The new housing industry is approximately 27% of the American economy. It is impossible to have a strong economy in the USA without the participation of the new housing industry.
New housing is not just single family homes. It also includes multifamily housing. In fact, when the housing starts number is reported each month, that number reflects the total starts for both single family and multifamily.
The USA is blessed to have a growing population. That has been one of our characteristics for hundreds of years. While the sources of growth have periodically shifted between births and immigration, the constant increase in population has provided economic growth.
A review of other countries that are not enjoying economic growth today demonstrates that it is massively difficult to have declining population and economic growth. Population growth is good.
Recognizing that “owners” have a different perspective than “tenants”, our government wisely has created incentives for Americans to buy their homes. To facilitate that result, over the years since the Great Depression, a variety of government agencies and entities evolved to facilitate home ownership.
One of the Government Sponsored Entities (GSE) that was created is The Federal National Mortgage Association (FMNA) often referred to as Fannie Mae. Fannie Mae and her sister GSE’s were created to buy home loans from banks and mortgage brokers with the intent of selling them as an income producing asset to investors such as insurance companies.
These loan packages were attractive because they were conservatively under-written and carried an implied Federal Government guarantee which made them AAA financial investments. Recognizing that the American taxpayer had some potential obligation, Fannie Mae was always VERY conservative in its criteria for the loans.
In 1999, to achieve his political goal of increasing home ownership, Clinton appointed his friend, Franklin Raines, to be CEO of Fannie Mae. Within a few months of his appointment, Fannie Mae changed the loan criteria so that it would begin buying the loans of unqualified borrowers – what we now call subprime loans.
But once they were bought by Fannie Mae, packaged together, and sold to investors those subprime loans carried a AAA rating! This is like the fairy tale of spinning gold out of straw… and just as real.
The good news for Franklin Raines is that he received bonuses equal to tens of millions of dollars before he left Fannie Mae and no one has asked him to return that money. The bad news is we American Taxpayers got nailed with the problem of collection on those loans and making good on the guarantees.
Remember what we said in an earlier article – if you want to cause significant damage to a capitalistic society or even destroy it, the target has to be the banking system. Capitalism only thrives when banks are able to lend money, a critical form of capital, to entrepreneurs and businesses.
Today, the entire housing industry is operating on fumes. The ripple effects are impacting the entire economy including the land market.
In the meantime, to combat the impact of bad policy on your net worth, talk with us about investing in land. The best investments are made at the bottom of an economic cycle, not the top. We will enjoy helping you find a great land investment that will provide to you a better long-term investment than a bar of gold.