” I’ve been kicked around
Since I was born.
And now it’s all right. It’s OK.
And you may look the other way.
We can try to understand
The New York Times’ effect on man.”
Bee Gee’s Staying Alive
Getting the stop sign signal is really important to long-term success in driving… and real estate development.
A key component of rental demand is mortgage availability and preference or aversion to home ownership, so today I’m going to dive deeper into the availability question. Despite plenty of talk of their demise my bold prediction is: Fannie Mae and Freddie Mac will survive.
There are many who blame the whole sub-prime meltdown on Fannie and Freddie. Indeed the congressional commission responsible for doing a post-mortem on the sub-prime collapse fell predictably along party lines. In fact in my estimation the post-mortem based by political philosophy breaks down approximately like so:
Democrats: Wall Street did it.
Republicans: Government regulations (ergo Fannie and Freddie) are to blame.
Libertarians: The Fed did it. End the Fed.
Me: What about main street?
Why did the country have a group delusion that a mortgage set at 9% resting at 11% was a grand idea? The lack of clear answers and political bluster has led me to conclude that all contain elements of truth. Why does this matter to us here at BiggerPockets?
I am still trying to wrap my head around the scope of the renter nation. Is it just an ordinary phenomenon that will slightly alter the boom and bust cycle of multifamily? Is it an era…similar to when we moved from horse and buggies to model T’s? From a land yacht Lincoln Navigator to a Tesla?
In researching last weeks post I was stunned to learn of the household formation numbers. It is anticipated that 5.5 Million NEW households will be formed between now and 2016 with a full 70 percent expected to be RENTERS. Renter Nation hello!
So the ongoing question that will be of keen interest to econo-geeks like me is the key assumptions about continued availability of mortgage financing.
Even if those numbers bear out will they eventually want to become buyers? If so – and Fannie and Freddie are obliterated – what will fill the void? However consider my three reasons why Fannie and Freddie will NOT be voted off the island:
The 20 Best Books for Aspiring Real Estate Investors!
Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.
Reason #1. Will that Dog Hunt?
It’s not at all clear that is what’s going to happen. President Obama recently reiterated that he wants to end Fannie and Freddie in favor of a “private” scheme that seems to coincided with a bipartisan proposal. My immediate snarky responses is….hmmmmm let’s go sell Iceland and China more residential mortgage-backed bonds. I’ll bet they will loooove it.
As some of my friends in the south say: That dog just won’t hunt! Maybe I am wrong, but it seems to me demand for this product from an investor standpoint would be tepid at best. Pure assertion on my behalf but it does it appeal to you? New improved residential mortgage-backed bonds…” No they are great THIS time….we mean it. Really, the are!!!”
Reason #2 Fear
Fear of the unknown can be a mighty powerful force to maintain any status quo. Indeed, according to a CNN article in 2006 only 30 percent of all mortgages were backed by Fannie and Freddie where all government backed mortgages was a stunning 86 percent of all loans originated. The recovery seems to be real but slooooow. Are we really going to risk major disruptions to the mortgage market?
Reason #3. No Clear Political Will in Washington to End the GSE’s
To me, the true canary in the coal mine for the political motive for home-ownership is the mortgage interest tax deduction. Follow this thread:
- IF they ever decided to act like adults in Washington and pass some much-needed tax reform
- IF that reform happens to scale back or eliminate the mortgage interest tax deduction watch
- Then watch out Fannie And Freddie your next.
My gut tells me this is not gonna happen. Further, it seems to me the bank and real estate lobby in Washington combined don’t seem to have a lot to gain by a major change in the status quo.
What do you think? Are Fannie and Freddie zombies? To me the risk of changing the system will win out and Fannie and Freddie will be dancing like John Travolta to the tune of the Bee’s Gee’s “Stayin Alive”.
Photo Credit: Nukamari