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The Freest of the Free Markets

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RISMEDIA, February 25, 2011—Think back to your college days. You went out all night and drank way too much. The next morning you had a devastating hangover, and one of your buddies came up with the miracle solution—the hair of the dog that bit you. So you started again. “It’s a miracle!” you thought, until it all caught up with you. Call it the law of unintended consequences.

I liken this to the recent wave of government intervention in our beloved housing market. Consider the following:

During the real estate boom of the “Roaring 2000s,” the federal government decided to play with the housing market. Their mission was to increase homeownership levels for more Americans at lower income levels. This was a laudable intent. Homeownership is good for families and good for communities.

The problem was how they went about it.

In typical federal form, they implemented a solution that was childlike in its simplicity. Instead of promoting responsible homeownership, creating savings incentives and educating the public on how to buy a home the right way, they just eliminated mortgage lending standards. By controlling Fannie and Freddie, and instructing them to offer no-down-payment, no-income-verification mortgages, they sent a wave of buyers out into the marketplace with a blank check in hand. You’ve heard of “funny money?” This was “Fannie Money.”

A few million buyers entered the market with pockets full of Fannie Money and had a direct impact on driving home prices beyond reasonable levels. We all remember the thought process: “I want this house. They are asking $675,000, but I have a blank check in my pocket for $725,000, so offer $725,000!”

We all know what happened next. Mortgage defaults jumped, and since Wall Street bet the farm that those mortgages would perform and that real estate values would always go up, their balance sheets crashed and we got the credit crisis of 2008. But make no mistake. This was not a chicken-or-egg situation. Bad government policy came first.

Fast forward to 2008, and the first thing those same politicians did was jump in front of the nearest microphone and shout, “If you can’t pay your mortgage, you are a victim of a predatory lender! You deserve help and the government will give it to you!” And then they were shocked when loan defaults jumped. (Notices of mortgage default filings peaked in the first quarter of 2009).

The government unintentionally created an incentive to default and then, for two years, continued to flail at the loan modification challenge. Finally, this latest set of solutions frustrated the policy makers in Washington, resulting in the October 2010 order to “freeze foreclosures.” Childlike simplicity or just a tantrum?

Even the Home Buyer Tax Credit backfired. It worked so well that fourth quarter 2009 home sales cranked, and once extended, the spring market of 2010 cranked again. But what was supposed to be a tipping point for consumer confidence ended up being a roller coaster ride. Fourth-quarter sales for 2010 are looking bad compared to 2009, naturally. And we can expect the media reports to reflect a lousy spring market of 2011, when compared to the record-breaking spring of 2010.

American real estate is the most in-demand product the world has ever known. America is in demand. Shelter is in demand. The American dream is in demand. If anyone in Washington is listening, please just leave it alone and let it heal. The American housing market yearns to be free.

Greg Rand is CEO of OwnAmerica.com and former managing partner of Better Homes and Gardens Rand Realty. For more information, please visit www.ownamerica.com.

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