It’s Déjà vu All Over Again in Housing

By nature economies and markets are cyclical, and the housing market clearly illustrates this point. Demand and rising prices create pressures on builders and developers to respond with more housing, and at some point there is an oversupply and prices and the market collapse. When lenders begin to loosen standards to increase profits from more home buying and refinancing it aggravates and even speeds up the inevitable cyclical collapse.
Over the past 30 years the government has become an increasingly larger influence on housing markets with hundreds or thousands of laws and regulations not only for housing but very much for bankers and lenders. It’s a bipartisan effort to curry favor with voters by stimulating the housing market to increase job growth and run up prices and activity. Lenders respond to government pressure by throwing sound lending practices out the window. The market cycles become more volatile and the booms and bust more damaging.
Post-crash, in 2008 and beyond, we saw hundreds of media reports of how a major factor in the market collapse was lax lending standards. Lenders issued mortgages to people who couldn’t afford them or the homes they were buying. Hindsight is rarely practiced by government, and it seems that we’re now seeing pressure from the Obama administration on lenders to again lower lending standards and lend money to more people to stimulate the economy.
Despite the need for taxpayer bailouts for Fannie Mae and Freddie Mac, the administration is pushing borrowers to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs like those offered by the FHA, Federal Housing Administration. The implied threat of audits is pressure on bankers to respond with lower lending standards for more people. If they acquiesce, they are rewarded with government backing to allay their fear of losses.
Leading up to the 2014 mid-term elections there will be a lot of this kind of pressure placed on lenders in order to get a bump in housing statistics to benefit incumbents. Another boom/bust cycle is in play, and it will play out much the same as in the past. Real estate investors should be cautious in their use of leverage, as it’s not fun to be stuck with properties that don’t cash flow.