When it comes to bailing out giant banks, huge companies and massive stock brokerages there's no shortage of government interest and activity. After all, it's in our national interest to protect investors — unless, of course, they're folks who merely bought a house or two.
The investor double-standard is hardly hidden. It appears everywhere and is never challenged, as if real estate investors are somehow disposable players in the foreclosure mess.
Alan S. Blinder, a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve, could not be more clear: He suggests that the government should develop a federal program to buy out mortgages from lenders, just as it did during the Depression — to “refinance only owner-occupied residences. Speculators can fend for themselves — or go into default.” (See: From the New Deal, a Way Out of a Mess, The New York Times, Feb. 23, 2008.)
Our Secretary of the Treasury, Henry Paulson, says “as our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures. However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud during the mortgage process. These efforts are to help American families who both want to and can, through a loan modification or re-financing, stay in their homes.”
Introducing the Hope Now program in 2007, President Bush said “we've got a role, the government has got a role to play — but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”
Why is someone who invests in real estate a “speculator” while corporations that lose billions of dollars hedging mortgage-based securities can count on the Federal Reserve to reduce short-term interest rates to bail them out?
The idea that we can pick and choose among borrowers with toxic loans produces several false notions.
- Misconception No. 1: If we only make owner-occupants whole then local real estate markets will recover. This is untrue. Why? Because investor properties lost to foreclosure will continue to flood the market, driving down all home values.
- Misconception No. 2: It's not a public policy problem if large numbers of real estate investors fail; they should have known better. This also is untrue. Why? Because when buyers look at recent home sales they do not distinguish between homes sold by owners and homes sold by investors, they merely look at sale prices.
- Misconception No. 3: Real estate investors who fail are universally frauds and thieves. Mr. Paulson equates real estate investors with those who commit fraud, an outrageous comparison. When Mr. Paulson worked on Wall Street and earned millions of dollars, did he once say that those who invested in stocks and bonds were also swindlers?
Who Is A Real Estate Investor?
Economists believe there are four basic sources of wealth: land, labor, capital and entrepreneurial ability. There's no shortage of seminars, books and tapes which explain in glowing detail how you too can become rich with real estate, even if you lack experience, cash or credit. While program developers always have success stories to share, they never say what percentage of their readers, attendees or listeners actually become rich. The reason, of course, is that the real money is not in real estate, it's in seminars, books and tapes.
But get-rich-quick plans aside, real estate has been a major source of personal wealth for many people. Long-term holders of real estate have commonly benefited from property prices which have increased faster over time than the rate of inflation, thus creating increased buying power and real wealth. According to the National Association of Realtors, the median price of an existing home rose from $124,800 in 1998 to $201,100 as of January 2008.
It's not just individuals who benefit from real estate investing, it's also local communities.
The Census Bureau says that at the end of 2007 there were 128 million housing units in the U.S. These units can be divided into two categories, the 75.2 million that were owner-occupied and the 52.8 million that were not. In the latter group we have second homes and investment property.
Imagine the cost of housing if we discouraged real estate investment. Does anyone seriously think that the government would — or could — step in to create the housing stock required to replace millions of investor-owner units?
The value and importance of investment real estate is obvious and overt: In many communities there's a homestead deduction for owner-occupants but not for identical properties owned by investors. In other words, investors commonly pay higher tax rates than homeowners for properties that are exactly alike. Does it make sense to drive away those additional tax dollars by discouraging investment?
Lenders, of course, gleefully finance investor properties with higher rates and tougher qualification standards than they require from owner-occupants. They would not make such loans if they produced ongoing losses, and they surely would not originate such mortgages without proper underwriting and appraisals.
Government policies encourage the purchase of investment real estate by allowing investors to depreciate property over time; engage in tax-deferred exchanges; and deduct mortgage interest, property taxes, insurance and repairs. In many cases small investors can write off paper losses against ordinary income.
According to the National Association of Realtors, existing home values in January 2008 were down 4.6 percent from a year earlier. No less important, unit sales declined 23.4 percent during the same period.
Given the enormous fall in home sales, would it not be smart to encourage investors to enter the marketplace, absorb inventory and increase the number of buyers looking for properties? Alternatively, if unit sales continue to plummet, does anyone doubt that home values will follow?
The exclusion of investors from government programs needs to be reconsidered. Saving investors from foreclosure would keep additional properties off the market, thus reducing inventories and perhaps returning home values to normal more quickly than would otherwise be possible,” said James J. Saccacio, chief executive officer of online foreclosure marketplace RealtyTrac. “In addition, we should encourage investors to enter the marketplace to absorb as much inventory as possible. By increasing the pool of potential buyers there would be less pressure to reduce home prices."
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.