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The Future of the US Housing Market from 2010 to 2016

Available on Amazon.com. The Future of the US Housing Market from 2010 to 2016. Key Perspectives and Questions Based on Scenario Analysis By Gerald Harris Author and Consultant www.artofquantumplanning.com. Introduction.

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The Future of the US Housing Market from 2010 to 2016

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  1. Available on Amazon.com The Future of the US Housing Market from 2010 to 2016 Key Perspectives and Questions Based on Scenario Analysis By Gerald Harris Author and Consultant www.artofquantumplanning.com

  2. Introduction According to Roger Lowenstein’s article in the April 19th New York Times (See: The Way We Live, Cracked Foundation: Reforming Housing Finance): The Treasury secretary is bedeviled over what to do with Fannie Mae and Freddie Mac, the bailed-out mortgage giants that have cost the taxpayers upward of $125 billion with as yet no end in sight. Shutting them down is not so easy because — get ready for this — since their bailout, in September 2008, Fannie and Freddie have become more, not less, important to the U.S. housing market. At present, 9 of every 10 new mortgages are sold to, or guaranteed by, arms of the U.S. government, the majority of them to Fannie and Freddie. Which is to say, without Uncle Sam, it is not clear that the private market for housing would even exist. This immediately raises the question of what is the future of U.S. housing and its underlying mortgage finance structure? I am venturing ideas for the next five years. As a futurist and scenario specialist I decided to create a scenario structure to think about this question and more importantly raise deeper underlying questions which might help in the formulation of solutions and policy. I suggest my own at the end.

  3. Background • Scenarios are what-if stories about the future that can be used for thinking, strategizing and assessing potential risks. • Very effective use of scenario thinking is based on having a clear question (in this case the future of housing markets and financing). • Scenarios can often be better understood if presented in pictures that show the interconnection and relationships of the various world views they represent. • Scenarios are based on key drivers of change which can shape the environment where the uncertainty exist. There can be multiple ideas about what the key drivers are, which is why scenario thinking is as more art (qualitative) than science. • Going from the qualitative to the quantitative is how scenarios can help learning, thinking and the creation of strategies and options.

  4. Key Drivers Shaping the US Housing Market in the Future • US economic growth (GDP growth) • Interest rates (monetary policy) • Shifts in global capital flows • Job growth (quality, quantity and location) • Growth in consumer spending • Government policy on housing finance • Market and competitive structure in private/bank lending This list in not intended to be exhaustive and can be added to by you as you think about this issue as well.

  5. Key Drivers of Change and the Scenario Map Nature of U.S Economic Growth: How strong will growth be? What will it be driven by (consumer spending, government investment, trade growth, new technologically driven markets)? Nature of Mortgage Finance in U.S.: How and at what levels will long term private money come back into housing finance? How will government policy support housing (tax breaks, mortgage subsidies)? What institutional structure will emerge to support housing finance? Nature of U.S. Economic Growth Nature of Mortgage Finance Investment in U.S.

  6. Key Drivers of Change and the Scenario Map Moderate Stable Nature of U.S Economic Growth: For the sake of thinking let’s span the uncertainty as either moderate and stable economic growth versus slow and unstable. Nature of Mortgage Finance in U.S.: For the sake of thinking let’s span the uncertainty as either limited availability of mortgage money with limited private investment versus significant availability with substantial private investment. Nature of U.S. Economic Growth Slow Unstable Limited Nature of Mortgage Finance Investment in U.S. Substantial

  7. Drivers of Change and the Scenario Map Moderate Stable Government to the Rescue Friedman was Right U.S. Social Democracy Nature of U.S. Economic Growth U.S.– A Third World Country NOW, 1Q 2010 Slow Unstable Limited Nature of Mortgage Finance Investment in U.S. Substantial

  8. Summary Scenario Descriptions 2010-2016 Now, 1Quarter of 2010: Despite some quarters of above 3% GDP growth, it is clearly now unstable and significant factors in the housing market, bank balance sheets, joblessness and international financial market risk (Greece) the U.S. is not out of the woods. Also as Lowenstien reports, very little growth in private long term investment in housing. Government to the Rescue: This is a description of the early stop-gap response to the financial crisis and a world where it continues. It is arguable whether it is going well (stopped a free fall) or not (huge deficits). In the long term government spending is clearly challenged as the U.S. government can only borrow so much, and there are risks of inflation and global financial market push back. Private investment in mortgages will stay low under such circumstances. U.S. Social Democracy: This is the hoped-for world of a middle solution in which a combination of smart government policy and regulatory change is sufficient to induce a moderate return of private capital into holding mortgage investments. The securitization returns but not in the same form as the past and with different Fannie and Freddie Macs. Economic growth also finds a way to reemerge from the private sector based on real value, productivity, technological growth and consistent job growth.

  9. Scenario Descriptions (continued)2010-2016 Milton Friedman was Right: This is a world in which a combination of effective government policy and economic growth driven by the private sector firmly reestablish a leadership role in shaping the economy and providing wealth based on real factors such as productivity, innovation and hard work. Is this possible in five years or can we assuredly head in this direction? US—A Third World Country: This is a world where the divide between the have and have-nots and renters versus owners is allowed to expand because there is no ability or political willingness to work for another solution. A raw form of capitalism is allowed to run its course and the social consequences are managed by force or other means. Thinking as a futurist, the key question in using the scenario map is what are the possible routes through our map (second order thinking)? How might we move from the one scenario “state” to another. This is where the fun is!

  10. Drivers of Change and the Scenario Map Moderate Stable 1. Government to the Rescue Friedman was Right 2. U.S. Social Democracy Nature of U.S. Economic Growth 3. U.S.– A Third World Country NOW, 1Q 2010 Slow Unstable Limited Nature of Mortgage Finance Investment in U.S. Substantial

  11. Description of Scenario Routes Route 1: This is a world in which government policy takes a path that accentuates competitive market solutions and they work! Policies that allow full-on bankruptcies by large institutions and market-based solutions, though initially painful produce the quickest and most stable results. Real cost and values are allowed to play out. Innovation results and housing recovers on a base of better private management. Route 2: This is a world in which a balanced combination of government intervention and competitive market initiatives are put in place. This leads to a moderate return of private investment in long term housing finance by some institutions, but also buffers some of the harsh impacts of total free-market solutions. Bubble-based economic growth is avoided but government spending and deficits remain an issue, with housing subsidies remaining. Route 3: This is a world in which government policy pursues a path that accentuates competitive market solutions with a result that the “rich get richer.” Social justice is seen as unattainable or against core American values. Government focuses on reducing deficit spending and public safety. An expanded ghetto-ization of American housing results.

  12. Final Thoughts • Over the next five years my opinion is that the Obama Administration will try to implement Route 2. I question though whether the policies, once implemented, may not actually be “Government to the Rescue.” If so, the financial markets will not sustain it and a deficit driven crisis will likely emerge. • The Republicans and conservatives want to take the risk of aiming toward Route 1 and take the chance of not actually ending up on Route 3. Some conservatives believe that if the U.S. becomes a Third World Country that it will not be so bad because the myth of the “opportunity for all” to rise out of it will still exists. If mostly ethnic minorities end up in the new ghettos then the underlying race-based agenda of conservatives will succeed. • The percentage of Americans who are trying to own and maintain homes is probably too high and we need other non-housing related ways for government policy to sustain social stability and economic growth. Renting is not a bad choice for most people and the after tax cost of renting versus owning should brought closer (a renters tax credit at the Federal level).

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