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Yes, I know that I am a commerical investment property sales broker, so why do I track the national housing market so closely? The answer is that this market has the most profound impact on our financial system, which affects our capital availability, which in turn affects our commercial real estate markets. Let’s look into this dynamic.The most recent housing bubble that we experienced has upended our financial system. History helps us to understand where we are today. Since 1970, there have been two other major housing bubbles, with peaks in 1979 and 1989.The most recent bubble started in 1997, ignited by rising houshold income which began in 1992 in concert with the 1997 elimination of taxes on residential capital gains up to $500,000. Investors are attracted to markets with rising values and the early stages of this cycle had this usual, self-reinforcing feature.The dot.com collapse, which created the recession beginning in 2001, could have ended the bubble but unusually expansionary monetary policy was implemented by the Fed to counteract the downturn. As the Fed increased liquidity, money naturally flowed into housing which was the fastest expanding sector. Both the Clinton and Bush adminestrations aggressively pursued the goal of expanding the homeownership rate. They encouraged Fannie Mae and Freddie Mac to purchase just about any mortgage in sight and lender’s credit standards eroded.Lenders and the investment banks that securitized the mortgages used ever increasing housing prices to justify loans to buyers with limited income and assets. Rating agencies accepted the supposition of ever increasing house prices and issued investment grade ratings which lured buyers for these securities from around the globe. Mortgage loan originations increased an average of 56% per year for three years – from $1.05 trillion in 2000 to almost $4 trillion in 2003! This trend continued.Home prices started to decline in late 2006. The latest Case-Schiller index, which tracks housing prices in 20 major metropolitian areas, fell by 19% for the three months ending January 31, 2009. This is a new record low for this index. Many of the buyers of houses in this bubble had far less than 19% equity in their homes, some with 3.5% or less. According to First American CoreLogic, 10.5 million households had negative or near negative equity in December of 2008.The result of all of this was: Bear Sterns, Merrill, Lehman, AIG, Fannie, Freddie, IndyMac, Countrywide and the dozens of other bank failures and general distress in our financial system. Government intervention we are seeing at every turn. The FDIC has asked for and received access to an additional $500 billion in government funds in anticipation of future needs.Not many people are talking aobut it but rising mortgage defaults could force the FHA to seek a taxpayer bailout for the first time in its 75 year history. The Obama administration will have to decide whether to ask Congress for taxpayer money or raise the premium it charges to borrowers. Roughly 7.5% of FHA loans were seriously delinquent at the end of February, up from 6.2% a year earlier. The FHA’s reserve fund fell to about 3% of its mortgage portfolio in the 2008 fiscal year down from 6.4% the prior year. By law it must remain above 2%. A strong FHA is essential for a recovery in housing.We have seen reports recently that the housing market has bottomed out. It is difficult to believe this is the case as we are not close to seeing unemployment peak, which will be critical for housing to bottom.The lack of equity in homes has greatly effected consumer confindence and consumer spending both of which effect corporate earnings which effects demand for office space, retail space and apartments. As housing prices stabilize and begin to rise, the wealth effect will be tangible and the downward spiral will reverse. Housing got us into this mess and housing must pull us out of it. Let’s hope it is sooner rather than later.

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