How to Solve the Excess Supply in Housing 17 comments
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Allan Meltzer is the latest to develop "a plan to rebuild the housing market." Although I have tremendous respect for Professor Meltzer, we don't think his plan addresses the real problem. He writes, "The main problem in Britain and the U.S. is an excess supply of unsold houses." More accurately, the main problem is an excess supply of housing units of all types.
Here's a chart of the unsold homes Meltzer is worrying about:
But there's another excess supply: rental units:
(data for both charts come from the Census Bureau)
A mortgage-focused plan to help people buy homes can reduce the first vacancy rate, but only by worsening the second. Those people who might buy a house are currently living somewhere. f we move them out of rental housing into owned housing, we aggravate the high rental vacancy rate.
Owned housing constitutes about two-thirds of the housing stock, with rentals one-third. So to reduce that owned vacancy rate down to a more reasonable level, changing the vacancy rate by one percentage point, we would add about two percentage points to the rental vacancy rate. Rental vacancy is already pretty high, and another two percentage points would clobber it.
So what's the solution to the excess supply of housing? Fire would be one solution, but we don't use that too much outside of Detroit. The other solution: a larger population. We add about one percentage point to our population every year, so we'll eventually grow our way out of this problem. But there are no fast solutions.
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This article has 17 comments:
While many folks complained about the RTC "dumping" properties on the market back 20 years ago, this effort helped stablize values by significantly reducing the backlog of excess homes for sale.
Furthermore, the government will need to provide end-loan financing.
As far as the rentals go...those can can't be rented will have to be sold too. There is simply too great a supply to meet today's housing needs.
The market will correct itself on a much shorter timeframe by taking these steps to get the properties back in the hands of folks who can afford them (at today's price levels...not those of 2006).
American savings rates are very low so few potential new buyers have 20% to put down on a house. Even if they have 20% down for a $300k house the $240k mortgage at 6% over 30 years leaves a $1498/month payment without including property taxes and house maintenance. The interest component of the mortgage payment in the early years will be nearly $1200/month.
The total cost of home ownership will be at least $1700/month, after putting down $60k of your own savings. This house might be barely affordable to someone grossing $60k per year. Of the $1700/month cost of ownership only about $300/month will be applied to reducing your loan principal in the first few years. So if you can rent for less than $1400/month it is probably the economically best thing to do. And you still have the security of your $60k in the bank.
People who have $60k in cash are unlikely to be risk takers who jump into a $300k purchase in a falling housing market. They will wait it out until it looks alike a bottom has been reached. If they have to rebuy because they moved then they added their old house for sale while they removed their new house from the market for no net drop in inventory.
And for a lot of the available inventory $300k is a long way down from peak prices and current mortgages on those houses. If a $240k mortgage is pretty much on the line where it is better to rent than buy we can see that there needs to be a lot more price reduction before the stock of housing will start to clear. I don't think there is any way out of this that doesn't involve a haircut for everyone who bought high and needs to sell now.
There are a lot of dynamics here. Maybe we should do the Russian thing and have a national holiday so everyone can go home that day and make a serious effort to procreate.
It's a sign of the times and I expect to see a lot more sites like Kayyah.com out there so long as the REO's and FSBO's continue to skyrocket.
- Tanya Worthington
As deryll said: incomes must be able to support prices...creative lending was bridging the income/price gap for several years and NOTHING can balance the current situation except for greatly increasing incomes or greatly decreasing home prices. Obviously the latter is in play for the foreseeable future.
Deals are being made, and when batches of hundreds of millions are being sold in one shot, it won't take long before the word gets out.
What they realize is that the inflationary campaign currently underway, is about to unleash major devaluing in the next year. The dollar is king right now, but it won't be 12 months from now. That's when you'll want hard assets, end of story.
This could turn into a nasty downward spiral. Foreclosed houses dumped by banks are already setting the price level. It may bring more buyers in but: 1) it reduces (satisfies) demand, lowering prices for a long time, and 2) what happens to all those rental houses? They aren't going to be worth much.
So house prices go down and down in this scenario, essentially as long as there is an excess of supply. We already tried artificially boosting demand by giving mortgages to people who couldn't afford them. That didn't work too well.
New buyers benefit from the glut, but existing owners have a problem. It's easy to say, "tough", but it's not as simple as that. As long as house prices are low, many people are stuck where they are because they have negative equity. When they have to sell due to life circumstances, they have to write a check to the bank, which doesn't always work.
Driving house prices down isn't going to stabilize the situation, any more than water receding after a tsunami undoes the damage of the surge.
The answer is to get the government out completely, so that the markets can clear. When this happens, all of the houses will be lived in by people who got very good deals, or people who got a good deal years ago.
I think this guy wants to see his picture on the web...
Well, the risks of investment are clear. However, homeowners should never consider buying their home an investment. (I have never agreed with the real estate industry that promoted such trash). Being a homeonwer is providing for a basic human need... shelter. A human need that we will have until death.
So, while no question investors will be hurt by promoting homeownership in the short run, in the long run they will do fine as they will be able to sell their investment at a profit when the market stabilizes and property values increase. But as a matter of public policy, investments are risky and homeownership is stabilizing. It makes no sense to make investments risk less and homeownership more risky.
And, please stop saying things like "people who couldn't afford their house anyway"....that is truly a small segment of the problem. A small segment. There are a lot of people who can't afford their houses now, for a lot of reasons, but to say that homeowners brought this problem on themselves, and the rest of us, is really and truly a profession of ignorance about the facts of this crisis.
Oh, by the way, not everyone who takes out an Adjustable Rate Mortgage (ARM) is trying to beat the system, buy more house than they can afford, etc. That's like saying everyone should only buy bonds, and not stocks, commodities, etc. There are diferent vehicles for different people for different objectives. Not all subprime loans were taken out by idiots or put in place by predatory lenders. Same reason. Problem is: because banks stopped lending and home values dropped like a rock (your opinion of home values is irrelevant) these people got stuck and then of course their housing expenses got too high. They were never supposed to be in these loans when they adjusted. They wouldn't have been if, oh I don't know, if the banks hadn't stopped lending and home values hadn't dropped like a rock. Say what you want, no one saw this coming, not on the scale it currently is. Think you did? Think again....
(BTW...I've been in the real estate and finance industry for years, and have made it an obsession to study this global crisis deep, real deep, so strap your boots on if you want to go toe-to-toe.)
Larger supply + Reduced demand = Lower prices.
It's as simple as that. The excess supply won't go away until prices come down to a point where incomes can support the payments.
The fact is that people paid 'too much' for the houses they bought, whether it was for their own home or for rental investment. The amount they paid in the past has no bearing on what the house 'should' be worth. Supply and demand sets the price, not 'what it used to be worth' or 'what I paid for it'.
Any attempts to deny those facts are simply rationalizations to avoid the reality that people have lost money from past decisions. While that isn't a pleasant thought, it's not one that will change by ignoring it. Those who acknowledge reality and deal with it first will be the ones who recover the earliest.
Here's a thought:
Apartments are mult-dwelling buildings or complexes. Vacancies in apartment buildings are not catastrophic to the buildings. OTOH, vacant houses are often stripped and quickly fall into disrepair.
So, instead of burning houses down, how about allowing the market to lower the prices so that renters can move in and maintain them?
I tend to agree that the other nations of the world will grow tired of constantly funding America's mishaps and American interest rates will skyrocket. What currencies then do you see outperforming relative to the Greenback? The Euro? Yen? Pound?
I don't intend to hand over my fortune to the 2 and 20% crowd so they can recklessly bet on a housing recovery with no accountability. What are my other options?
Seeker
On Nov 13 04:17 PM sickofthehype wrote:
> Right now there are hedge funds prepared to buy millions upon millions
> in pennies-on-the-dollar real estate direct from Fannie, from Countrywide,
> and many others.
>
> Deals are being made, and when batches of hundreds of millions are
> being sold in one shot, it won't take long before the word gets out.
>
>
> What they realize is that the inflationary campaign currently underway,
> is about to unleash major devaluing in the next year. The dollar
> is king right now, but it won't be 12 months from now. That's when
> you'll want hard assets, end of story.
Banks borrow from gov. at 1.25% and write mortgages at 6% which then get held by Fannie or Freddie (which are owned by gov.). Why can't the gov. set up a lending platform that would be more direct.
Gov. should set up a special fund to be used to buy only new homes and foreclosures. Money lent to the banks at 1.25% which is then lent to borrowers at 3%-4%. This would cut the monthly cost by half without reducing the value of the house. Inventories would get cleaned out, people facing foreclosures would be able to stay in their homes and new jobs would be created to satisfy demand.
This program shouldn't cost tax payers, it only limits the profit generated by financial institutions.
We should be talking about this Nationally. It would be MUCH cheaper than the bailout or stimulus approach.