Recycled Movie Plots that Could Impact Your Real Estate Investments

I read an article in one of those trashy grocery market tabloids about a new movie planned for release early next year. The story revealed an exciting plot, but didn’t ruin the ending. It’s relative to the housing market and Real Estate investments, so I thought it relevant to this blog.

The plot goes something like this: Federal regulators release news that they will be changing some Freddie Mac and Fannie Mae guidelines to make it easier for prospective buyers to get mortgages.

As I read the article I thought, “Hasn’t this been done before?”

You probably remember that movie. Maybe you even saw it in theaters. The movie didn’t come out that long ago and it made headlines everywhere.

Oh, wait! That wasn’t a movie. It was real life.

If I remember correctly the ending was not very pretty. Millions lost their homes. Housing prices dropped through the floor. The global economy almost collapsed.

So why on earth would “more of the same” be proposed by anything but a Hollywood script?

Strong Housing Equals Strong Economy

I assume that anyone reading this (or with a pulse) knows that the economy and housing are not in great shape. The interdependent nature of these two markets hints to the ambition of the new regulatory changes.

When the economy is good, people have jobs and money. They pay their bills and save. As a result, they have the qualifications and means to buy houses. When more people qualify to buy property, demand goes up. When demand rises, so do prices. Higher prices lead to equity and confidence which results in a stronger economy. The housing market and the overall economy are an indiscernible chicken and egg.

The most recent regulatory changes are being instituted with hopes that banks will begin to more actively loan money. The changes ease the mortgage buy-back requirements for banks that sell notes to Fannie Mae and Freddie Mac. That includes everyone. According to their Freddie and Fannie, banks will be more likely to lend money to borrowers if they know they are less likely to be “on the hook” when a loan defaults.

On paper it makes a lot of sense. Regulators may be right, but what works on paper often gets shredded in the real world.

Lessons From the Past

Lesson 1: In 1999, Fannie Mae and Freddie Mack were encouraged by regulators to increase lending to higher-risk borrowers. They bought tons of loans that were less than AAA rated. The result was an historic rise in home ownership and a roaring economy – in the short term.

It took years before the full impact of these relaxed guidelines ended up smacking us all on the face. Hard.

Lesson 2: During the first decade of the 21st century, the Federal Reserve kept interest rates lower than they had been in years. As a result of the terrorist attacks of September 11, our economy took a big hit. The low interest rates incentivized millions to refinance their homes or buy new ones. People like us bought Real Estate investments. At the time the action seemed genius. The influx of money buoyed the economy and kept us out of a recession. On a down note, the increase in capital also led to a huge bubble.

Lesson 3: The First Time Home Buyer credit which was part of the 2009 Stimulus Package gave an incentive for more people to get into their own homes. If they qualified for a mortgage and met certain requirements, they could receive an $8000 tax credit toward the purchase of their home. This action boosted the housing market. Properties sold more quickly and at higher sales prices than prior to the incentive. It appeared that we might pull out of the housing downturn.

Unfortunately, this action like the others, was short sighted. We saw a temporary positive impact with no lasting results.

Say Goodbye to Hollywood

The government track record for successfully manipulating the housing market has been exceptional in the short term. Over time these manipulations seem to escalate a cyclical downturn, into a “jump off a cliff.”

We all want the economy to recover. I’d love to see some of my early Real Estate investments restored to the value of what I paid for them. I just don’t think the answer is encouraging more loans.

Maybe I’m a cynic, but I think we can all agree on one point. We’ve seen this movie before, and the ending isn’t pretty.