consequently, the United States Federal Government dedicated the expenditure of over a trillion dollars for the housing and financial industries in early 2009 with hopes of steadying home prices and thereby loosening the credit markets. So with over a trillion reasons for housing values to stabilize, how could the widely heralded and respected S&P/Case-Shiller National Home Price index report that the home price slide actually accelerated in early 2009 by declining an additional 20% when compared to early 2008? The simple answer is that while well-intentioned, the federal government’s efforts to aid housing were often misdirected and ineffective.

For example, the foreclosure hiatus coordinated by many lenders and federal authorities in early 2009 served to only delay a large waive of foreclosures from hitting the market. This postponement of pain only served to backlog the nation’s housing inventory and increase the supply of homes on the market – which eventually caused prices to decline further. The federal government had hoped to prevent these foreclosures from ever occurring by releasing new federally sponsored loan modification programs at the outset of the foreclosure hiatus. Unfortunately, these loan modification programs have been ineffective as relatively few borrowers have attempted to modify their loans, and many who did try complained that the qualification process was difficult in light of the stringent qualification standards and the decreased values of their homes. The federal government’s efforts to increase consumer demand have fortuitously been more effective than its attempts at controlling housing supply. Various departments of the U.S. government have coordinated their efforts to keep mortgage interest rates artificially low by purchasing billions of dollars worth of mortgage-backed securities. In addition, many home buyers have taken advantage of recently enacted federal and state tax incentives and lending regulations for purchasers of new homes.

Fortunately, the free market has come to the aid of the government’s housing stimulus efforts despite the bevy of recent media depictions of capitalist open markets as unregulated criminal havens where only sin and greed run amuck. A combination of low home prices and the diligent efforts of REALTORS™ across the nation in advising their clients about ever-changing housing values, markets, regulations and financing programs have caused a significant increase in U.S. home sales throughout early 2009. The National Association of REALTORS™ reported in June of 2009 that its’ Pending Home Sales Index, a widely cited indicator of housing sales based upon the number of sales in escrow or under contract, rose by 6.7% in May of 2009 and has shown steady increases for the past three months. In Califo
ia, where much of the housing crisis was initiated and most severe, the Califo
ia Association of REALTORS™ reported in May of 2009 that the median price of an existing home actually rose for two consecutive months and that home sales increased by an impressive 49% compared to the year prior.

Despite how encouraging these recent statistics may seem, recent reports of continuous national housing price declines prove that even though minor battles are being won by boosting consumer housing demand, we are still losing ground in the war by letting the supply of homes for sale continue to outpace demand’s advances. If the U.S. government is fortunate enough to have retained the trust of the U.S. voting citizens and is again authorized to expend federal funds to remedy our economic crisis, the infusion of these funds must be performed efficiently, effectively and quickly.

The focus of future government stimulus should undertake the task of reducing the supply of housing inventory, and should therefore be concentrated on effectively preventing further foreclosures from re-occurring in a cyclical fashion. This cyclical foreclosure cycle always keeps supply teasingly ahead of demand, gradually reducing median housing prices as each foreclosure is put back on the market for sale at a bargain price. In order to accomplish this feat, federal funds must be used to reimburse banks specifically for reducing the principal loan balances of borrowers across the country. This undertaking would virtually halt the foreclosure cycle in its tracks, correct bank balance sheets, and get borrowers’ heads back above water – all the while costing less taxpayer dollars than the shotgun-approach to fiscal stimulus that has been wholly ineffective at stabilizing housing prices and the economy thus far.