Joel Dobson offers a market summary on political and corporate effects with regard to the US housing/mortgage market.
Looking at a multi-trillion dollar housing market and attempting to evaluate how to best assist the people at the end of the spectrum (those hit hardest by unfair and illegal practices as well as less scrupulous individuals), can become a bewildering task. That is, unless you can evaluate on a macro scale and break down various segments of responsibility and place them in the right order on the ladder to recovery.
During a speech in Virginia early in 2012, President Barack Obama relayed his views from his State of the Union address. Obama discussed the blueprint of what he wanted to amend in the US property economy: “American manufacturing, American energy, skills and education for American workers so that we can compete with anybody around the world in this 21st century economy.”
It was a positive outlook until he came to the housing bubble, which he claims is the single biggest drag on recovery from recession.
“A lack of building demand has kept hundreds of thousands of construction workers idle,” he said. “Everybody involved in the home building business – folks who make windows, folks who make carpets – they’ve all been impacted.”
Obama went on to outline his government’s housing recovery strategy, including the actions taken by the attorney general’s office, as well as various subsidy programs to ease the burden on home owners who are still ‘underwater’ on their mortgage versus property values. It is these owners who have stuck out the turbulent tide of repayments without the ability to refinance their mortgages.
Charting the Homeowners Bill of Rights was another consideration of action. This Bill will ensure finance providers state clear terms for consumers to adhere to before committing to a financial product.
There are many steps that have been outlaid and placed, with many more to follow, that will ensure that the US housing and financial services markets won’t face the same potential for risk and consequent meltdown.
Steps to allay the risks
- With millions of people owing more on their mortgages than their homes are worth, many are still waiting for the Obama Government to back the comments he made at Dobson High School in 2009. There was $75 billion intended for the individuals that were in uncontrollable circumstances. The impact of this and other measures taken by the Obama Government have been clearly documented. What is not clear is the projection of stimulus for the US market over the following months of 2013 and into 2014.
- New mortgage rules coming from the Dodd-Frank Act are designed to stabilise lending practices. This means stringent procedures will enforce harsh penalties on lenders that allow borrowers to attain funds they do not have the capacity to repay. This is a basic system that will enforce the greater control of outgoing funds. As such, there are restrictions placed on potentially toxic mortgages entering the market and having subsequent impacts.
- Nine state attorneys general recently petitioned the Obama Government to replace the current regulator of housing finance: Freddie Mac and Fannie Mae. The group are citing the lack of support that the acting director of the Federal Housing Finance Agency (FHFA) has not been able to significantly assist home owners. As such, the regulator needs to be replaced with a more assertive individual who can make greater inroads to easing the pain that home owners face. A settlement between the US Government and five major banks to the tune of $25 billion was an indicator that such easing on mortgage holders was possible – just not publicly agreeable with policy makers. As the Mae and Mac delegation back about two-thirds of US mortgages, and are chartered by the US Congress, the premise for the Obama Government is in most aspects a contradiction on what would otherwise be a tax payer-funded bailout of the mortgage debt. This is a position upheld by republicans opposed to most of Obama’s submissions for a housing market recovery.
- US housing market growth will allow the Obama Government to attain a greater standing on other monetary policy. The real hope here is to reduce household debt, thereby assisting the amount of disposable incomes for use in generating greater consumer spending in the US economy. This then has a follow-on effect in the controls of inflation as well as allowing positions of savings to be utilised by banks for other positions of leverage.
In March 2013, Peter J Wallison presented before the Senate committee on Banking, Housing and Urban Affairs on his proposal for housing reform. Wallison was instrumental in the Reagan administration with regard to the deregulation of the financial industry; the same proposals that led to the removal of the protection mechanisms of the financial ‘Shield’ that led to the mortgage-backed securities (MBS) issues.
Wallison discussed moving the housing market to a function where it would operate much like every other US industry, without direct government financial support. It would thereby be more strictly overseen by private enterprise. Any regulation by government on the mortgage industry would be on quality of assurance. Programs for low-income families would be within parameters of pre-set budgets and limit risk (where possible) to taxpayers as well as home owners. Finally, Government Sponsored Enterprise of Freddie Mac and Fannie Mae are dissolved. Many analysts and commentators agree with these directives, however they are cautious regarding the policy to underwrite any such strategy.
The HUD (Department of Housing and Urban Development) budget for 2013 has seen an increase this year of over $1.4 billion. The increases have largely been implemented to protect vulnerable families, revitalise distressed neighbourhoods, and stimulate the department to reduce ineffective programs and protocols, thereby reducing waste and timelines and allocating the newly freed up resources to other programs.
There are numerous other supporting elements to the greater US economy that will have a ‘trickle’ effect to easing the burden on the multi-trillion dollar housing market. A long standing issue in the world, and specifically the US, is the income tax structure. A common phrase in the political and now mainstream field is the Buffett Rule. This simple evaluation indicated that Warren Buffett was paying less on his income tax as an effective rate, than his secretary was.
In fact, most middle income earners in the US are paying a lot more per capita on their salaries than their richer counterparts. The wealthiest US citizens have been enjoying the lowest tax rates in nearly 50 years. The proposed changes to the tax system would see that the wealthiest persons would have significant limitations to what they can avoid in taxes via loopholes in tax rates. The Bush administration was infamous for looking after the top 1% of taxpayers and, as such, reflected the decade-long neglect that resulted in poor policy and improper practices that assisted in leading the US economy to one of the most dire financial points it had endured since the Great Depression.
US income taxes are spent in three main areas: national defence (almost 25% of every income tax dollar), health care and job/family security which include housing and food assistance programs. Community and regional development only equate to less than 0.5%. The allocation of taxes for social security and Medicare are comparable. These distributions – when assessed as a whole of the contribution from an income – are again almost a third of the gross outlay from a US citizen’s salary in an income band of less than $100,000.
Some quick math on the apportionments of supportive elements of levy placed on the average US worker sees a swift correlation between the allocations of support they’re outlaying and the rates of persons in need of assistance. What is required is a greater view across each state, and more broadly the federal government, in allocating more from the annual budget to reduce these expenditures and consequently support the population in attaining a more secure financial future for themselves and the economy as a whole.
More than US$7 trillion has been lost in home equity since the US housing bubble peak in 2005. Significant inroads have been made from multiple angles over the last eight years to ease this vast gap, however in realising that most of this gap was a hyper-inflated, and therefore unrealistic figure, a lot more needs to occur in order to remove the burden from one crippled and steadily recovering industry, and spread the impact to other sectors that will have greater appreciations to assist the US economy as a whole.