It Might Be Impossible to Stop the Decline of Housing Prices

One of the keys necessary to solving the latest economic crisis is stopping the decline of home prices. The home is a source of wealth for the majority of Americans.  While these home prices keep dropping, the majority of Americans are spending a lot less due to uncertainty or inability to have access to credit. The whole economy is being poisoned.

The first signs of the problem began in early 2006. The supply of houses remained within statistical norms. It was the demand for houses which fell. Actually, the buyers were there but they just could not get loans as the banks tightened lending practices as foreclosures began to become more and more common. 

The solution to solving the declining housing prices should be easy – just create a lending mechanism so that the buyers can start buying again. There should be a lot of potential demand out there because they have not been buying for several years. This is exactly what the National Association of Realtors (NAR) proposed in their press release last week.  According to NAR President Richard F. Gaylord:

The U.S. Treasury and Congress need to work together to ensure that the American people benefit from the economic recovery plan. The Treasury Department has gotten off track by focusing too much attention and stimulus money on Wall Street and banks that are in turn using the money for mergers and acquisitions. The administration needs to get back to the original intent of the plan – stabilizing the mortgage and housing markets – to help families avoid foreclosure.

The NAR simply wants lower mortgage rates, loosening of loan limits, and some mechanism to force banks to loan money to buyers. They want to create stimulus to the demand side of the housing issue.

Catch 22

How is a banker supposed to loan money if the asset placed for collateral is decreasing in price? It is not inconceivable that a loan with a 20% down could be underwater in a few years if housing prices continue to decline. You must stop the housing market values from declining. This will help free up the credit market so that loans can be written without the risk of housing valuations falling.

Here it gets interesting. The problem is no longer just a shortage of demand (caused by credit unavailability and falling home prices), but because the housing crisis actually began in 2006, we actually have too many houses, too much supply. Every month you hear the unsold existing home inventory report by the NAR. You might even have realized that unsold inventories have grown only by one million homes – only a 50% increase from 2005 levels. This would seem to be an easy backlog to wipe out once the economy picks up.

The Dirty Little Secret

If you are a real estate investor or broker/agent, you know this secret. The unsold existing home inventory which was about a 9 months supply in September 2008 is only the tip of the iceberg. The real inventory is twice that amount, and may be more.

Beginning in 2006, the quantity of home sales fell. Did the need to sell homes somehow evaporate? No, if the sale was discretionary the seller either did not list the property or was talked out of listing the property by the real estate agent until the market gets healthy. Some examples of discretionary sellers are: 

• Estate sales
• Recent retiree wanting to relocate
• Second home owners who need to liquidate
• Owner relocation but could not sell house so he rented it out.

And the problem may be greater than shown on these graphs as you really should not count short sales (foreclosured existing home sales) as a house sold. This overstates the existing home sales when comparing data to other periods. The real backlog is most likely over 10% of all homes in America and growing daily.

And How Will You Stimulate Demand?

It has been demonstrated to the first time buyer that housing prices may not keep going up. Why tie up capital in a house when you can rent and use the capital for another investment? And if prices keep falling – what first time buyer wants to jump into that quicksand? You simply cannot make an economic argument today that anyone should purchase a house when renting is cheaper. The usual benefit of asset appreciation has evaporated.

Another element currently out of the market and not likely to return is the short term property investor who buys low (normally fixer uppers), and the resells high. Many of them were given “short haircuts” when the housing markets reversed suddenly, and their equity required to continue investing evaporated.

And all the people being foreclosed will not be able to reenter the market even if they wanted to. What lender wants this type of customer?

There is no ready solution to the decline in housing prices

We have too much supply unless we are willing to tear houses down. We have very little demand unless we can offer all buyers a massive incentive (like providing a 20%.down payment tax free) – and then you will create another bubble. And to make matters worse, we have entered a recession, creating uncertainty about any major financial decisions – such as buying a house.

My solution is to do nothing because I have become convinced nothing will work. The problem is too big for a band aid solution. The quicker the housing market finds its natural bottom, the quicker the overall economy can begin recovering.  

Disclosures: I am a real estate investor, and I believe it is best for me for the housing market to find its bottom quickly. I am not willing to pay taxes for solutions which do not work. I know the government will want to appear to have done something to solve this problem – but they should resist the showmanship.

Comments

[vbierschwale:]

Actually I'm a licensed realtor in the state of Texas and I totally disagree with this, primarily because for 20 plus years I worked in the IT business.

Housing prices will go back up when we quit sending 1 TRILLION 200 BILLION dollars per year to other nations in exchange for Oil and Labor.

By following on this path of self destruction, we sowed the seeds for the current financial crisis back in the mid 70's when we first started closing down our steel mills and sending our work offshore.

Yep, I've read all the lies that say that the people who had jobs that were offshored have found similar or better paying jobs and if that is so, show me the data because my own personal experience has been documented at www.KeepAmericaAtWork.... in the article titled "Your wages do matter"

Not only have we deprived our federal government of 2/3rds of the money they used to collect for taxes to run our country, we have deprived our retailers, manufacturers and raw material producers of 2/3rds of what I use to make after taxes.

Now multiply my own particular numbers, or anybody elses that has experienced similar circumstances by 10 MILLION people and you will begin to see the severity of the destruction that we are doing to America, our fellow citizens and our lifestyle.

I have also created a "Wall of Shame" at www.KeepAmericaAtWork.... where I am slowly documenting the companies and the CEO's that are responsible for the symptoms such as the housing crisis, the auto crisis and the financial crisis and I hope that when you run into them at the Country Club or Grocery Store or Church or wherever that you tell them "Thanks a lot for what you're doing to us as a country"

Virgil
www.KeepAmericaAtWork....

2008 Nov 09 07:03 AM

[Jon Smirl:]

A simple short term fix would be to temporarily lower the cost of keeping a home. This could be done by allowing the tax deduction of double the amount of interest paid on an existing loan on your primary residence.

The government knows how much interested is being paid and can calculate exactly what this would cost. Lower the multiplying factor each year until the excess inventory clears.

This would be trivial to administer and it delivers the largest benefits to the people who need it the most; ones with large, high interest loans. It a lot of cases it would wipe out this group's federal tax liability completely.

It would have cost a lot less than $700B and the banks would have been ok since everyone would have paid their mortgages. You only get the deduction for interest PAID not accrued.

2008 Nov 09 07:43 AM

[Lok Sang Ho:]

I have been proposing a buy-back program with the Federal Government offering to buy from owners of existing homes valued below the median price at October 2008 market prices. This will at once put an effective floor on home prices for 50% of the existing housing stock. The Government can rent these units out, with potential tenants including the homeowners who needed to sell. Over the longer run this will not cost the government anything, as nominal prices will certainly rise, and even in the short to medium run, the government will collect a decent revenue stream. Consider the psychology of this. Investors will rush in, as there will be upside potential and no downside risk. Some sellers may withdraw their units from listing. The stock market will rebound, and bring badly needed confidence back.

More important, the proposal will still allow more expensive homes to fall, and will not include buying from developers. The market will be allowed to work with a healthier psychology. And that is what counts at this crucial hour. I argued this will reverse the vicious circle running between the real sector and the financial sector.

2008 Nov 09 07:56 AM

[Lok Sang Ho:]

I have been proposing a buy-back program with the Federal Government offering to buy from owners of existing homes valued below the median price at October 2008 market prices. This will at once put an effective floor on home prices for 50% of the existing housing stock. The Government can rent these units out, with potential tenants including the homeowners who needed to sell. Over the longer run this will not cost the government anything, as nominal prices will certainly rise, and even in the short to medium run, the government will collect a decent revenue stream. Consider the psychology of this. Investors will rush in, as there will be upside potential and no downside risk. Some sellers may withdraw their units from listing. The stock market will rebound, and bring badly needed confidence back.

More important, the proposal will still allow more expensive homes to fall, and will not include buying from developers. The market will be allowed to work with a healthier psychology. And that is what counts at this crucial hour. I argued this will reverse the vicious circle running between the real sector and the financial sector.

2008 Nov 09 07:56 AM

[Jane:]

Prices must come down to levels that are in line with incomes. This is the denial part, that many in the industry refuse to accept. This is the result when an industry and govt help create a bubble...it bursts!

2008 Nov 09 08:17 AM

[investor88:]

Agree let housing prices find its natural level of support instead of messing around with it.

2008 Nov 09 08:43 AM

[Ageless:]

Let's add a few additional demographic facts that suggest the U.S. housing market will not rebound anytime soon.

(1) Consider that there are far fewer people in Gen X than in the Boomer generation. Their smaller numbers will be reflected in the continued sluggish rebound of single home sales.

(2) Consider that Gen Xers are burdened with the very high cost of education, financial responsibility for their parents and, of course, later life children who also must be educated if America is to continue to compete. Their money (what there is of it) must be spent judiciously.

Don't count on Gen Y to bail the housing market out. While their numbers are large, their story is complex and we will leave that story to be told another day.

As for the behemoth houses in places like California, we ask - who will buy these oversized houses at any price?

2008 Nov 09 08:58 AM

[ArnoldCountry:]

Your article is pretty factual. Truly we have a supply and demand problem additionally hammered by a recession. I do think that something can be done besides nothing.

First, the government should create a new lending entity guaranteed by the full faith and credit of the U.S. Gov. that makes loans to BUYERS (not refinances) with rates in line with such a guarantee (5% approx). Only those loans could be purchased from financial institutions. They should make the criteria looser than current standards. This would ease up the ability for credit and since they would be treasury grade, the U.S. Gov. would not have too much difficulty selling the securities for them.

Create a tax credit for homebuyers the purchase in the next two years.

Change the bankruptcy laws to allow cram downs (modifications) on existing loans.

This would shift the losses right back to the banks and investors which would slow down foreclosures dramatically, allow homeowners to stay in their homes and lower payments that equivelent to rent considering the tax incentives. This slow down of foreclosures coupled with a new source of money for purchases would impact the supply side of the equation by reducing inventory.

Unfortunately, our representatives (a joke) are more influenced by the banking and securities lobby then they are doing what is best for our economy and its citizens. As long as they are talking bailouts, that means the average citizen needs to get its wallet out.

2008 Nov 09 09:06 AM

[rm:]

[One of the keys necessary to solving the latest economic crisis is stopping the decline of home prices.]

This is not the key, not at all.

Declining housing prices are a SYMPTOM, not a cause.

And despite the decline, housing prices are still too high relative to average income levels.

In addition to the already-high surplus housing levels which you mentioned, there's still more to come. Homeownership levels were artificially high, and even those "at the margin" borrowers who've managed so far will stumble when the forces of a weak economy and the real cost of homeownership collide.

Your conclusion is correct, though- there is nothing we can do to DIRECTLY bolster home prices. And all of the real solutions to the underlying fundamentals are going to take a long time to show results.

Of course, this assumes that the jackasses in Washington can pry themselves away from the idea of short-term "fixes."

2008 Nov 09 09:09 AM

[Philip Gvinter:]

The decline in housing prices is very necessary. The most important statement made by the author is "You simply cannot make an economic argument today that anyone should purchase a house when renting is cheaper. " This emphasizes the most critical part of the housing crisis. Because lending standards got so ridiculously lax (100% financing with seller paid closing costs and no verification of income for average credit buyers) that it created a bubble by over stimulating demand from unqualified buyers. The problems created by this have been unrealistic expectations for housing demand as traditional renters began to be lumped in as buyers despite their inability to buy and maintain homes at prices which are completely out of whack with traditional ratios of house price to income and house price to rent. In order for these key ratios to return to a sustainable range house prices must still fall in many areas. The only way for housing prices to stabilize without taking this necessary correction wages and rents must increase significantly. This is not possible given the current economic situation. While there are lots of complaints of banks not lending there is little evidence to support this. Conforming loans for up to $417k are still available at extremely attractive and historically low rates for borrowers with 5% to 10% down payments. FHA loans at similar rates are available for buyers with as little as 3% to put down. These are not onerous credit standards but rather sustainable standards which need to be upheld in order to prevent massive numbers of foreclosures caused by non-credit worthy buyers being allowed to purchase homes in large numbers. The issue at hand is that we are now in a negative feedback loop. In order to fix housing we must create jobs and stimulate the economy yet in order to do so we must first see a bottom in the housing market. The idea of the government purchasing houses in order to rent them out is interesting but misses a critical point. When houses can be rented for a profit prices will no longer fall as investors will gladly become landlords for the cashflow. The issue in bubble markets like CA, NV, AZ, NY, MA, FL, and my home market of the greater DC area is that this is not possible. The price to rent ratio is still so skewed as to make it highly unprofitable to be a landlord. Government intervention is possible because the government has much lower funding costs than a private investor (treasuries yield less than 4% while a mortgage is still over 6%) . The government also has the ability to buy in bulk which could allow it to take in a large portion of a lender's Real Estate Owned (foreclosed properties) at a discount price associated with bulk transactions at a time when very few investors have the means and fewer still the risk appetite to undertake such a venture. This type of stimulus (buying properties at current market value from lenders in order to turn them into rental units) could help to take away some of the excess inventory without creating a property bubble.

2008 Nov 09 11:11 AM

[Terry Finn:]

Pipe dreams! What are you smoking? It's time for a reality check. You really believe that the GREAT CONFISCATOR, our government, is going to solve the problem they created. Fanny and Freddie were the government's strong arms suing the banks to make mortgage loans to illegals and minorites that couldn't afford to pay. I.E. Buying votes. The ponzi scheme is over. Magic wands only work in fairy land. Obamanomics are simply empty promises. The national treasury, our gold, our savings and our real estate assets, have been pillaged by the gate keepers. Remember Judas, also a banker, sold out Jesus for only 30 pieces of silver. Our forefathers did everthing possible to keep our government tiny, but it just didn't last. Check the money in your pocket, on each coin and dollar bill is a warning from our founding fathers, IN GOD WE TRUST. Not bankers, nor governments! Be frugal and be patient as the $250,000. home works it's way back down to the $25,000. price that your grandfather paid. That is really all it's worth.

2008 Nov 09 11:14 AM

[Griz:]

I think we should ACCELERATE the decline in prices to stimulate more transactions. This should be done by re-directing some of the $700B to BUYERS and not sellers.

I have tried to do a short sale on the home we are renting but the bank will not come down to accept our offer (yes, it is an insulting lowball, but what the heck). My Realtor said that very few of these deals have been getting done so far because the bank doesn't want to "set a precedent" of accepting a lower price and causing market values to decline further (besides being very difficult to find out who actually owns the mortgage). I now think the $700B is actually just helping the banks to hold-out longer and delay the pain of getting this ever-growing inventory of homes off of their books.

If instead of bailing out existing homeowners (who inherently took on risk by investing, yes investing, in a home purchase), the banks are directed to use some of the $700B to pay for low-ball short sale purchases (as in the example above of helping yours truly out) wouldn't this cause things to start moving again?? We would accomplish the mission of encouraging more home ownership (as our house is going to the bank and will sit vacant anyway), and will generate more revenue for states and local economies as transaction volumes pick-up again.

See, I think everyone has been beating around the bush, proposing ideas that would help out the country when what they are really covertly proposing are solutions that are in their own best interest (typically existing homeowners looking to get bailed-out or stop asset price deflation, as in the case of my landlord). I instead am coming right out and suggesting a proposal that would benefit me. Yup, there it is, right out there for all to see... GIVE MONEY TO THOSE WHO WERE RISK-AVERSE INSTEAD OF THE RISK-TAKERS.

P.S. In addition to waiting for property values to hit 66% decline here in So Cal, I'm in 100% cash waiting for my Dow 5,000 entry-point too :)

2008 Nov 09 11:38 AM

[EasyLearn:]

Fundamentally the growth in housing pricing can't out pace the growth in wages. As long as those growths are out of balance it will require all types of tweaking to keep the supply and demand balanced which will create bubbles in other places of the economy. The best thing we could do for the real estate market is stimulate growth in business to create more jobs and raise the median wages.

2008 Nov 09 11:40 AM

[ccerenz2:]

"You simply cannot make an economic argument today that anyone should purchase a house when renting is cheaper." This is the crux of the entire problem. When owning a home has a preferable cash flow scenario to renting, then pricing will stablize. I'm a broker in Southern California, and for the most part buying residential properties is still not cash flow positive...therefore it seems logical that we have further to fall.
The author's comments are right on about the real inventory number versus what is listed in the statistics. From my anecdotal observations, the real inventory number is probably twice as high as what shows for sale in the MLS.

2008 Nov 09 11:41 AM

[Tom Lindmark:]

When we get back to historical affordability and price/rent ratios the backlog will be absorbed. Stop looking for sure to fail schemes to turn things around. Let housing prices find their natural level just like any other asset and then watch the market efficiently work. There are projected to be 1.5 million new households formed next year. The country is growing unlike many and that natural organic growth will provide the demand to absorb the supply over time.

2008 Nov 09 11:42 AM

[RTF 360:]

The paradigm was shattered.
The American Dream is dead.

The younger generation is not interested in matrimony, making a family, becoming shackled for life to auto and housing debt or demonstrating dutiful allegiance to an employer or a government.

How can you trust a system that fleeces you of your retirement and home equity after paying into it for 35 years and then having it default.

Yo, Barney ...wipe that joy juice off your chin and tell us what you did to our home equity.

2008 Nov 09 11:45 AM

[Chris White:]

Dear Steve
Please don't take this wrong. There is a secret. Let me tell you what it is. A job creation program which starts to rebuild the wages and earnings of America's workers. Mortgages used to be qualified on the basis of peoples' incomes, and their incomes were verified from their employment. Housing prices are not going to recover until people start to feel some confidence in their ability to pay their way, and that means jobs. This is another secret. There are no financial gimmicks, mechanisms or sch like which can replace that.

Oh, I almost forgot, since peoples' incomes get spent, job creation also helps business.

2008 Nov 09 11:50 AM

[ebworthen:]

Most important than supply:

1. Potential buyers do not want to get screwed by the bank so why buy in the first plac? The banks played craps with invested mortgage money, the government taxed property owners to bail them out. Why should I invest in being punished for paying a mortgage?

2. In 2005 the Supreme Court rulled municipalities could use eminent domain to sell personal property to developers to increase tax revenue. So...why should an individual invest in property that can be taken away?

2008 Nov 09 11:57 AM

[ebworthen:]

*More* important than supply...


On Nov 09 11:57 AM Eric W. wrote:

> Most important than supply:
>
> 1. Potential buyers do not want to get screwed by the bank so why
> buy in the first plac? The banks played craps with invested mortgage
> money, the government taxed property owners to bail them out. Why
> should I invest in being punished for paying a mortgage?
>
> 2. In 2005 the Supreme Court rulled municipalities could use eminent
> domain to sell personal property to developers to increase tax revenue.
> So...why should an individual invest in property that can be taken
> away?
>

2008 Nov 09 11:58 AM

[RobertsJim:]

Problem: Let's get creative about drying up the enormous oversupply of houses now driving down home prices, a basic supply-demand mis-balance that will continue to drive prices south until the mis-balance is rectified.

Solution: Establish a new, sharp source of demand by adding to to eligibility criteria for immigration the requirement to buy a house, perhaps via rent-to-own deals that require modest down payments (i.e., option payments, non-refundable except in certain instances).

No home purchase contract; no green card.

2008 Nov 09 12:01 PM

[A. Corinne:]

Virgil - We live in a global economy where labor and wage standards become more efficient every day. At some point in the future, THERE WILL be a small dicrepancy paid for labor on a global basis. The question is, what kind of labor do we want in America? Please stop wishing to go back in time and have a little more faith that the American work force can adapt the skill set required for the future. The more excuses we make for those that choose not to adapt, the more we hold our country back. We are an amazingly creative and innovative group of people. We spend more money by far both privately and publicly on R&D and education, per GDP, than any other country in the world (except S. Korea). Please wake up.

~American Abroad

2008 Nov 09 12:30 PM

[carey_jim:]

I like your solution: "Do nothing because nothing will work."

It reminds me of the guy who refused to become a Buddhist (me) because he said, "I don't believe in nothing."

In the same spirit, I realized at one point that I couldn't convert to Judaism because all my Jewish friends are antisemitic and I didn't want to be antisemitic.

I could never convert to Islam for reasons that I can't state publicly and I can't be a Catholic because the only position that would suit me in the Catholic Church would be that of Pope and it's already taken.

You might be wrong however: Doing nothing might NOT actually work and in that case NOT doing nothing would be best.

But no one will ever try nothing anyway so it don't make no difference.

2008 Nov 09 12:33 PM

[James Wilson:]

Here is how you solve the housing problem. Take all the low prices homes that have been forclosed on and give them to homeless familys and homeless eldery. Suddenly you have taxes comming in . Stop the spending on Homeless and welfare where you can move people into the low cost homes. The communities inprove. The homes are cared for and the taxpayers money serves 2 functions by getting an abandonded house filled and people out of public housing.

It does not cost anything for Public Housing to set empty !!!!!

2008 Nov 09 12:55 PM

[Rhett:]

Hansen is absolutely right. Housing must find its own bottom, and it willl in its own sweet time regardless of outside intervention. Any government program that props up home prices is temporary foolishness at best.

2008 Nov 09 01:04 PM

[ebworthen:]

EXACTLY!


On Nov 09 11:45 AM RTF 360 wrote:

> The paradigm was shattered.
> The American Dream is dead.
>
> The younger generation is not interested in matrimony, making a family,
> becoming shackled for life to auto and housing debt or demonstrating
> dutiful allegiance to an employer or a government.
>
> How can you trust a system that fleeces you of your retirement and
> home equity after paying into it for 35 years and then having it
> default.
>
> Yo, Barney ...wipe that joy juice off your chin and tell us what
> you did to our home equity.

2008 Nov 09 01:21 PM

[ebworthen:]

RTF - Agreed.

The responsible middle class, the backbone of any nation, has been sold out, bent over, and the train is off the rails.

Why should I invest in ANYTHING if I'm going to get fleeced and put in a pen to have a wolves watch over me?

Not going to happen because the sheeple will eventually awake from their Monday Night Football slumber and REVOLT - quit paying their bills, quit paying their taxes, and let the Elite and Entitlement classes fall.

2008 Nov 09 01:26 PM

[ebworthen:]

Envision this: L.A. Riots times 100.

That is what is coming, Obama or no.

The abused responsible of the middle class are buying weapons, not houses or stocks.

The inner cities will collapse in "gimme" riots, there will be millions of shocked blue staters who won't know what to do, and the rest will try to restore LIBERTY and the CONSTITUTION.

2008 Nov 09 01:31 PM

[viewfromnyc:]

It IS impossible to stop the decline in housing prices as the price of homes in most markets is above the market clearing price, Economics 101! The government can introduce distortions to the market to increase the market clearing price, but all that does is reallocate wealth within society and ultimately hurt our country. Market mechanisms are not instantaneous. People who bought overpriced homes, either directly as the purcahser or indirectly as a lender wth weak underwriting need to realize that they in fact have lost money and nothing the government could do will materially change the amount of money lost. Time to adjust the selling price and adapt to the current market.

2008 Nov 09 01:44 PM

[woodsey:]

Yep, I live in Texas where the economy is a little better, less greed, more caring than elsewhere. Lost heavily in the market especially RE. Paid cash on the barrel head for my new home. We must wait for housing to bottom before the turn around. But it won't be much if laiser-faire continues.

2008 Nov 09 03:29 PM

[jhaus:]

Stimulate demand with a modified section 8 program. Investors and home owners that are struggling would benefit. I haven't heard a good argument against this and I can't see any other way that government involvement isn't incentivising poor behavior. I wrote about this in more depth here and including a very interesting graph: www.nnnrent.com/2008/1.../

2008 Nov 09 04:28 PM

[SteveD64:]

Good comments....exactly correct...market will find the "right" price....people forget that there is no real estate market.....ALL local....ALL neighborhood....

2008 Nov 09 04:43 PM

[Jolly_Rancher:]

The best way to fix real estate is to:

A) Create Jobs
B) Reduce personal and government debt
C) Reduce fuel prices

Sounds impossible? No, it's easy.

A) Remove regulatory barriers, and the best two place to remove those barriers is drilling and nuclear. Open drilling in California, Florida and the Northeast. Streamline approval for construction of nuclear power. Just those two changes alone would directly create hundreds of thousands of jobs and lower fuel costs and lower the trade deficit and require no new government spending. How can you beat that?

B) Furthermore, the government should directly tax high pollution fuels and high pollution users. Coal has to go, unless the process is clean coal.

C) Also, the time is ripe for a government sponsored health care system for those who wish to participate. This would remove an enormously expensive burden on businesses, allowing them to be more competitive with foreign business.

D) Lastly, the government should restructure the EPA from a watch-dog agency to a service agency. The EPA should be responsible for hazardous waste disposal. This would remove another enormous burden from business.

This is very very quickly doable. Now.

Have a great evening.
Jolly Rancher

2008 Nov 09 05:01 PM

[Kunst:]

Jane: "Prices must come down to levels that are in line with incomes."

Or incomes must come up to levels that are in line with prices.

The simplest and easiest (i.e., the American) way out of this dilemma is to devalue the US dollar by monetizing (buying with newly printed money) all or part of the federal debt. Result: higher incomes and prices, including house prices. Existing homeowners have positive equity again and mortgage payments drop as a percent of income. Rents go up, making home ownership more attractive.

Of course, the dollar is worth less, American industry and workers are more competitive, the American standard of living goes down (inevitable anyway), and energy costs skyrocket. Lenders and anyone living on fixed income/return cash flows lose, borrowers (isn't that America?) and asset owners win.

Or maybe we will reduce government spending and increase taxes to create a budget surplus we can use to pay back that $11 trillion (and rising) we owe. That would be the honest way. How likely do you think that is?

2008 Nov 09 05:27 PM

[CLH:]

Keep housing prices up? no way!! The housing bubble went up until no one could afford a house. The market must be allowed to correct and the gov. should butt out.

2008 Nov 09 09:31 PM

[Kiisu:]

Perhaps I missed something, but regarding:

* "a buy-back program with the Federal Government offering to buy from owners..."

* "the government should create a new lending entity guaranteed by the full faith and credit of the U.S. Gov. that makes loans..."

* "A job creation program..."

* "Take all the low prices homes that have been foreclosed on and give them to the homeless..."

* "A program which subsidizes rents of homes..."

And all similar Federal Government-oughta-dos....

I've read the US Constitution.

I've yet to find a clause that permits the Federal Government to assume any of those powers.

Though it seems obvious from history that many of our legislative, executive and judicial leaders have consistently and willfully violated their oaths to "protect and defend the Constitution against all enemies foreign and domestic"... I fail to see how proposing additional violations of the Constitution would solve any of our perceived problems.

As my grandfather might have said, "unconstitutional expansions of the Federal Government are not the solution... they _are_ the problem."

If you truly desire to remove the limits and give such powers to the Federal Government, then it is right, just, and appropriate to amend the Constitution accordingly.

Until then "we the people" should not be begging the source of the problem to illegally assume even more power.

2008 Nov 09 09:54 PM

[blasted:]

First the goverment should stop co-siging evey goofy loan put in front of it. Second they should stop charging landlords more than homeowners for property taxs. In Indiana landlords pay double what home owners pay for a similar home. If property taxes were fairer investors would buy more REO's lowering the number of houses on the market, . Also an increse in renters causes rents to go up and home prices to be supported.
On Nov 09 09:54 PM Kiisu wrote:

> Perhaps I missed something, but regarding:
>
> * "a buy-back program with the Federal Government offering to buy
> from owners..."
>
> * "the government should create a new lending entity guaranteed by
> the full faith and credit of the U.S. Gov. that makes loans..."<br/>
>
> * "A job creation program..."
>
> * "Take all the low prices homes that have been foreclosed on and
> give them to the homeless..."
>
> * "A program which subsidizes rents of homes..."
>
> And all similar Federal Government-oughta-dos....
>
> I've read the US Constitution.
>
> I've yet to find a clause that permits the Federal Government to
> assume any of those powers.
>
> Though it seems obvious from history that many of our legislative,
> executive and judicial leaders have consistently and willfully violated
> their oaths to "protect and defend the Constitution against all enemies
> foreign and domestic"... I fail to see how proposing additional violations
> of the Constitution would solve any of our perceived problems.<br/>
>
> As my grandfather might have said, "unconstitutional expansions of
> the Federal Government are not the solution... they _are_ the problem."
>
>
> If you truly desire to remove the limits and give such powers to
> the Federal Government, then it is right, just, and appropriate to
> amend the Constitution accordingly.
>
> Until then "we the people" should not be begging the source of the
> problem to illegally assume even more power.

2008 Nov 09 10:53 PM

[Did U Think...:]

Well said. There is no gov't solution short of tearing housing down and that makes no sense given the number of homeless we have. It would be better to create work projects to turn blocks of abandoned single family dwellings into rental properties or old folks homes with a live in quarters for a "host". Old folks of limited means could live their final days there living which would be assisted by the otherwise homeless host. The old folk's homes could themselves be sold to pay for the very reasonably priced care.

But spending taxpayer money to keep prices high? That is insane and it fundamentally cannot work.

2008 Nov 09 11:16 PM

[JOSEPH FOSTER:]

GOOD COMMENTS ABOUT HOUSING.
TAKE ALL THE FORCLOSURED HOMES AND RENT THEM AT AFFORDABLE PRICES THIS WILL REMOVE THOSE HOME FROM THE MARKET FOR SALE.
IN TIME PERHAPS 5 YEARS THESE HOME WILL BEGIN TO APPRECIATE
AND THE GOVERNMENT WILL RECOVER ITS INVESTMENT.
I HAVE BEEN A SUCUSSFUL REAL ESTATE INVESTOR FOR OVER 30
YEARS. REAL ESTATE INVESTMENT IS A TIMING WHEN TO BUY AND HOLD AND HAS OUTPERFORMED THE EQUITY MARKET ON A LONG TIME HORIZON.
A UK STUDY WAS MADE WHER PROPERTY WAS PURCHASED OVER LONG TERM AND COMPARED THE INVESTMENT TO THE EQUITY
REAL ESTATE HAS OUT PERFORMED EQITY INVESTMENT, IF YOU DOUBT MY WORD LOOK AT WHAT HAS HAPPENED TO THE MARKET IT HAS WIPED OUT ALL THE GAIN MADE IN THE LAST 10 YEARS.
ASIDE FROM REAL ESTATE A TIME BOMB IS TICKING SLOWLY ON
WESTERN JOB REPLACEMENT BY CHEAP CHINESE LABOUR, THIS PROCESS WILL EVENTUALLY DESTROY THE MIDDLE CLASS.
CAPITALISM LEFT WITHOUT GOVERNMENT INTERVENTION WILL
SELF DESTRUCT. WHEN THE MIDDLE CLASS IS DESTROYED THOSE CHEAP GOODS SALES WILL DROP.
THE EXPORT OF JOBS TO CHINA IS GREAT FOR CORPORATE PROFIT, THE FEW OF THESE CORP EXECUTIVES MAKE A FORTUNE, TYHE SHARE HOLDER IF THEY ARE LUKY MAY ALSO GAIN, BUT THE PROCESS SELF DESTRUCT THE MIDDLE CLASS.
FINALLY LET ME QUOTE WHAT OBAMA SAID:
IT IS GOOD FOR THEM AND NOT FOR YOU.
FOR THEM MEANS CORPORATE AMERICA AND YOU MEANS THE AMERICAN WORKER.
WHEN EXTREME CAPITILIST CONCEPT DESTROYED THE MIDDLE CLASS IN RUSSIA AND CHINA, A REVOULOUTION STARTED AND
THE COUNTRY COVERTED TO COMMUNISM.
OBAMA HAS BEEN ELECTED AT THE RIGHT TIME TO SLOW THE SELF DESTRUCTION OF AMERICA, MCCAIN WOULD HAVE SPEED THE PROCESS OF SELF DESTRUCTION BY MORE WARS, SUCH AS IRAN, THEN REVEIVE THE COLD WAR AS BUSH IS TRYING WITH RUSSIA A SUPER POWER CAPABLE OF TAKING ALL OF EUROPE WITHOUT THE USE OF NUKE BOMBS.
UK AND USA INVASION OF EUROPE AND LANDING WAS MADE POSSIBLE BY RUSSIA DESTROYING 5 MILLION OF THE BEST GERMAN ARMY, BY THE TIME WE LANDED IN FRANCE HITLER MILITARY POWER WAS 80% DESTROYED.
I DO RECOGNIZE WE HELPED RUSSIA NOT WITH WEAPONS BUT WITH FOOD.

2008 Nov 10 12:54 AM

[secmaven:]

The confiscatory role of local real estate taxes to fund the excess wages, health and pension benefit of government "workers" has played a large part in driving real estate values down. Buyers increasingly recoil at the prospect of paying these taxes at increasingly higher and higher rates. And with Obama's promise of reduced income taxes the incentive to take on the burden of property taxes, as well as deductible mortgage interest, is reduced. If as is reported, 45% of the public pays no income taxes, this leaves only 55% of the public as potential home owners even if home prices stabilize (the best case) rather than continue to decline.

2008 Nov 10 01:48 AM

[Ryan in Sha...:]

I must 2nd A. Corinne's argument completely. American's particularly must get out of bed each morning with the thought "How am I going to be more competitive than nationals of each other country on the planet?" Education and Technology are being spread across the entire planet. This is a huge net benefit to humanity. Deng Xiaoping (former Chairman of China) will be remembered in history for eliminating a huge amount of poverty. Bringing people up to American standards of living is a great thing for humanity.

Each time I read about stimulating jobs in constructing and other blue collar sectors in the USA, I realize that Americans are hiding their hands in the sand rather than competing. There is not a net economic benefit to consumption - there IS a net economic benefit to competing effectively.

Do you really want to be weaving together shoes more inexpensively than migrant farmers in rural chinese factories? If you're going to compete, you should be leveraging your STRENGTHS (education, legal system, gov't transparency, etc) to create products that you can EXPORT to the rest of the world at HIGH MARGINS. Where does the MARGIN come from? INNOVATION and COMPETITIVE ADVANTAGE.

The Germans understand this. Germany has the highest trade surplus in the world. They are exporting power plants, premium automobiles, even MagLev trains.

Americans - you've created MSFT, Google, Starbucks, the NYSE, etc. Keep the innovations coming. The future is bright.


On Nov 09 12:30 PM A. Corinne wrote:
> Virgil - We live in a global economy where labor and wage standards
> become more efficient every day. At some point in the future, THERE
> WILL be a small dicrepancy paid for labor on a global basis. The
> question is, what kind of labor do we want in America? Please stop
> wishing to go back in time and have a little more faith that the
> American work force can adapt the skill set required for the future.
> The more excuses we make for those that choose not to adapt, the
> more we hold our country back. We are an amazingly creative and
> innovative group of people. We spend more money by far both privately
> and publicly on R&amp;D and education, per GDP, than any other country
> in the world (except S. Korea). Please wake up.
>
> ~American Abroad

2008 Nov 10 03:02 AM

[Mowog:]

Corinne, great read! However, as you surely are aware, Germany is experiencing a slowdown, possibly one that will be worse than ours. Its demographics aren't as bad as Japan's yet, thankfully for them. Growth will return, but the social welfare states are going to crumble nevertheless. Inflation to "pay down" debts will eat people's savings, thus making them more dependent on the destructive state.

2008 Nov 10 07:43 AM

[mkttrdr:]

Credits for buying foreclosed homes is a good start.
But to get the supply down is the biggy-tear em down.
Some markets have 2-3yrs supply on sale now.

2008 Nov 10 12:58 PM