FEATURE ARTICLE, OCTOBER 2008

HOUSING BILL HAS LITTLE EFFECT ON RETAIL, OFFICE
Consumers have the power to make sure Congress’ Housing and Economic Recovery Act fulfills its purpose.
Brad Johnson

Congress’ new bill, the Housing and Economic Recovery Act of 2008, enacted on July 30, will assist 500,000 at-risk borrowers and create a stricter regulator to control the finances of Fannie Mae and Freddie Mac. The legislation authorizes the Federal Housing Administration to help borrowers trade mortgages with escalating monthly payments for more affordable loans backed by the federal government. Finally, this new bill will dedicate a portion of its estimated $500 million per year profit to a new fund for low-income rental housing, making it the first significant federal of its kind commitment in decades.

Congress acted prudently in the face of continued economic headwinds to provide a substantial safety net for homeowners.  History has shown that allowing the market to spiral downward through massive foreclosures only exacerbates value declines, which not only hurts the general economy and the secured collateral, but has a very real negative impact on the social fabric and individual families.

Fannie Mae and Freddie Mac are secondary pools of residential mortgages, so the pending bill will have minimal impact on commercial real estate. However, there are some effects that will flow into the commercial real estate sector.

In the long term, an expedited reversal of negative economic conditions will benefit the broader economy and the commercial real estate sector. Positive growth will return to the economy in a quicker time period then if the economy was left to fend for itself. Protracted periods of languishing growth hurt everyone in both commercial and residential real estate alike.

In areas hardest hit by the housing market meltdown, the most significant factor prolonging the housing recovery appears to be the continuing supply of foreclosed homes adding to the inventory. This is particularly true in areas like Southwest Florida and Tampa Bay, which may be among the first areas to see the impact of the housing bill, provided that it is effectively implemented. Though most industry observers think that it may be 12 to 18 months before the housing market rebounds, Tampa has historically bounced back faster than most metro markets because of its lower average cost of housing and favorable factors for corporate relocation and employment growth. As the housing market stabilizes, disposable income and consumer spending will increase, and sagging retail developments will be among the first to benefit, followed by the office sector.

Other than maintaining measurable economic stability, which will benefit the commercial sector as well as the broader economy, the bill is unlikely to have any measurable impact on the commercial real estate sector in the short term. If any short-term impact does exist, it will be the bill’s ability to stabilize monthly housing costs. As a result, this could improve disposable income, but prudent homeowners are encouraged to take any savings this bill provides, and actually save the money for future contingencies. If a homeowner reduced his monthly expenses on a variable rate mortgage by $500 per month, he should not take advantage of the extra money and decide to go and borrow additional funds to purchase a flat-screen television. The safety net and savings this bill provides should be reserved for future food and gas increases in the near term or saved to reduce overall debt levels on credit cards and increase personal savings.

The increases in the jumbo limit were certainly needed given the magnitude of housing costs. The reason a large majority of people accepted second mortgages with variable debt was because the jumbo limit was too low to allow purchase of most median prices homes in high-value markets like the Northeast. However, Fannie Mae and Freddie Mac would be well-served by limiting the ability of borrowers to pile second mortgages on top of the new higher jumbo primary debt. The key to stability is to return to financing leverage where borrowers have enough of an equity stake that 10 percent value declines do not force them into default.

The main effect of the housing market meltdown was to signal to homeowners that it is time to shift spending from discretionary items such as retail sales to housing. This has affected the commercial market by reducing the absorption rate of new commercial property and, over the longer haul, has reduced sales in many discretionary retail sectors such as restaurants, leisure activities and clothiers. That slowdown is being reflected in the numbers of store closings and bankruptcies being reported recently.

Americans must develop some general fiscal discipline to keep our housing costs within the 30 percent of income. Because of the short-term cheap money available on interest-only second mortgages, many people are now faced with housing costs at more than 50 percent of income. This is unsustainable under almost any economic condition, but with housing, fuel and credit card rate increases, the effects are absolutely crushing.

Notwithstanding the short-term positive impacts the bill may have to stem the tide of massive foreclosures, we must adjust our personal fiscal mindset in the long-term by paying down our debt and increasing our personal savings. While these housing bills are designed to help our economy and real estate sectors, the real responsibility is up to each individual to revive our current economic situation.

Brad Johnson is the managing director of Tampa, Fla.-based Integra Realty Resources.

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