Aug 30
Recovering from the Real Estate Katrina
Once upon a time there was a great River that flowed unhindered from Northern Minnesota to the Gulf Of Mexico.
The River used to manage itself, and we lived in harmony with the Father of Waters. Flood plains were great for farming, so long as the farmers understood that occassionally their fields would flood. The River provided good transportation, so long as pilots understood the river would sometimes be too low to run, and full of snags and boulders to be avoided. Towns could flourish near the river, so long as townspeople understood they had to build on high ground.
But we wanted more.
So the Army Corps of Enginners created a series of locks, dams and levies to control the Old Man. Dams and locks created pools north of Cairo, IL to St. Paul, where even during drought, a constant depth of at least 9 feet could be maintained for boat and barge traffic. Levies enabled farmers and townspeople to encroach the River and live in flood plains, or even below sea level. Wetlands - nature's best flood and pollution control - were developed and all but disappeared.
The result? We've had 3 or 4 100-year floods since 1993. Safe to say the levies and dams turned the 100-year flood plain into a 10 or 20-year flood plain. Pollution has been a terrible problem, especially from farm runoff (though we've made great strides recently to improve this). Erosion has created a dead zone in the mouth at the Gulf of Mexico. Ultimately, our dependence on the River forced us to build more dams, levies and flood control devices. The more we tried to control the uncontrollable, the greater the catastrophic failure would be. 5 years ago, we saw what such a catastrophe might look like in the wake of Hurricane Katrina, and the failure of New Orleans river levies.
Was the bursting of the real estate bubble our industry's Katrina? In a sense, yes. I think the tax credit probably offered legitimate relief for a time to the industry; we had no "Brownie, this tax credit is doing one heck of a job, " moment that I can identify. But it wasn't a permanent solution; lobbying for another extension might be something akin to just sending in more FEMA trailers. Perhaps the real estate market is capable of correcting itself, and the list of unintended consequences in attempts to fix it may be long and scary.
But like the Mississippi, we've already done too much to simply let nature take its course at this point. Too many people live in the River's hinterland to simple remove the dams and levies. Likewise, millions of people have so much of their existence tied to real estate. I don't think we can simply stop enacting policy to help distressed property owners any more than we can stop maintaining dams. NAR will continue to lobby for tax credits and incentive programs as the Corps will continue to reinforce levies.
The keys will be in how we understand the natural forces of the market, and what we can and cannot control. We need to recognize the difference between a short-term solution, and sound, long-term policy and practice. Balancing the needs of the banks, homeowners, and REALTORS® will be a lot like balancing the needs of shipping, farming, environmentalism and residents who live near the river. There will be winners and losers, especially in the short term. Do we have the strength to withstand this flood?
This post is in part a response to Jay Thompson's blog post - http://www.phoenixrealestateguy.com/will-the-homebuyer-tax-credit-return
Thanks for your post. Rain drops and individual transactions are an assumed part of the equation. We can no more imagine a dry Mississippi River bed than we can the cessation of buying and selling homes on an open market.
But as I noted, the more we attempt to manipulate for our own benefit that which was never meant to be manipulated, the greater the catastrophe when natural cycles rage against our machine.
I also think we may have reached a point after years of manipulation where we can't just up and say, "That's it. We're just going to let nature take its course." Some have called for just this in real estate. I suspect the consequences would be pretty severe and probably not our best path at present.
That said, I am also in favor of showing much more restraint when enacting policy designed to stimulate artificial recovery. The invisible hand is always nearby.