REALTORS Refloating the Housing Bubble

Why is it never the REALTORS’ fault when they can’t sell homes? After about a decade of feasting off of the housing bubble, one created largely through loose money and easy credit, REALTORS today are “struggling” to put deals together. Is it just that the housing bubble collapsed like the literal house of cards it was? Maybe that’s why today’s real estate leaders are complaining that it’s not their fault the recovery is stalled.

It’s all because of those “stingy” lenders. Somehow the REALTORS didn’t get the memo explaining that the reason the housing bubble popped was due to “over-generous” lending to buyers in the first place. The air was let out of the balloon because “un-stingy” lenders created an equity gap that couldn’t sustain a movement of only 1 percent on the average (adjustable) loan. Yet the “solution” – according to the REALTORS – is to forget all of the lessons learned and throw good money after the bad. Haven’t we been to this party before? Wasn’t it junk bonds, then subprime lending? Maybe the REALTORS just want to cut out the middle man and give the money out directly to buyers – through the “new finance miracle” of higher government backed mortgages. Then the market will return to “normal.”

Talk about wanting to have your cake and eat it too!

Everyone should be scared when they hear leaders (industry and political) saying things like:

A rebound in the housing market is being held back by stingy lending standards, the president-elect of the National Association of Realtors said Thursday. Irving real estate agent Charles McMillan – who takes over as head of the 1.3 million-member Realtors association later this year – faults mortgage companies for keeping some potential homebuyers out of the market.

This quote was from the May 8th Dallas News website and it reminds us of a certain kind of fuzzy math from some years ago. McMillan continued:

“What they have done is raise fees and make qualifications almost impossible for people to get loans,” he said. In particular, Mr. McMillan criticized the high costs of so-called jumbo loans – mortgages of $417,000 and more – that are chilling buyer demand in many markets. Interest rates on such mortgages now are much higher than those on smaller loans. And Mr. McMillan said that in some depressed housing markets lenders are raising costs even higher to homebuyers and making it tougher for them to qualify for loans. “That stigmatizes properties unfairly,” he said.

McMillan may be forgiven for using hyperbole in claiming that it’s almost impossible for people to get loans, since qualified buyers are buying homes just fine these days, and many at a fine discounted sales price. The association he will take the helm of, the National Association of REALTORS, said today that housing sales gained 12.5% in the Northeast, a sector particularly hard hit in the overall downturn, although other areas were still declining. Yet the leader of the real estate industry can’t possibly be arguing that lenders are wrong for “making it tougher for [buyers] to qualify for loans,” considering the errors of their former ways, can he? Does the National Association of REALTORS simply expect lenders to write-down billions and simply start doing it all over again?

Of course lenders are going to tighten standards and requirements. Not the least of which, they’re going to start verifying income and requiring substantial down payments – the tenets of sound lending practices that REALTORS should vigorously support as the foundation of homeownership. Anyone remember “building equity” as the reason for buying a home? But perhaps the real problem isn’t that McMillan and other are worried about tighter standards. The real issue can be found in his own statement: What REALTORS want is for lenders to more freely lend on jumbo mortgages. And the only reason to do that is to induce housing prices to rise again.

The REALTORS want to relaunch the housing bubble, back into the stratosphere.

Arguably, refloating the bubble is in the REALTORS’ best interests: it will help sell the homes of sellers who are upside-down in their equity stance by recreating artificial home prices (due to inflated lending). An uptick in pricing should induce buyers come off the “wait and see” sidelines, too. And let’s not forget that REALTORS – who are paid on commission – will make more money if house prices rise. None of which should we begrudge the REALTORS: it’s their business and they have mortgages to pay, too.

The trouble is, the lenders aren’t going to play along this time. They lost too much money in the last round to let price inflation take off again – especially in a fickle commodity like housing. Houses aren’t supposed to be “traded” by buyers and sellers – not, at least by the people who purchase them almost entirely on “margin” (that’s what a subprime buyer with no money down really is). Lenders are going to be very skeptical about appraisals, too – especially those adjusted for “market prices” that are derived from REALTOR MLS SYSTEMS. This isn’t to say that appraisers and the REALTORS “caused” lenders to get fast and loose by publishing crazy MLS data. The lenders willingly played along. However, the lender hangover is going to last much longer than REALTORS desire – especially as tighter standards hold up their next commission check.

The scariest part, though, is that REALTORS are actually hurting their professional image by playing the blame game. Plenty of homes are selling and plenty of buyers are buying. It’s up to the REALTORS to price homes properly and find qualified buyers. It is not up to lenders to turn marginal buyers into easy deals for REALTORS. It’s also disingenuous to all of the qualified buyers – especially those who purchased with a REALTORS’ help during the same period who did put down 20% – to argue for looser standards on higher loan limits (read: higher risk loans). Many buyers didn’t over-extend themselves by borrowing beyond their means and REALTORS should be careful to advocate that overextension is the solution to market woes.

Looser standards on government backed loans are just another reconfiguration of a housing disaster – one that continues to hurt the sound buyers and owners. What hurts housing prices isn’t lack of affordability – it’s a foreclosure on the same street as a buyer with 20% equity in his house who now can’t sell because this “market price” is driven down by a fire-sale next door.

Who do REALTORS think subsidize the cheaper standards for jumbo mortgages? Higher lending to marginal buyers causes rates to rise – for everyone. Government backed loans are bad for current owners because they increase the risk of failed borrowers in their own neighborhoods: That’s what brings down market price – not lack of buyers, but “failed” buyers whose homes go on “wholesale” and depress the neighborhood value. And let’s be honest: risky buyers with no-money down are financed by good buyers with only 10% down who have to pay for “insurance” that really spreads the risk caused by risky buyers in the first place.

There is no free lunch, not even for REALTORS. The “good” buyers who became today’s “good” owners are the ones who will finance the relaxed standards that REALTORS want to fuel their new housing balloon. Current homeowners will face higher costs to tap their equity (like for college tuitions), credit options lessened – because someone has to pay for lending to marginal buyers. And since the chickens always come home to roost, these homeowners will remember who was pushing for looser lending when it comes time to decide whether – or not – to hire a REALTOR to sell their home again in the future.