Is the housing market as we know it completely unsustainable?

When subprime lenders were wiped out in the mortgage industry’s nuclear winter of 2008, subprime residential mortgage lending didn’t go away. It got nationalized. The Federal Housing Administration (FHA), which had been a forgotten joke for much of the previous decade, suddenly became the driving force of home sales. FHA insurance allowed buyers to pick up houses with as little as 3 percent down. It went from insuring 2 percent of the market in 2006 to about 30 percent by 2010. That’s roughly the same percentage of borrowers who took out subprime loans at the height of the mortgage frenzy.

But now the FHA itself is in trouble, because – surprise! – it looks like a lot of those insured loans are going bad. Its auditors say the agency’s mortgage insurance fund, which just last year was valued at $1.2 billion, is now valued at negative $13.4 billion.

We’ve got a big economic problem waiting to drop a house on us.

We created this financing fiasco by trying to make everyone a homeowner. We dramatically loosened lending rules and opened a spigot of mortgage money. Then the tap got turned off. The real estate market nosedived. And it didn’t show any signs of revival except when the government ponied up $8,000 in tax credits for anyone buying a house. When that program ended, sales plunged again. Home sales last year in Massachusetts hit their lowest level in a generation, according to figures tracked by The Warren Group, Banker & Tradesman’s publisher.

Mortgage Math

Sales numbers in the commonwealth are up this year – which isn’t saying much, since we’re measuring against a pretty low standard. But last week, The Warren Group also reported that foreclosure petitions rose 22 percent for the month of October. And that was a good month. Year-to-date, they’re up 44 percent.

On both the national and local level, there’s a story being told by the math that no one wants to hear. We’re still trying to rationalize, support and encourage a housing market that is bigger than its britches.

It’s understandable why. Home buying leads to lots of economic spinoff – retail sales, services and more. It’s a very profitable market for everyone involved in the sale, too, from real estate agent to mortgage originator to appraiser. And it seems like a good thing to do socially. Doesn’t everyone deserve to own a home?

The answer to the last question is, actually, “no.” The numbers are pretty stark that we are still putting far too many people into homes they can’t afford. At the very least, they can’t afford them over the long haul, and that endangers all of our economic well-being.

All the players in the mortgage industry can see this. The persistent levels of foreclosure that undulate across the nation are a big warning sign. So too are the dramatically high number of buyers who still can’t get into the market at all without government help. But just like when we were heading into big subprime problems, no one in the industry wanted to speak up for rationality.

It took from the Pilgrims landing at Plymouth Rock until 1996 for the median home price in Massachusetts to hit $156,000. We only needed eight more years for that median to skyrocket to $356,000 – more than double what it took a few centuries to attain. That was a market that was too good to be true.  It was a fantasy market, made tangible by loose money and unwillingness to recognize reality. Despite all the pain we’ve gone through, we haven’t walked out of that fantasy world yet. We’re still using government dollars to push people into housing they can’t afford.

Few are willing to acknowledge that we’ve grown accustomed to a housing market that isn’t real. But just how many real taxpayer dollars are we willing to continue committing to this unrealistic dream of homeownership?