This week it was difficult to focus on saving Small Town America because there were more urgent items on the agenda, namely the Minnesota Twins. Last weekend my brother and I said good bye to our season tickets seats we have passionately enjoyed for nine seasons, only to have the season extended in one of the most dramatic games I have ever seen this past Tuesday night. The two girls and I (wife not home) will be watching tonight to see if they can even the series with the Yankees. Let's Go Twins!
Enjoy the game and this week's news:
- There is a lot of housing-related news this week starting with this article in the Economist. While the tone of the article is upbeat, it is essentially so because the analysis indicates we are getting closer to the bottom, although we are not there yet and there is a lot of volatility yet to be expected.
On average house prices in rich countries rise for around six years by around 50%, before falling for five years by 24%. But this time around, the boom was twice as long and prices rose by more than twice as much as during past upturns. The IMF argues that although house prices have already fallen by 20%-close to the historical average–“there could still be significant corrections to come”. This conclusion will not please those hoping for a sharp recovery.
- Locally here in Central Minnesota, home sales are down and the median price of those sales are also down. After the standard real estate agent quote expressing wishful thinking, this article illuminates the support system that has kept housing prices from falling further in the near-term:
The $8,000 first-time home buyer’s tax credit has made an impact in the market, Elwell and Banaian said.
Elwell said the real estate industry is now entering its slow season, which traditionally runs from October to February. But he said Congress might extend the first-time home buyer’s tax credit, and says that could impact the market.
- And Congress is indeed looking to extend the tax credit. Contrary to feedback we received on STB.com last week, this is another way in that the federal government has worked to artificially prop up home prices. This paragraph from the article ends with a quote by Senate Majority Leader Harry Reid attesting to this goal, and the lobbying and politics that surround it:
Keeping the home-buyers credit and broadening it has been a priority for real estate agents and the home builders lobbies, and for Mr. Reid, who faces a tough re-election race next year in a state that has been among the hardest hit by the housing crisis since mid-2007. In a statement after the White House meeting, Mr. Reid said the government should “continue efforts to strengthen the housing market by extending the home-buyer tax credit.”
- So do we have a free market in housing? Or, more importantly, does the current price of housing reflect market conditions or have the prices been distorted - perhaps significantly - by government intervention? The CATO Institute blames the planning profession, which it actually ascribes more power and influence to planners than what is actual reality.
...local factors, not national policies, were a necessary condition for the housing bubbles where they took place. The most important factor that distinguishes states like California and Florida from states like Georgia and Texas is the amount of regulation imposed on landowners and developers, and in particular a regulatory system known as growth management.
- Whether CATO is correct or not, there can be little dispute that the Federal Housing Administration (FHA), which insures mortgages for high-risk borrowers, has been part of the federal approach to an "ownership society" that, by artificially increasing the number of potential home buyers, has artificially driven up the cost of housing. FHA has had to scale back and may have to scale back even more if things turn from bad to worse and their default rate climbs over already historic levels. It is a scaffolding of subsidy that runs the risk of turning into a disastrous negative feedback loop that destroys home prices. From the article (emphasis added):
“Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, F.H.A. will not need to ask Congress and the American taxpayer for extraordinary assistance — we will not need a bailout,” [FHA Commissioner] Mr. Stevens said in his testimony.
- And if you think it can't happen, that we can't over-subsidize, overbuild and over-extend ourselves into collapse, just take a look at Detroit. While there are many complexities to the situation there that make simple analysis somewhat questionable, at the end of the day there is a greater supply of homes than there is demand. At that basic level, the rest of the country is trending towards Detroit, not away.
- A tremendous amount of wealth is locked up in baby-boom retirement savings. Instead of helping the housing situation, this wealth concentration is likely to make it worse. The $10 trillion boomers collectively have is not going to be put into the market but instead into conservative instruments (such as government debt) that will allow that wealth to slowly decline in the twilight of the boomer years. Since a great deal of boomer wealth is also locked up in housing, and people are loath (or unable) to take a loss on their housing - particularly when they believe we may prop the price back up - we may collectively be in for the long slow decline.
- Just a final word on those boomers: Will they be moving to the cities? Will they be moving to our small towns? Possibly, but I think the larger question is whether or not they will be moving at all.
- One thing is sure and that is that my team is moving. From the Metrodome to Target Field beginning next season. As my brother Brent and I move from Section 114, Row 7 (which is the front row, you betcha), Seats 1 & 2 to Section 204, Row 1, Seats 7 & 8, I can't help but feel a little nostalgic about the old Dome.
- And as one of my all-time favorite Twins Torii Hunter said, the Dome may be a bad place for baseball, but a lot of great baseball was played in the Dome. Seems like we are not quite done yet and so hopefully next Friday I can write a little more about my favorite team.