Achieving Market Sustainability

The economic news the day after Thanksgiving is just as somber as the news was the day before the holiday. While the financial markets seesaw with every statement our political leaders make, the real estate market continues to suffer regardless of who is speaking. Real estate has three distinct challenges to overcome before equilibrium returns to the marketplace. In order to have sustainability in the market, all three of these challenges will have to be addressed and solved.

The first problem is the home mortgage crises. Contrary to what some of our elected representatives have said, only a small part of the problem was caused by unscrupulous lenders, mortgage or real estate brokers. For nearly twenty years, the elected representatives of both parties pushed the idea of home ownership for all. Though political contributions by the real estate and banking industries were part of the reason for this enthusiasm, much of that policy was brought on by politicians believing that home ownership was the birthright for all.

Rather than providing government help such as below market rate mortgages for the sub-prime market, Washington DC urged, threatened and cajoled the private financial industry to provide mortgages to poor credit risks. Cheaper priced homes became in demand because of easily obtained mortgages resulting in price escalation in that sector and subsequently every other sector. Homeowners, who a generation ago strove to pay off their mortgages, now refinanced yearly taking advantage of falling rates and perceived accumulated equity in those homes. Homes were no longer thought of as a place to live and raise a family but became commodities just as gold or platinum.

Home prices fueled by abundant and cheap money provided by Wall Street’s exotic financing instruments were now caught in an inflationary spiral. Homeowners became investors and bought homes not to live in or even to rent but to sell at a profit within weeks or months of purchase. The homebuilding and construction industry responded by building more homes for these investors to purchase which resulted in the second problem — oversupply.

As new homes were being built to meet this demand of investor market exuberance, many real estate professional investors saw where this was heading and began to sit out the market. Neither the population nor their incomes were increasing as much as prices and availability. As more and more buyers were forced into more and more exotic mortgages in order to afford to buy homes at ever inflationary prices, there was less wiggle room in the family budget. A job loss, sickness or a simple home repair became enough to send some into missed mortgage payments and foreclosure.

With oversupply of housing and inadequate income to meet existing obligations, home prices have fallen, credit markets won’t lend due to losses, and fear of further economic erosion have frozen the home market. This has caused credit and financial markets to become unstable. A recession that has gripped the entire world has resulted in the third problem of the real estate industry — the commercial vacancy problem.

When the economy goes into recession businesses need less space. This retraction causes vacancies resulting in a weakening of the commercial real estate market. The good news for that market is that unlike the home market there was no overbuilding, and therefore, oversupply is less of an issue. Unlike the last several recessions, this one did not have as one of its causes too many office buildings being built. As the nation emerges from recession, the commercial market should find equilibrium rather quickly.

Until all three of these problems are solved, the real estate market will continue to experience severe problems. But to solve these problems our political leaders must understand the problems. Our world is too complex to have the same hackneyed phrases and promises offered to us as have been offered in the past. It is imperative that our leaders surround themselves with experts and then listen to their advice even when it is advice they do not want to hear.

Not everyone can obtain the American dream of wealth and success, and home ownership is not for everyone. What our government should be striving for is giving every American an opportunity to achieve success not guaranteeing the achievement of that success.