If you ask this question to Congress or the current administration the answer will be up for the real estate market. Everything is going to be fine…just keep paying your mortgage. Call your local realtor and “buy buy buy” a house is the mantra. In their mind there is no better time than the present. Let’s get serious and be real. The current state of housing needs a historical comparison for you to really understand how to proceed. I am going to provide this to you. If you call a local realtor they are not necessarily going to be in a position to communicate this to you. Many of them need to sell you a house regardless of the market conditions and many of them were probably home watching Big Bird and the Sesame Street Gang in the early 1990’s.

Where are we in this crisis? Let’s travel back to 1990-94 to the Savings & Loan Crisis and draw a parallel as it pertains to markets. In the early 90’s we had a massive crisis with the banks. Banks were taken over left and right and the loans and properties all ended up in a big bin called the RTC or Resolution Trust Corp. The government cut construction lines to builders in spite of their contractual obligations. If Uncle Sam took your bank over your contacts were null and void and your loan was now due in full. It was a real “like it or lump it” event with the government. I witnessed this with my own eyes and had real clients that lost millions. If asked to reflect back on individual government acts that I witnessed I would have to say that I saw communism at work in America. To draw a parallel to today’s crisis what did I really witness?

It’s simple. Today the crisis in real estate and mortgages is being managed by the government. The process is being drawn out over time. Back in the early 90’s the government took a different approach. They saw the risk to the economy and they took aggressive action to address the problem. They were determined to force the market to clear and deal with the problem banks and properties quickly. Chicken Little did come in the early 90’s and I saw properties, both commercial and residential along with unfinished communities and land, going for fire sale prices of ten –fifteen cents on the dollar. The government was in charge and on a mission. The market was being forced to clear by the government. The weak banks were being dissolved by the RTC and the properties were being forced into stronger hands. It was extreme but a very healthy process. This is much different that we have today.

What do we have today? We have a managed crisis. We are four years into the crisis with no end in site. Supply and demand is way out of whack. There are millions of homeowners underwater and thousands of homes in REO vaults within the banks and GSE’s. Makes you want to run out and buy a house doesn’t it. On top of that demand is being hurt by tight lending parameters. The banks are scared to lend. Can you blame them? The market is stagnating and prices are slowly sagging. This is what happens when the market does not clear. Why would a lender want to lend on a property that may end up underwater or as a foreclosure or short sale 18 months out? On this note, I just spoke with a 2010 client this morning that mentioned that the people that bought his house are now seeking a short sale. The risk is high and it is unwise to trust an artificially government supported market. The government wants the banks to lend but if they do not allow the market to clear and become healthy they are creating a derivative level of risk in my opinion. Its not self serving and I don’t understand why or who benefits.

Let me give you another example of the government’s wishes so you don’t think I am making a political argument to serve my self interest.

Let’s look at the new HARP refinance program. This is an add on to the old one in the past two years that is now going to encourage people to refinance regardless of the loan to value. If you owe 300% more on your property then current value, but it meets the general criteria and you have a job, then you can lower the cost of your debt burden. Sounds great doesn’t it? What about all the mortgage debt that the homeowner has well above current market value? How long it is going to take for someone to see that they will never get out of this debt burden? The debt has to be dealt with or the market will not be healthy. The government wants to keep people in the clutches of moral character and keep them in the homes paying regardless of the debt. This is the exact opposite of the S & L Crisis of the 1990’s. We have had many recent inquiries from potential new clients for short sale’s that have gone through the previous HARP program only to say “how the hell am I ever going to get out of this”

The effect on real estate values will be a draw out gradual sagging of values. People in denial will be able to stay in denial. The neighbor renting across the street paying $1500 in rent will face off against the homeowner with the same house paying twice as much with several hundred in personally debt liability over their heads. The cycle will continue until the debt is dealt with.

I believe the government belief is that once the economy gains better traction that the housing market will get pulled up in a vacuum. This is flawed and I do not believe this can happened due to the extreme levels of debt. Although it is equally flawed to forgive trillions of debt for homeowners across the board because this would wipe out your secondary mortgage market investor base, the current do nothing manage the crisis is also unhealthy. The only answer is to reflect back on history and force the market to clear. Drive the delinquent properties to workout with short sales or foreclosures and put them in stronger hands. The S & L Crisis took four years but the pain wasn’t that bad. The longer we wait for the ultimate clearing of the debt the harder and more painful it is going to be.

Having said all of this, I think you would be foolish to go out and buy a property today. Watch the headlines for unemployment and assess the mortgage lending climate. These will be early clues for a potential turn to the positive. Let the watershed moment occur when the market is forced to clear by virtue of the thousands of underwater owners capitulating their over price debt burden properties. This will overwhelm the government’s management strategy and move us closer to a healthy real estate market down the road.

There are recent voices saying that there is a 50% chance that FHA will need a bailout. This is an example of the derivative level of risk that is being piled on that I am talking about. It’s going to get a lot worse if the crisis continues to be managed. Let it happen and then go shopping for a property you want to own. The people that followed this plan in the S & L Crisis made out so be patient. Properties are still overpriced and if you’re smart you won’t get taken by the siren songs of the realtors and the government. It’s not ok. Housing has structural problems that are not being fixed with Obama’s band-aid. That’s the problem and my solution is let the market clear.

Yes, I am advocating kicking the people out of their homes and foreclosure or workout of the debt through short sale. It’s inevitable. True capitalism has winners and losers. That is what makes our country so great. A loser today can learn from their mistakes and be ambitious so they can be a winner tomorrow. A managed crisis will not provide this opportunity in my opinion and this process is important for the financial health and prosperity for every one of us.

As a parting thought, if you’re stuck underwater in a property get educated or contact my team for a short sale at www.thengotiatedsolution.com . Avoid foreclosure and mitigate the debt with a short sale. Drop kick the bad situation and start over without the unnecessary step of going broke in the process. Good Luck.

Blogging from the front line of the housing crisis.

GHunter

Submitted on Wednesday, November 16th, 2011 at 11:17 am