Minnesota 2020 Journal: Tanking Home Values Should Focus the Mind
Pop quiz. If the Twin Cities housing market, after the briefest of recoveries, returns to tanking, posting a 36 percent loss in value since its 2007 peak, what do you do?
B. Pass a bill to amend the Minnesota constitution to ban gay marriage (something already prohbited under Minnesota law).
C. Blame Governor Dayton for, well, anything.
D. All of the above.
If you’re a conservative elected state policymaker, the correct answer is D. If we pose the same question about the entire Minnesota housing market, rather than just the Twin Cities, the answer is still D. Minnesota’s conservative public policymakers, despite the considerable challenges facing our state, are more determined than ever to ignore Minnesota’s problems.
First quarter average Twin Cities’ home prices are falling, reflecting the national trend. Average home sale price fell during the first quarter of 2011, 15% from the same period a year earlier. The average first quarter 2011 price was $159,000, off from the June 2006 average high of $247,000. Economists call that a big hit, indicating substantial financial loss.
We now understand that home prices soared well past any reasonable value-based calculation. Several important factors contributed to the housing bubble. Chief among those was the idea that prices would never decrease. A significant number of people borrowed money to purchase a home assuming, in part, that they would sell that home at substantial profit. Then, somehow, and this part gets a bit vague, they would then purchase successive homes that they also couldn’t afford, successively and profitably selling those until, in a surprising turn, breaking the pattern to purchase a home they could afford with their speculatively achieved profit. It’s the same argument that gamblers have used to delude themselves for millennia.
Combine mania with ready loan funds, an underpowered regulatory environment, tax policy encouraging home ownership and a tantalizing take on the American dream of middle class homeownership, and suddenly, we had a housing bubble. By the end, as we now know, pretty much any breathing soul could get some kind of home mortgage. When the housing market crashed, the worst deals collapsed immediately much like a tidal wave plowing through sandcastles.
Demand for home purchasing disappeared. Home prices dropped. What started as a trickle turned into a torrent when homeowners couldn’t make mortgage payments. Foreclosures mounted. The infrastructure supporting home purchasing collapsed as the entire home mortgage industry, incentivized by fees on deals, died.
Unlike a bad business deal, like the Wall Street banking crisis or the Detroit auto industry bailout, home mortgage foreclosures, particularly on this moment’s scale, are a distinctly street level experience. Given high levels of home ownership, a great many people have been directly impacted by a home foreclosure. Most everyone else knows someone affected by a foreclosure. A significant number of homeowners, living within their means and reliably paying their mortgages are impacted simple because market conditions prevent them from selling their home to purchase another. The housing crisis is a shared, collective experience whether we like it or not.
The housing market, like every other aspect of modern life, is inseparably linked to state and federal public policy. Conservative policy advocates like to piously declare that less government would create mythically perfect market conditions that, in turn, would somehow have avoided the current financial downturn. That’s false. Even doing nothing constitutes a policy initiative. Collective action or collective inaction is policy. Paired with government’s capacity to fund and enforce action or inaction as an expression of public will turns policy into public policy.
Three years ago, Minnesota 2020 proposed a policy initiative aimed at stabilizing Minnesota’s housing market through a home loan guarantee program. It was based on historical home value trend lines. Home prices had fallen rapidly, significantly deviating from the historical trend. Just as home value speculatively increased above what “normal” market conditions should support, homes were similarly undervalued. Our program suggestion worked to reinforce purchaser confidence in parallel with the slowly recovery economy.
Despite some encouraging legislative reception, conservative policymakers in general and Governor Pawlenty in particular, didn’t embrace the idea. So, it went nowhere. Most troubling though, was the conservative attitude that government only creates problems rather than works to resolve them. That perspective facilitates removing homeowner and small borrower protections, from sophisticated financial predators. Much of conservative policy advances the interests of Minnesota’s richest citizen at the expense of middle- and working-class Minnesotans. Government’s proper role, in the conservative tradition, is the concentration of wealth into fewer hands.
The Zillow quarterly housing report should remind Minnesotans that homeownership is Minnesota community stability. A return to crashing home prices hurts all Minnesota. We need state public policymakers focused on creating effective measures that stabilize home values, grow Minnesota’s economy, create jobs and balance Minnesota’s budget deficit. To date, the conservative-led State Legislature hasn’t done any of those tasks. Time is running short but, if they work at it, compromise and progress is possible. Moving Minnesota forward requires no less.