Is Housing Policy Working?
This post first appeared in the June edition of: Cirios Trends Special Edition: Mid-Year Review – Will Housing Slide Again?
From WhiteHouse.gov: “President Obama’s programs to prevent foreclosures will help bolster home prices.”
Reams have been written, and will continue to be, about the wisdom of our country’s current housing policy, and whether unintended consequences of these efforts will ultimately do more harm than good. This is not a partisan discussion, as Obama’s housing policy is a continuation of the Bush Administration’s loan modification and foreclosure prevention efforts.
For now, we’ll leave the debate over effective policy to those more concerned with rhetoric than us. Rather, let’s examine whether these policies, however flawed (or not flawed), have achieved their stated goal of propping up home prices.
Despite the historic declines of the past four years, US median home prices have retraced to almost exactly the long term trend. Looking at the graph below, you can see that as prices started to recover last year, they hugged the trend like a stranded sailor to a life raft.
Indeed, recent declines have pushed back through the trend, but on the surface it appears that government efforts have largely achieved the goal of staunching the bleeding. When we last showed this graph in March 2008, prices were in freefall. It seemed like no one was buying, everyone was selling and the market would never stop unraveling.
But as we learned at the beginning of this newsletter, those are precisely the times that bold buyers can step in and reap huge profits.
As we discussed last year, government housing relief programs have tried to generate a “soft landing,” preventing the market from over-correcting and going down so far it would take years to recover.
Now, as a second round of price declines is underway, there continue to be concerns about a policy that may have simply delayed the inevitable.
Another aspect of housing policy with more mixed results has been foreclosure mitigation efforts. Loan modifications have been, until recently, the centerpiece of programs aimed at limiting
repossessions. Success has been muted, as default levels continue to be higher than expected and lenders remain reticent to grant meaningful principal reductions.
The Administration has now turned to short sales (selling a home for less than is owed on the mortgage) as the latest strategy to keep struggling homeowners in their homes. And while short sales on paper sound like a win-win for everyone, in reality they are messy, red-tape laden transactions.
The housing market is central to the President’s belief that through policy, government can coax the economy back to health. To success of these programs, not their relative merit on a philosophical level, is what really matters to those who want to make good real estate decisions.