Warning: RE Industry will be Harmed if Bailout is Backed by Us
URGENT INDUSTRY MESSAGE
REALonomics continues to take a position that the natural market cycles should dictate the recovery and that government sponsored bail out attempts will create additional long term issues and actually stall a real recovery.
Although many in the industry favor federal intervention we are hard pressed to find anyone setting forth specific rationale for doing so. We hear a lot of emotion but not much sound economic reasoning based upon our industry’s historical commitment to traditional capitalism as the driving force behind real estate home ownership.
Wachovia was snatched up by CitiGroup just days ago. According to the FDIC’s website, there have been 40 bank failures since 2000 and NONE of them…yes, that’s right…none of them was bailed out by taxpayers. At iVoteAmerica.com there are predictions of more bank mergers over the next several business days.
Failing banks will continue to be absorbed just as ALL of them have been absorbed to date. After all, the best investment good banks can make today is to purchase assets of failing banks for pennies on the dollar and delivering huge internal rates of return to themselves. Therefore, patience is called for and we ought not to allow ourselves to be influenced by knee-jerk politicians from either party. Forget the election for a moment! Forget your favorite party preference for a moment!
Yesterday, September 29, 2008, the stock market lost more than $1 trillion in value. REALonomics predicts that investors will surface, shifting their investment strategies to more conservative, traditional positions.
NAR is Wrong on Rescue Package
Furthermore, REALonomics believes that the endorsement of the bailout by the National Association of Realtors (NAR) is a dead wrong endorsement and a clear indicator of NAR’s desperation with the housing market and its departure from the traditional approach to real property investment where true equity was a necessity to home ownership.
Our core value has always been home ownership as the primary investment for individuals and families. Behind this core value we have heretofore (prior to subprime lending) advised our clients to utilize conservative strategies when purchasing a home, including establishing and NEVER compromising their equity position. Have we decided as an industry that this is bad advice and adopted a dangerous borrow-to-the-hilt value system?
Some of you will remember the days when we encouraged homeowners to build “true” lasting equity that they could rely on when it came time to retire. The home was a person’s primary savings and investment account. I have a question for the RE industry; “Have we decided to depart from this core value position?”
Danger, Danger and More Danger to Owners
What about real estate company owners, our favorite topic? If the bailout occurs with a massive amount of taxpayer dollars used to rescue the so called “toxic mortgages” most real estate company owners will be effectively out of business within a short time as home values will likely plummet to pre 2001 levels. The toxic loans will be discounted to unprecedented levels, impacting literally every property value in metro markets.
If a rescue occurs, all property values in the United States will immediately decline. In fact, the financial institutions are already cutting HELOCs and credit card amounts in a desperate attempt to ratchet the market downward.
If the rescue occurs as currently outline by the Senate and voted down by the House, the ability for the average American buyer to access available real estate investment capital will diminish the market by perhaps another 50%. Although REALonomics is not attempting to inject hysteria into an already highly charged situation, we believe it is important that Realtors® have a clear understanding of the potential long term risks of a bailout by taxpayers.
Just Plain Old Bad Business and Bad Policy
The rescue of bad loans is simply bad real estate business and bad real estate business is bad for the real estate industry and bad for real estate company owners.
Let the market fix itself. The market will repair itself and the results will be less painful than allowing the bailout to prevail. The fact is…actually, the truth is, we are going to be harmed. The only question is how much pain are we going to allow to be inflicted upon the industry?
If we do not allow the market to heal itself and we adopt a taxpayer bailout mentality we will be adopting a fundamental shift in the historical values espoused by the real estate industry and to a large degree we will have socialized real estate, diminishing the value of all Realtors® and the industry itself. Such a shift in policy will create a huge potential for government oversight of the real estate industry and create transaction liabilities for broker/owners, franchisors and let’s not forget appraisers and mortgage lenders.
We encourage you to think deeply upon these things.
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I disagree.State the facts that lead you to this conclusion. This is not a bailout. Assetts are bought and will be held and sold later after the economics have stabilized. Without the bailout the panic would have been worse. Also where do you see 8 out of 10 Realtors oppose this plan?
John, thanks for comment and the question. The “assets” being purchased with tax payer money are actually referred to as “toxic loans;” the worst loans in the market. These will be purchased at huge discounts, and sold at discounts, thus lowering the value of properties in those areas where the mortgages are in place. This harms the property values of those properties where the owners are not delinquent and thus the industry. The bill was also laden with added pork spending programs to the tune of millions and millions of our dollars. As for the 8 of 10 in opposition, we base this upon our specific emails that come to us regarding this bailout program and the communications we have with our readership. We receive a lot of communication that is not visible on the site through our other ventures as well. REALonomics understands that there are differing opinions regarding the role of the federal government in private sector mortgage lending and we respect them all. As you will see following the bill, the Feds now want to federalize many banks by actually owning a part of them. This entire affair is a huge game-changer for the industry because it will impact the latitude of private sector money and how it is allowed to be used in mortgage lending. Thanks again and please, keep commenting, even when you don’t agree. We are not always right in our opinions and we actually hope we are wrong on this one! - REALonomics