The Tycoon Report

Will the Obama Policies Help or Hurt the Real Estate Market?

Friday, November 14, 2008 | Ethan Roberts

Now that a new President has been elected, the question becomes what kind of changes are we likely to see and how will the policies of the new Administration shape the different economic markets. Today I will examine the possible Obama effects upon the real estate market. Specifically, I am raising the question: Will Obama help or hurt the real estate market?

Most recently, in predictable fashion, the President of the National Association of Realtors (NAR), Charles McMillan, had this to say about the Obama victory:

"Realtors are excited by this historic election and stand ready to work with our new President and the new Congress on issues that are at the heart of the American dream of home ownership."
Ho hum, what else would you expect NAR to say? No matter who won, their statement would have been identical. Let's face it, they purposely say nothing controversial, not wishing to rock the boat in any way. In fact, the Realtors Political Action Committee (RPAC) routinely gives funding to both parties, so as not to offend anyone who could eventually be deciding on issues that are germane to NAR's well being. RPAC spends millions of dollars in campaign contributions on both the national and local levels.

According to a recent article in the Daily Real Estate News, the Obama Administration and the new Congress will quickly focus on regulatory reform of the financial services industry. The main thrust of the focus will be on "proper regulation of mortgage-and other asset-backed securities." Of course Fannie Mae and Freddie Mac, currently under the long arm of the government, will be scrutinized as well.

Talk about the foxes guarding the hen house!!! 

In 2004, when the emerging troubles at Fannie Mae were brought before Congress and regulation was sought, it was the Democrats who vociferously defended Fannie Mae and attacked Republican congressmen like Richard Baker (R-Louisiana) and Ed Royce (R-California) who were pleading for some sort of regulation. For example, Rep. Maxine Waters (D-California) said at the time:

"...We do not have a crisis at Freddie Mac and in particular not at Fannie Mae, under the outstanding leadership of Mr. Frank Raines."   
Thank you, Ms. Waters, for your inspiring words. But isn't that the same Franklin Raines who accepted early retirement from his CEO post at Fannie Mae while investigators from the S.E.C. were looking into alleged accounting irregularities? The same Franklin Raines who was accused by the Office of Federal Housing Enterprise Oversight (OFHEO) of shifting accounting losses so senior executives, such as himself, could earn enormous bonuses? The same Franklin Raines who had to return millions of dollars in a civil lawsuit settlement with OFHEO? 

So where is Franklin Raines today? Well, in July 2008, the Washington Post reported that Raines was giving Barack Obama advice on mortgage and housing policy matters! Having served in both the Clinton and Carter administrations, it would be no surprise to see him land a role in the new administration. Can you say, the "Peter Principle"?
 
Gregory Meeks (D-New York) and others also defended Fannie Mae and Freddie Mac, and harshly attacked Armando Falcon, the director of OFHEO, who dared to question the policies of those two companies.  And then there's Barney Frank (D-Massachusetts), who undoubtedly will have a major role in the Obama Administration, who had this to say to the OFHEO representatives:

"I don't see anything in your report (about Fannie Mae and Freddie Mac) that raises safety and soundness problems." 

Maybe Congressman Frank was too busy counting his campaign contributions to notice any problems with those companies whose campaign contributions were supporting him.

On the other hand, Christopher Shays (R-Connecticut) had this to say:

"I'm tempted to ask how many people in this room are on the payroll of Fannie Mae? Because what they do is they basically hire every lobbyist they can possibly hire, they hire some people to lobby and they hire some people to not lobby so that the opposition can't hire them."

If all this seems hard to believe, simply run a search on www.youtube.com for "Fannie Mae, Freddie Mac congressional hearings, 2004". Watch the actual videos of the hearings and see for yourself what happened.

Are we to trust these same people to regulate these agencies again? Did you know that the securities and investment industry, including Fannie Mae and Freddie Mac, contributed close to $10 million to Obama's campaign?

Now before you blast me for being biased against the Democrats, let me assure you that had it been the other way around with Republicans zealously defending Fannie and Freddie, I would be questioning their ability to regulate these companies going forward as well. 

Also, let me add that it was during the Clinton Administration when the law regarding taxation on the sale of one's primary residence was changed for the better, allowing homeowners to sell their home after only two years in residence without paying capital gains taxes (up to $250k for single individuals, up to $500K for married persons). 

This was an outstanding change to the confusing and punitive laws enacted previously, and one which has allowed hundreds of thousands of families to make larger down payments in order to afford to move up to nicer homes. I applauded Clinton then, and would do so again today.


Another highly probable change in the Obama Administration will be the raising of the capital gains tax, most likely from the current 15% to 20% or more. This will have a negative impact on real estate investment trusts (REITs), as well as private real estate investors, particularly those who buy real estate as long-term rentals. Those who are considering selling an investment property, (and who have a buyer lined up) might want to think about selling before the end of 2008 to take advantage of the current capital gains rate.

I am also wondering about the effects on the real estate brokerages when tax increases on small businesses earning over $250,000 per year are enacted by the Obama Administration. If and when the real estate industry begins to make a comeback, these brokerages will find themselves with a larger corporate tax burden. Just what they don't need. The same is true for many small businesses which are in some way connected to the real estate industry.

NAR will certainly have it's own Christmas wish list for Obama, including asking for a ban on national banks getting into real estate brokerages, and more tax credits for home buyers. The National Association of Home Builders is calling for a tax credit of 10% of the purchase price of a new home, with a maximum of $22,000. People will be looking for Obama to do something to help ease the national foreclosure crisis. But will government action really help? And who is going to pay for all of these tax credits?

Recent attempts by the Bush administration to help the housing industry have thus far yielded only slightly positive results.  The government offered a $7500 tax credit to first time home buyers, but then sheepishly admitted it was just a loan that would have to be paid back in $500 installments over 15 years. Attempts to get lenders to refinance existing sub-prime loans into FHA loans have had only moderate success, as lenders are often reluctant to cut the principal owed on the loans after property values have already declined so much, and some borrowers are reluctant to give up 50% of their equity to FHA going forward.

So the Obama Administration really has its work cut out for it to stop the decline in house values and foreclosures. What I fear more than anything, are the typical congressional decisions made without considering all of the ramifications of their actions.  It's far too easy to do the politically correct thing, and then beat your chest and yell like Tarzan for the votes of Average Joe and Betty.

You know, sometimes the best government action is simply to do nothing and let the markets sort themselves out. But then, it wouldn't be big government if it did nothing. And the Obama Administration promises to be very much about big government.  So to answer my own question, I am afraid that the new administration will be pounding their chest like Tarzan to stop the bleeding within the real estate market, but only time itself, as they say, will heal all wounds.

JUST SAY NO TO....







Ethan Roberts
Contributing Editor
The Tycoon Report