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Jim Scott
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Slouching Down the Road

There have been fifteen straight months of home price increases in San Diego, according to the respected Case-Schiller Index. Even so, improving prices have failed to inspire either consumers or employers as evidenced by sales figures for 2010. They have been lackluster thus far and will likely end the year close to the 2009 numbers. It should be more of the same next year.

The country has always depended on rising housing demand to jump-start economic growth; in the past, employment gains and a rising GDP have been closely linked to new and used home sales. This time around the recovery paradigm has shifted. Beginning with the first oil embargo in 1973, enthusiasm for San Diego real estate has been driven more by greed than utility. Homes evolved into commodities that were perfect inflation hedges and foils for cable TV get-rich-quick hucksters. The post-recovery market ahead will be characterized by stable prices and very modest appreciation rates, perhaps only a point or two over inflation. Tom Vu will need to get a day job.

Although prices have been relatively stable for the past year, there is much work to be done given the legions of owners on private and public life support. Real estate exists in a world of selective de-leveraging and patchwork subsidization. Federal and state intervention has kept the depression wolf at the door, but this cannot go on forever. Banks are propping up the market by delaying foreclosures and hanging on to their seizures; this is both good politics and economics but there must be an end-game. At some future point free market forces have to bring order to the marketplace.

The new Congress and the Administration need to establish a clear path to the final resolution by answering two questions. First, did the various rescue plans achieve any real benefit to the citizenry? Tax credits and other incentives were at best a temporary fix. Like the popular “cash for clunkers” program in the car industry, the recent spring rally was nothing more than consumers time-shifting purchases. I am not convinced these expired Federal and State incentive programs accomplished anything. Low interest rates, even though there is inflation risk, have achieved the most for relatively little cost. Governments enacted a series of formal and informal efforts to keep failing debtors in their houses. These programs have not produced any significant results. Mortgage modification programs, a good idea, have been spectacular failures, foundering on the dysfunctional relationship between bank regulators and lenders. This is a problem Congress and the Fed can fix.

Second, are there other effective approaches to solving the problem? The election process should provide meaningful debate on the issue but I am probably being hopelessly naïve to think that may occur. No office-seeker will probably want to touch this tar baby. To effectively wind down this housing recession without destroying the economy, either troubled property owners or their lenders will have to walk the plank. The current policy of benign postponement has been good politics but has not solved the problem.

I do not believe our current political process will be capable of finding a solution. Politicians, bent only on jockeying for power, will have little interest in trying to solve this thorny and intractable issue. Real solutions will create angry single-issue constituents, fueled by our 24-hour news cycle world. Trying to work in the narrow middle ground on this issue is probably a one-way ticket to political exile. Both parties will engage in dysfunctional governing, spending most of their effort framing the battleground issues for 2012. It makes far more sense to ignore this morass.

All is not lost. Money is cheap and will remain so until at least 2014. Homes are still bought and sold, only with a new set of rules and problems. Sellers need to adjust their price expectations and recognize there is no appreciation bonanza waiting around the bend no matter how great the weather is here. Buyers should cease looking for the perfect deal and buy a property that they like and suits their lifestyle and budget. Prices are not likely to collapse and the odds are San Diego prices will continue to creep upwards. Money has never been so cheap. Banks will cleverly manage their stashes of foreclosures and prudently dribble them out to enhance returns and please their minders. Mr. Bernanke will keep the price of short-term money near zero and is now jawboning about pushing down long- term rates. If the Fed decides to initiate another round of purchases of long-term Treasuries, look for fixed rate conforming loans to go below four percent. The Board's inflation hawks are on the run.

The culture's New Frugality will extend to real estate. The conflict between bank regulations and non-performing loans will not be resolved in the near future as everyone has some stake in keeping ‘extend and pretend’ going. Renting and defaulting have become an acceptable middle class lifestyle. Homeowners will have to stop complaining about flat real estate values and consider that the past three years were not an aberration but the beginning of a long process of de-leveraging debt and equity. Those of us still left with a mortgaged roof can take comfort in low payments and knowing that over the longer term, surviving is winning.


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