All Change In Real Estate?

Lost amid the euphoric scenes coming to us from the Egypt was today’s release by the government of its suggestions for change in the structure of US housing policy. It seems that big changes lie ahead for the US housing market, with many of the results of those changes very uncertain.

The primary basic thrust is to reduce the roll of government in the market while beefing up regulation and setting standards for securitization, foreclosure, and underwriting to limit future recurrences of the recent debacle. The headline in all this is the the government is proposing to eliminate the twin towers of the old regime: Fannie Mae, and Freddie Mac are to go. These two organizations are now massive players in the market for mortgages so their reduction and then elimination will have to play out over a decade or more. Nonetheless the goal is to privatize the mortgage market. Depending on which of the three options proposed in the report that market will be almost entirely handed over to private capital, with only the original low income support function of the FHA remaining intact.

Another key goal of the changes is to limit the possibility of huge future taxpayer involvement in the mortgage market. The report makes clear that private capital should bear the brunt of any repeat of the recent crisis. Each of the three options has a different backstop roll for the government, but in all three there is a concerted effort to reduce the moral hazard embedded in the existing policy set up.

But perhaps the most radical change is the implicit shift in thinking: housing policy is no longer simply a question of encouraging maximum home ownership, the rental market needs sprucing up and support as well. Indeed the report devotes some space to the need to attract moire capital into multi-family rental housing to provide better options for the low income families who were teased into home ownership and who are most deeply affected by the shenanigans of the unscrupulous lenders behind the bubble. There’s even talk of getting rid of the mortgage interest tax credit to reduce the skew in national investment that long standing government support of home ownership has induced. This shift away from public support and encouragement of home ownership is a complete sea change in US policy and runs counter to the post war premiss that home ownership is the ultimate goal for the average family. Renting is now to be an equal partner.

What all this means is unclear. Plus there will no doubt be contentious debates ahead. Already some conservatives have waded in and called the report a fudge. They advocate, naturally, an even more restricted roll for government. Plus, given the ongoing fragility of the housing market no one wants to rush – except the libertarian wing of the GOP – but one thing is clear: the US housing market, the construction industry, the lenders, and its regulators are going to be put through a dramatic change.

My guess?

More expensive mortgages, especially for higher priced homes. Lower house prices, than otherwise, so gains from current levels will be limited. A shift towards renting rather than owning, or rather, a better mix of the two. Wall Street domination of the mortgage market. The abolition of the tax credit -which is really only welfare for the middle class. And more options for financing. Oh, and much, much, more fine print to wade through. That means higher legal and other transaction fees.

None of this is soon. But it’s on its way.