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FinalCall.com News
Business & Money
Housing Market: Boom To Bust To Economic Blueprint
By Cedric Muhammad
Blackelectorate.com
Updated Apr 5, 2007 - 5:26:00 PM
The Housing Market: From Boom To Bust - To Economic Blueprint
Much has been written regarding the state of America’s housing market. Perspectives run from insightful to confusing with little from the perspective of the Black economy. But if anyone is to adequately explain the rollercoaster ride we have all been on, they must consider at least five factors, without taking Black America out of the picture. Once that is done, the meaning of events and a proper response, in pursuit of an enlightened economic self-interest, will become clear.
Factor 1: President Clinton’s 1997 Taxpayer Relief Act.
While serving as her chief campaign strategist in 2004, Cynthia McKinney asked me for advice prior to a candidate screening, before an important association of real estate professionals and institutions. Her position on the subject of capital gains (a capital gain is the amount by which the sale price of an asset exceeds its initial purchase price) was an area in which they were especially interested. I advised Ms. McKinney to express support for an exemption from capital gains on the sale of a home, but that she articulate her view that there are too many Americans and those in her 4th District of Georgia who don’t even have the opportunity to own a home to sell. Ms. McKinney called me shortly after the screening to tell me how well it went and how pleased they were with her answer regarding capital gains tax treatment.
My advice came from realizing that of all factors making Black homeownership profitable, the most important was President Clinton’s 1997 Taxpayer Relief Act which allowed families to exempt the first $500,000 in profit on the sale of a home from capital-gains taxes. For singles, the exemption was $250,000. Being freed from paying capital gains taxes at a time when property values were rising was just too much to resist. The result, for many, was a mix of first-time home ownership, and investment profits, but also foreclosures and mortgage fraud.
Factor 2: The Federal Reserve.
The price of gold is the best measurement of inflation. The Honorable Elijah Muhammad suggested this in writing, “The English pound and the American dollar have been the power and beckoning light of these two great powers. But when the world went off the gold and silver standard, the financial doom of England and America was sealed—the currency of America is not backed by any sound value—silver or gold. The note today is something that the government declares they will give you the value in return, but does not name what the value is. But they definitely are not backing their currency with silver or gold. This is the number one fall, and it is very clear that the loss of the power of the American dollar means the loss of the financial power of America.”
Defining the value of the dollar in terms of a specific weight of gold allows a nation to determine the amount of currency it should supply to its economy. By watching the price of gold a central bank, like the Federal Reserve, can determine whether too many or too few dollars are being supplied for the benefit of producers, consumers and investors. From 1996 to 2002, the Fed supplied too few dollars judging by the price of gold, which reached a low of approximately $250 per ounce. Then, beginning in 2003, the Fed supplied too many dollars, judging by a price of gold that shot up from $375 per ounce (now it is around $650). This excess liquidity encouraged banks to make loans in riskier ways (and it also encouraged people to turn to real estate as a protection against inflation). With so much money on the books and so many different ways to get it into the hands of those investing in real estate, many were enriched as never before, and mistakes were made in matching home seekers with strange new mortgage arrangements. Then the Fed made matters worse. In an enormous monetary error, it sentenced the housing market to doom by hiking short-term interest rates. As Paul Hoffmeister of Bretton Woods Research told me, “we believe the problems were caused by the 2004-2006 fed funds rate hikes from 1.00 percent to 5.25 percent, which have slowed economic growth and worsened the inflation environment. The combination has been disastrous to marginal borrowers as job prospects have deteriorated and short-rates have sky-rocketed. For example, the 1-year fully indexed ARM has risen from 3.85 percent in the spring of 2004 to approximately 7.75 percent today.”
Factor 3: The Cultural Sentiment: The Real Estate ‘Come Up.’
For the last 10 years, at least, the cultural sentiment in Black America—among street entrepreneurs, corporate professionals and investors, has been that getting involved in real estate was one’s ticket to prosperity and a life of riches. In addition to the money that individuals made and lost in property markets, one should consider how much money Black America sent to wealthy authors and experts, seeking strategies, advice, insight and tactics. Just how influential have authors like Robert T. Kiyosaki, and Robert G. Allen, been, for example, in funneling Black investors into certain investment strategies? It also is important to consider that Blacks are relatively less comfortable with the American stock market, preferring real estate as more secure and lucrative. This was documented in 2003 when Ariel Capital and Charles Schwab and Co. conducted a survey which asked Blacks, which is the “better investment”—home improvements or stocks? Seventy-six (76) percent of Blacks and 61 percent of Whites chose home improvements, while only 20 percent of Blacks and 33 percent of Whites chose stocks.
Factor 4: Sub-Prime Lending.
A sub prime lender lends to borrowers who do not qualify for loans from mainstream sources. Almost anybody—with bad credit, low income levels, bankrupt—can qualify for a sub-prime loan. Naturally, then, Blacks and the historically poor and oppressed, due to their relatively lower standing in America’s wealth distribution, would drink from this pool of capital more often than others. In certain parts of the country, the extent to which Blacks and Latinos depended upon subprime loans is striking. According to the National Community Reinvestment Coalition and data from the federal Home Mortgage Disclosure Act, in Macon, Ga., prime lenders issued 13.7 percent of loans to Blacks, compared with 59.3 percent for subprime lenders. In Salinas, Calif., about 58 percent of loans by subprime lenders went to Latinos, compared with 25.5 percent from prime lenders. How long and to what extent has this been a problem? Subprime loans to Blacks were in effect in 98.5 percent of major urban areas, while the same was true of Latinos in nearly 89.1 percent of said areas according to the National Community Reinvestment Coalition (NCRC).
Factor 5: Alternative Rate Mortgages.
To understand the downside of adjustable rates (which are offered to the poor and rich), one only needs to consider this from The Wall Street Journal article, “Homeowners Start to Feel The Pain of Rising Rates” by Ruth Simon, which reads: “Luisa Cordova-Holmes was looking to lower her monthly payments when she refinanced her $312,000 mortgage in 2004. Instead, she wound up digging herself into a ditch. For their new loan, Ms. Cordova-Holmes and her husband chose a so-called option adjustable-rate mortgage, which carried an introductory rate of 2.35 percent and gave her multiple payment choices each month. “I had a lot of financial obligations,” says Ms. Cordova-Holmes, an accountant who lives near Detroit. Two years later, however, the interest rate on her loan has jumped to 8.75 percent, her loan balance has climbed to $324,000 and her minimum monthly payment has risen to $2,257. She says the terms of the loan weren’t clearly spelled out.”
What Lies Ahead
Delinquencies are rising in both prime and sub-prime loans, whether fixed rate or adjustable rate. As a result, lending guidelines are tightening. Ten to 15 percent of those who just recently qualified for loans no longer can, according to William Emmerson, CEO of Michigan-based Quicken Loans. Home-builders now face a dilemma—do they start constructing more homes and create new inventory while so many of their previously built homes remain unsold? Government-sponsored enterprises Freddie Mac and Fannie Mae, created to stabilize the American mortgage marketplace have seen their share prices fall by 15 percent. And Senate Banking Chairman Chris Dodd is asking federal and state regulators and the five major players in the subprime market—New Century, HSBC Holdings Corp.; Countrywide Financial Corp.; WMC Mortgage, owned by General Electric Co., and First Franklin Financial Corp., part of Merrill Lynch—three politically charged questions: 1) When did regulators learn about the most unusual mortgages in the subprime market?; 2) Were lending standards inadequate or just not enforced; and 3) What should be done about an increasing number of foreclosures?
According to www.mortgageimplode.com, over 40 subprime lenders are either bankrupt, ceasing operations or desperately seeking funding or new ownership. I see that number growing without a recovery of this market anytime soon. Additionally, remedies offered by lawmakers and regulators will probably only make matters worse and even harder for those on the bottom of the economic ladder to obtain capital for real estate investment.
All along the way, as demand for homeownership falls and more and more people decide to rent, property values should continue to fall across the country, presenting opportunities for those ready to seize them.
The Alternative
The Honorable Elijah Muhammad taught that America’s greatest fall would be seen in the weakness of her dollar. The great Muslim leader said certain aspects of this economy would continue right up to the moment of its fall. He indicated that the construction business would be one of them, saying that the hammers would be ringing right up to the end. He also mentioned a final great rally in the stock market. His conclusion and prescription was always the same: Black America should unite economically and would eventually be forced to.
In his Saviours’ Day 2007 address in Detroit, the Honorable Elijah Muhammad’s National Representative, the Honorable Minister Louis Farrakhan, in succinct and brilliant fashion outlined aspects of the Honorable Elijah Muhammad’s economic blueprint. He specifically mentioned how young Blacks in street organizations could positively unite and pool their resources to become property owners and community developers and protectors.
While many economic leaders describe the problem of ‘access to capital’ in America, few emphasize that more than enough capital—for wealth creation and the satisfaction of basic needs and wants—already exists within Black hands. An estimated $800 billion in buying power has yet to be pooled for internal community development. Yes, Blacks may no longer be able to access capital from New Century, HSBC Holdings Corp.; Countrywide Financial Corp., WMC Mortgage, and First Franklin Financial Corp. as they once could, but does that mean we can’t access the same from our own wallets, purses and bank accounts?
If there ever was a time to follow the economic blueprint of the Honorable Elijah Muhammad, which can begin with 6 to 8 people humbly pooling their resources to buy land, construct homes, invest in commercial development and start businesses, it is now. We are entering a buyer’s market like no other.
(Cedric Muhammad is a business and political economist and CEO of CM Cap, ‘The first strategic consulting firm for the Black Entrepreneur.’ Contact him at cedric@cmcap.com.)
