Seizures, Bailouts, and Hurricanes
September was a crazy month in the real estate market!
First, Fannie and Freddie were seized and people did not know where this left them in the mortgage process. Then, we had a hurricane which shut down everything--and altered the value of many local properties both positively and negatively. Next, an impending catastrophic event was announced by the Fed. This emergency was summarily dispensed by our congress who worked tirelessly to pass legislation that will undoubtedly create liquidity in the credit markets (there’s a little sarcasm in that last sentence in case you didn’t notice it).
How will all of this look going forward? Let’s discuss the Houston area post-Ike situation first--it is the most positive. Here, there is at least a silver-lining. We will see economic activity due to the reconstruction necessary for our area. This will be financed primarily by insurance claims and Federal grants, etc. Being one of the only major markets in the nation with this type of activity during a nation-wide recession will certainly give us a sense of momentum when everyone else recovers. Once again, Houston should be somewhat insulated from what ails everyone else. I believe the performance of our local officials will not go unnoticed by corporations looking to relocate. The real estate markets here will continue to suffer due to bleed-over from national news and economic affects. However, we should continue to be stable relative to the rest of the nation.
Now that we have covered the good news, let’s discuss the bailout plan. There are a few outcomes which I hope do not happen due to the plan passed by congress last week. Yet, I believe they are going to be inevitable. I am not an economist, nor a soothsayer--just someone who has seen the government do this type of thing before. In any case, I have been wrong many times, there is no reason why this post should prove me to be infallible.
Somehow, immediately after the presidential campaign, the sky will suddenly turn blue. Congressional leaders will reassure us they are at the helm and our economy is great. Your neighbor next door will disagree, but what do they know? Really, people are trying to get re-elected here--no need to listen to that type of negativism this far from the next primary.
Additionally, congress will find it wise to remove the ‘mark-to-market’ rule or suspend it. This rule is the reason most of the large banks have suddenly had liquidity problems--they had to value their mortgage portfolios at the value of the underlying collateral (homes), rather than the outstanding principle owed by mortgage holders. Since property values have decreased, the bank’s asset base did so as well. The Fed will begin buying these distressed loans, but will need to make a profit (remember, people need to get re-elected). Therefore, the easiest way to do this is to remove mark-to-market and voila, we have increased value in the Federal mortgage portfolio overnight. Never mind all the money everyone lost before the Fed saw the wisdom of suspending the rule. That happened during the last administration, right?
The credit markets will loosen and the word ‘sub-prime’ will be replaced with a more palatable one. Not all at once mind you, but slowly like before. The ‘Community Reinvestment Act’ has not gone away. Banks will continue to receive pressure from congress to lend to people who don’t qualify and the FHA guys and gals will be right there reassuring them they will be covered by the government just as before. I would be really surprised if buying bad loans is not somehow tied to issuing new ones--maybe I’m being pessimistic here.
The housing market will rebound. Of course, this would have happened anyway, but we would have had to wait on ‘market forces’ to work their way through the system and learn a few painful, yet valuable lessons--who needs all that?
I could be wrong about the preceding points. As stated earlier, I’ve been wrong before and certainly will be again. Some things you can just count on, like when government officials say, ‘It is likely that if we do this correctly, then we could see a profit from our actions today.’
So where does this leave the Houston/Cypress real estate market? As stated earlier, due to Ike and a few other characteristics unique to Houston, we should continue to see moderate activity in our area. People will still buy and sell homes here. Financing should be more readily accessible to us due to the strength of our local economy. Simply make certain you choose a high-quality Realtor® who is a local market expert.