Not so long ago I was deeply involved with the housing markets. 

I remember clearly the impact the housing market had on so many businesses where I worked.  I remember asking myself over and over what had led us to that point in disbelief.

Months before – getting access to the resources to purchase a new home was a foregone conclusion as long as your credit score was acceptable by the lending institution.  Home flippers – those who excelled at buying previously-owned property, restoring it, and selling for a quick turnaround profit – abounded.  There were multiple television shows dedicated to the concept.  An average home buyer, or even speculative house “flip” business needed only to have the will to make it happen.  Lenders were plentiful.

In the earlier part of this decade the economy was healthy and confidence was high.  New buyers were plentiful.  The clouds parted daily and the angels sang and the Sage Counsel of Alan Greenspan kept us on course.  Then things gradually changed – in ways transparent to many of us… until it was too late.

Subprime lending accelerated to 20% of the mortgage market by 2006, double the value a decade earlier.  Buyers piled on.  Competition led to looser lending principles and unethical practices.  Then came the crunch.  The ripples spread outward into the overall economy like a tsunami.

Within months of the crash – lenders tightened the reins on the lending principles guiding home mortgages.  We’ve all analyzed the crash nearly to death at this point – but let’s look at the current realities we face.

Although confidence began returning to the markets over the summer into fall and gradually led us up to the strong September existing home sales figures, October figures show a decline of 4 percent from August and 8 percent from a year ago.  There are several key linchpins still indicative of continued woes in the housing markets – none of which seem to have been definitively solved.

Difficult selling market: Home owners are still flatly unable to recover their investments and many simply aren’t willing to liquidate at this time.  The typical home owner has spent a great portion of their savings building a home.  Moving to another location – thus also affecting a more difficult job market from those unwilling to shift locations until they expect to at least break even.  Couple this with increased difficulty buying a new home period.  I recall the easy days of the 10% downpayment.  Now most homeowners – even with excellent credit face 20%.  In a down economy with substantial job losses – dropping 20% on a new home is simply an impossibility when simply paying the bills has become harder.

Foreclosure starts continue to outpace new home sales.  Until liquidity comes back to the housing markets in a way that will empower those with acceptable (which needs to be appropriately defined) credit – I expect this to continue.  The simple fact is that until more lending is available to the middle-class investors and average citizen they aren’t making enough headway to turn the corner.

The housing markets affect so much of the rest of the economy – new home construction – the housing trades in general – utility services – it can quickly be surmised that when we DO TURN the page on the current housing woes – these corners of the economy will also take a marked turn upward.  In my own area alone more than half a dozen developers had to close show in the early part of 2009.  Developments that had boomed months prior sat unfinished with exposed framing and in some cases the roof was simply off the house.

To quicken the pulse of the overall economy, think about the simple domino effect that would result if those defining our lending principles simply examined the obstacles a current buyer faces and tackled these issues headlong.  Simply moving from a 20 percent to 15 percent down payment for many would make a significant difference to potential buyers.  A return to 10-percent would markedly move the figures more so.  Inventory – which is still declining – would likely shift within months – potentially 2 sustained quarters.  Valuation would increase in the most hard hit areas as inventory dwindled more thus changing the supply and demand ratio.  Confidence, which is the psychological barrier undermining the chain-reaction, would gain ground.  Think about how many small home services would receive a jolt from the liquidity.  Movers, manufacturers, realtors, appliance repair and installation, electricians, plumbers, carpenters, painters, the list is endless.  I personally know of over half a dozen myself who had to completely shift their jobs to other corners of the economy.

Initially, throw in increased tax credits.  Legislation for this is already underway, but needs to become a reality more quickly.  The American Recovery and Reinvestment Act of 2009 – offering an $8,000 dollar first time home-buyer tax credit – has already extended credit and stimulated an immediate response in the figures.  This, however, will be short lived if congress does not extend the credit beyond November 2009.  In fact, it can strongly be argued that a lack of action to extend the credit might significantly reverse the gains made this past year.  Since inception, estimates show as many as 300,000 home buyers have already benefitted from that credit to date.  Up to 350,000 jobs could result through this year if the credit is extended.  Take that away at such a critical time in the turnaround and we see a significant reversal in momentum.

Adding to the complex nature of these issues – let’s take a look at the bailouts for Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) – with a combined 85.9 billion in direct support.  Basic market principles for economic expansion and contraction tell you that in order for a free market economy to thrive some business must inevitably be allowed to fail.  Should we try to minimize the impact by such a massive failure – of course we should.  I submit however that we should examine the logic behind propping up the very institutions that brought the economy to its knees.  Legislators and the citizens that elect them should ask themselves if they want to return to reliance on two entities that obviously failed.  Not in a small way.  We in the general public often classify this as “epic failure.”

Why not merge the two into a more streamlined entity guided by sound legislation that will truly stimulate our economy – not prolong the stagnation we face.  Two steps forward and three steps backward still equals one step backward.  Pouring cash into a poorly run institution can only create a more polished and costly POORLY RUN BUSINESS.

I liken FNM and FRE to 40-year old cars.  You can spend twenty thousand dollars on new tires and seats, paint and a new radio.  If you don’t change the engine – it still won’t move.

Share prices for FNM and FRE respectively sit just over the dollar mark at 1.08 and 1.23 respectively.  For those new to the housing markets as we know them – banks issue mortgages then sell those mortgages to FNM and FRE.  They are so closely tied to mortgage lending in our modern economy any substantial impact to these two entities has dire consequences for the housing market and the lending principles they provide to the banks.

As of this month Keefe, Bruyette, and Woods issued a downgrade of both stocks to underperform and cut their price target to $0.  Yes folks thats a zero.  That said – having seen the events of this past year unfold – I would caution investors to turn in their shares quite yet.  Several times already we’ve seen similar downgrades across the markets that resulted in a share “shake out” – whereby retail investors sell on emotion and allow for a more convenient entry point for institutional investors waiting on the wings.  That said – do your own due diligence – but keep your eyes open.  Many investors recently saw gains on these two stocks upward of more than 200 percent followed by a sharp decline, partly accelerated by this downgrade.

In summary – we have considerable obstacles.  Common sense is needed.  Make sure you’re contacting your legislators and expressing the realities you face.  Don’t forget to recommend extension of the tax credit.