Wall Street Journal
By Daniel Goldstein
April 16, 2014
After what seemed like months if not years of waiting, Re/Max real-estate agent Chris Kershisnik's cellphone is starting to ring again.
"There are plenty of buyers in the market now and there's not much holding them back," says Kershisnik, 34, who works out of Germantown, Maryland, a suburb of Washington, D.C.
The numbers bear this out. According to RealtyTrac, which keeps tabs on the U.S. real estate market, there were 4.8 million home sales in 2013, up nearly 25% from the depths of the real estate crash in 2010, when just 3.8 million homes were sold. And while more than one million U.S. homes are in foreclosure, that figure is down 23% from a year ago.
But home sales aren't the only thing making a comeback. Years after the 2008 crash wiped out more than $3.4 trillion in real estate wealth, some are wondering if it's time once again for policymakers to foster home buying as a way to build middle-class and minority wealth and cure many societal ills. Is it time to bring back "The Ownership Society?"
The answer, experts seem to agree, is a definite maybe.
While the term "Ownership Society" has been generally attributed to President George W. Bush, who said in June 2004, "if you own something, you have a vital stake in the future of our country," the goal of greater homeownership was widely seen as a bipartisan good by many presidential administrations.
"The initial efforts were noble," says Henry Cisneros, who served as President Bill Clinton's Secretary of Housing and Urban Development during Clinton's first term. "It was the right thing to do."
Cisneros points to the postwar housing boom in the late 1940s and early 1950s that helped drive the consensus that the "American Dream" meant owning a single-family home in the suburbs. But for many minority and inner-city residents it was just that, a dream -- a fantasy in fact, Cisneros says. "When the Clinton administration got into office in 1993, the home ownership rate among whites was 62 percent. For minorities it was just 42 percent. Our goal was find a new on-ramp to narrow the gap."
What followed, says Cisneros, was a "perfect storm" of two decades worth of bad policy, bad lending decisions by banks and the Federal Reserve, and bad decisions by consumers to enter into the "Ownership Society" before they were educated and ready.
By the height of the crash, the on-ramp had become a one-way exit off a fiscal cliff. According to RealtyTrac, more than 14% of the loans that originated in 2005 were in active foreclosure. Twenty percent of the loans originated in 2006 were in foreclosure, and 18% of loans made in 2007 were in foreclosure.
"If you could fog a mirror, you could get a mortgage," says Steve Brown, president of the National Association of Realtors. Too many homeowners were short-term investors, he said. "In the 1950s you weren't looking to flip a house, you were looking to raise children and hold backyard barbecues."
For Cisneros, who now serves as executive chairman of CityView, a Los Angeles-based real estate development company that focuses on creating affordable housing for middle-income families, its critical that policy makers get beyond finger-pointing for the 2008 housing market crash.
"It's much more complex than bickering over whether it was the fault of Wall Street or the Community Reinvestment Act" he says.
Indeed, the Obama administration has indicated its continued support for building families' wealth through home ownership. In January at a conference in Tacoma, Washington, HUD Secretary Shawn Donovan said "homes are the foundation of our lives and where we raise our families. He added that owning a home "helps families build wealth, start businesses and put their kids through college."
Cisneros says in order to jump-start a new ownership society, banks and mortgage lenders need to go back to basics.
"We ought to know whether people can pay the loan before we make or resell the loan," says Cisneros, who also serves as Chairman of the Bipartisan Policy Center's Housing Commission in Washington, D.C. "Back before the crash, it didn't matter what was in the (loans), the underlying goal at that time was 'just get more of it.'"
If the first step toward recovery is for banks to make loans, and not repackage them to sell elsewhere, then the second lesson is making sure consumers are much more educated, says Alfred DelliBovi, who served as deputy HUD Secretary under Jack Kemp during the first Bush administration.
"People still don't understand the bundle of risks they are getting into," DelliBovi says, adding that home buyers need to be counseled in-depth on mortgages before they assume the debt, not afterward when they are under threat of default and foreclosure.
DelliBovi, who recently worked at the Federal Home Loan Bank of New York, also started a program that educates low-income buyers on mortgages. "We would do about eight to ten nights in a classroom atmosphere," he says. "We had about 10,000 success stories with a default rate of less than half a percent." Those attendees also had a bonus for attending. "We would match savings up to $7,500 at the closing table."
To DelliBovi, it's critical for banks and other mortgage lenders to treat interest as their income, and not focus so much on generating origination fees. "Holding the loan for just long enough to generate fees and repackaging the loan after three months isn't having skin in the game," he says.
And HUD's Donovan says a mortgage market that's 80% backed by government entities like Fannie Mae and Freddie Mac is "unsustainable." Private capital, he said in January, "should be at the center of the system,"
Brown, the president of the National Association of Realtors, agrees that the solutions have to be supply-side driven. "We have to have a flow of private capital into Fannie Mae and Freddie Mac. Mortgage credit is just too tight," he said. Brown said stronger job growth is needed as well to boost wages.
That's especially true for Hispanics and Latinos in the U.S., according to Enrique Lopezlira, senior policy analyst for the National Council of La Raza, a Latino advocacy group. "Finding somebody in the Latino community with a FICO score of 720 and 20% to put down on a house just isn't us," he says. Still, home ownership going forward for Hispanics will be critical, he says, as it is the key wealth-building asset for the community.
The National Council of La Raza also says for home ownership to work, loan products have to be simple, and include the 30-year fixed mortgage, which Lopezlira says is still the best product out there.
Back in Germantown, Maryland, Re/Max's Chris Kershisnik is struggling with a unique dilemma. He has buyers, but a shortage of inventory. The metro Washington market has about 1,000 fewer homes available today than a year ago.
Kershisnik attributes that to nervous sellers who are unwilling to assume more debt in a "move-up" home or worry they may not qualify for a new mortgage under tighter lending standards. And although Kershisnik makes his living selling homes and supports the idea of an "ownership society," he's realistic about what ownership really means.
"The ownership society means ownership, not indentured servitude as a result of debt," he says." Freedom is gained when you own something, not when you are mortgaged."