Before we begin I am going to ask that all of you do as I did when sitting down to write this article: clear your mind of political affiliation/bias, and look at the facts as objectively as possible. Whether you are a fan of President Barrack Obama, or absolutely loathe him, is neither here nor there: he is going to be around for four more years, and only through objectivity can we be truly prepared.
No, I am not talking about an apocalypse, though the media is making the impending “fiscal cliff” just that! I am merely talking about what homeowners should expect to see in the housing market during Obama’s second term.
Let us begin by discussing presidential second terms, and the resounding lack of success that has generally been had during them. Whether by bad luck or bad policy, the pattern proves almost indisputable: since the 1960s second terms have been cursed! If we have to pick a starting point for the pattern, then Lyndon Johnson would be it. Poor LBJ’s second term left him with a legacy of failure, stemming from the Vietnam War, our first major defeat of the 20th century.
Next up to bat was Richard Nixon in the 1970’s. For Ole Dick Nixon, failure wasn’t enough… he endured public humiliation through the Watergate scandal, and ultimately resigned from office.
In the 1980’s we had Ronald Reagan, who despite having a decent second term (presiding over a housing boom) had to go get mixed up in the Iran-Contra affair. While that was rough, it wasn’t as bad as the affair in which our next president partook.
Yep, you guessed it! Bill Clinton is our next stop on the terrible term train. While I don’t think I need to even say it, his impeachment due to an extra-marital affair represents a shameful chapter in our nation’s second term history.
Last but not least George W. Bush brought the curse fully into the 21st century with the beginning of the housing market crash.
While there were second term presidents prior LBJ, the only one who truly had a strong run was Franklin Roosevelt. Having the great depression on his hands and an inevitable war beckoning us into Europe, FDR still managed to usher in a sense of resiliency and damage control that our nation desperately need.
Although the circumstances are not nearly as dire, Obama coincidentally finds himself in a situation similar to FDR. Will Obama’s policies and plans be the New “New Deal” that we’re all hoping for?
To answer this question let’s go further into the rabbit hole and do some digging of our own!
Reflecting on the past four years, and how Obama handled the economic crisis that unfolded before him, is necessary for us to gain insight into what he believes is the underlying problem.
So what has he done? When the economy began its freefall what was his plan of attack? While I am not a rocket scientist (yet) it is clear to me that he believed the problem to be a business related problem. He sprung into action, bailing out the “Big” banks to the tune of $700 billion, in an effort to provide liquidity, keep the banking system intact, and increase retention in the employment sector. A bold move, but a decision had to be made and so it was.
His plan to rectify the situation was to focus on business and the economy, expecting that the housing market would follow suit; however quite the contrary was true. The big banks regained their footing quickly, and the housing market remained in a dismal state.
When this dichotomy was realized, Obama again sprung into action and launched several programs directed at the housing market. The largest of which, the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP), both had a marginal impact on the damage done to the market. Again, I am not pointing fingers. In fact I would go so far as to say that both programs had great intentions, but the underlying issue is twofold: 1. Homeowners couldn’t truly afford the homes that they had purchased.
2. Properties were grossly over-encumbered, and were no longer worth what was owed on them.
The major focus of the programs Obama put into action was centered on the first problem (affordability) and not the second (negative equity).
Furthermore the programs fell short in the implementation phase. There was, and still is, too much “wiggle room” for the banks to use to circumvent helping homeowners.
As of now, a lot of the kinks have been worked out in the programs, yet the unaddressed issue of home value still lingers. Evidence of this issue is represented by the $689 billion in negative equity reported during the second quarter of this year.
In addition to the programs Obama has introduced, he has also supported quantitative easing efforts (holding the federal funds rate to an all time low in an effort to stimulate buying and increase lending).
Historically, holding the interest rates down does stimulate the housing market; however there are many that believe this type of interest rate manipulation is exactly what put us in this mess to begin with.
So what can we homeowners expect going forward? Surprisingly, the housing market was one of the least discussed topics by the Obama camp; however several telling statements were made. The most poignant of these statements was that the Obama administration believes HARP was very successful, and will be expanding it. This statement reaffirms their position that affordability is the issue, not the negative equity.
They have also announced and proceeded with allowing Fannie Mae to begin auctioning off REO properties (foreclosed properties, which are currently being held vacant). Again this is an affirmation of the administrations lack of concern for home values, as the discounted bulk sales will push home values further down.
Another plan currently being worked on is to turn foreclosed properties, currently sitting on the government’s books, into rental housing (again neglecting value and focusing on affordability).
While we do not know much more about Obama’s plan to help the housing market recover, we do have one other piece of information that speaks volumes about his confidence in the market: he supports The Federal Reserve’s plan to keep interest rates low. If Obama was confident that the housing market was healthy he would be lobbying for the adjustment of interest rates; as holding them down too long increases the risk of inflation.
So the take-away from all this is that with one hand Obama is pushing for affordability in the housing market, while with the other hand he is trying stimulate demand. What will the result be? Likely, a maintenance of the status quo. I would be surprised if we didn’t bounce around this bottom without any major swings for the next four years. That being said, if they flood the market with REO properties or make lending more accessible we could see a swing downward or upward, respectively.
The play for the next four years is simply to do what’s best for you. If your mortgage is more than your property is worth, get out while you can still take advantage of the debt forgiveness act. If you’re planning to buy property, get in there at today’s interest rates. If you have equity, consider cashing out by selling or refinancing and picking up a nicer/larger/more comfortable piece of property at today’s prices.
Please leave your thoughts/comments below, I would love to hear what everyone’s predictions are!