It was six years ago last month that the median selling price of a county home reached the highest point ever recorded at $521,000. It’s been downhill from there.
Last month the county’s median selling price was $256,000. Looking back six years ago, most of us in the housing industry knew we were long overdue for a correction. We were expecting a gentle settling. A little hot air escaping from an over-inflated market was perceived as good for the long-term health of the housing market. What actually happened to property values was more in line with the trajectory of the Sutter’s Mill meteorite that exploded over Coloma on April 22. No one anticipated the 50 percent decline in property values and this despite all the federal and state efforts to prevent the very housing meltdown we actually experienced.
Over the last six years both our federal and state governments have adopted a plethora of housing policies that were intended to stop the free fall of property values, prevent or curtail foreclosures, stimulate new construction and encourage home sales. The results have been disappointing at best and a colossal failure and waste of money at worst. The lessons learned over the last six years should be a wake-up call to those who believe government can solve every social or economic issue.
Interest rates have been a traditional vehicle to stimulate the economy and the housing industry. Policies adopted by the Federal Reserve, which controls our money supply, will increase or lower the mortgage interest rates. During inflationary cycles the Fed will increase rates and during recessionary times the Fed will lower the rates. Since 80 percent of all home purchases are depended on mortgage financing, home sales are rate sensitive. As an example, the monthly principal and interest payment on a $300,000 mortgage at 4 percent is $1,431 and at 6 percent is $1,800. The higher the interest rate the fewer buyers will be able to qualify for a loan.
Six years ago the interest rate for a 30-year fixed rate loans was running at 6.5 percent. That rate seems high today with current rates less than 4 percent but the 6.5 interest back then was substantially lower than the previous 30 year average of 8.2 percent. Interest rates have been steadily declining, an attempt by the Fed to stop the hemorrhaging of the housing market and stimulate the economy. Despite the low rates and ample money supply, housing values have continued their steady decline.
Throwing money at a problem has been a well-used tool by governments attempting to solve a problem. And so in October of 2008 Congress approved the $700 billion bailout “Troubled Asset Relief Program” (TARP) where 327 financial firms received nearly $200 billion. The final tally for the bailout of Fannie Mae and Freddie Mac is not yet known but he Congressional Budget Office says the real cost of the federal government guaranteeing the business of failed mortgage giants is $317 billion.
Federal and state tax policies have been another tool used to stimulate economic growth and the housing market. As an example, homeownership is considered a worthy national goal and so housing receives special tax treatment. Having an income in California in excess of $250,000 is not and therefore, according to Gov. Brown’s millionaire tax initiative, deserves to be taxed at a higher rate. So how did tax manipulation work?
The 2009-10 federal homebuyer tax credit was passed by Congress to jump-start the housing market. First-time homebuyers were eligible for up to $8,000 in federal tax credits and repeat buyers up to $6,500. California followed suit in an effort to stimulate new home sales and construction activity in 2010 and approved a $10,000 tax credit for homebuyers who purchased new homes. So how successful was the tax policy in jump-starting new construction or propping up home values? Not at all. Perhaps a few builders sold some standing inventory but no new construction jobs were created and the housing market got progressively worse.
In its efforts to stem the rising tide of foreclosures the Obama administration identified the real culprit of the foreclosure phenomenon as the loan. Perhaps they discounted the other possibilities like the recession with millions of borrowers losing their jobs or the borrowers who lied on their loan applications. The real problem was the loan and subsequently all that was required was to simply refinance the loan and that would be the end of all this nonsense.
Since 2009 the government has spent billions of taxpayer dollars for loan modifications and special programs designed to keep borrowers in their homes. The results have been underwhelming. Half of all loan modifications fail in the first six months. Many loan programs are so narrow in their qualification that few qualify.
California’s approach to the foreclosure issue was to blame the banks. It was their fault for making the loans in the first place. Their punishment from lawmakers would be increased foreclosure regulations that prevented or delayed lenders from foreclosing on delinquent borrowers.
Over the last six years we have witnessed extraordinary measures by government to prevent, mitigate or resurrect the housing market. The results have been underwhelming. There will be some who say it wasn’t enough and some who say the problem was too big to be solved by government intervention. But six years ago last month housing values peaked and the next month started their long decline.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website at kencalhoon.com.