NOTES FROM OUR MEETING WITH CONGRESSMAN HOWARD BERMAN 28TH DISTRICT, CALIFORNIA
By Roger Ewing
This past week, my business partner Ernie Wish and I had the pleasure of meeting with Congressman Howard Berman of the 28th Congressional District in California. The goal of our meeting was to explain to the Congressman what reality looks like from ground zero in Southern California’s residential real estate industry. Specifically, what are the challenges and what work needs to be done to move the economy forward?
There are several issues that are preventing the real estate market from making a full recovery that Ernie and I hoped to communicate to the Congressman.
First, the home sales market is a continuum that cannot be segmented when creating policy. While it may be politically correct to offer financial support to first time and low value homebuyers, one cannot ignore the high-end market. These two market segments operate in concert with one another. Without a healthy “move up” market, that includes the upper price points, all market price segments will struggle and grind to a halt.
Second, the real estate market is hypersensitive to negative changes in employment. Individuals who feel secure in their jobs, and have an expectation of doing better in the near term, will buy homes. When a home is offered for sale an explosion of spending often follows. Sellers and buyers invest in their homes both before and after the sale occurs. This healthy spending results in jobs, which in turn results in economic growth. As a result of this phenomenon, the residential real estate market is responsible for 10% of the Gross Domestic Product.
Third, the home buying market in Southern California, while enjoying more transactions this year than in 2008, is not as healthy as current press releases may lead us to believe. Nearly half of all reported sales are either REO or short sale transactions. Most of these sales are occurring in a low price environment created by the recession, and many of these buyers are investors who are offering cash for homes while freezing out families searching for shelter. The result is that only about half of the transactions occurring today are the result of individuals and families searching for a home to live in.
Fourth, the federal government needs to do more to help create a secondary market for “jumbo loans”. Loans over the $729,750 conforming limit are very difficult to obtain. Would be home buyers in the price segment of $1 million to $2.5 million are struggling to obtain financing, even though interest rates are at or near historic lows.
Jumbo loans in excess of $729,750 are critical to creating and sustaining a healthy move up home market. Under current restrictive lending standards, the market is held captive beneath a glass ceiling that is preventing discretionary, well-qualified homebuyers from selling their existing home and purchasing another. We effectively have a “bottle-neck” that is hampering the real estate recovery in all price segments.
We found Congressman Berman to be engaging, animated and inquisitive. He is very concerned about the state of the real estate industry and the unemployment problem facing California. After 26 years as a United States Congressman, he is keenly aware of the difficulties associated with creating policy change in Washington, and clearly understands how to navigate the political hierarchy. I believe he was genuinely interested in learning about real estate in his district, as evidenced by the fact that he originally committed 30 minutes to our meeting, but then spent well over an hour with us.
With a vibrant, active home market, all of us are winners. Business thrives, investment increases, tax bases increase and the federal government will spend less on financial bailouts in all sectors of the economy.
In future blogs I will explore in more detail how the financial system works in conjunction with home sales and why real estate is a critical ingredient in preventing our fledgling economic recovery from stalling.