Help the Housing Market with a Buyback Program

I disagree with the statement that "There is no solution to the excess supply of housing other than to have a good-sized fire, or grow our population" (Bill Conerly, Seeking Alpha, November 26, 2008). It is clear that destroying the housing stock makes no sense, as people will need housing later on. Bringing in immigrants through some kind of "invest and stay in the US" program might help, but you would need such big numbers of rich immigrants that this might not be realistic, and it could also lead to other problems. There is a better choice: the buy-back program that I propose.

The buy-back program that I propose is not unfamiliar to economists. In introductory economics texts, it is pointed out that the government could buy and store up the surplus grains during years of bumper crops. During years of poor harvest the stored up stocks can be released. With crops, however, there is the difficulty caused by the aging of the stored up stocks. With homes this is not a problem. A buy-back program may therefore remove the housing stock from the market temporarily, or may entail renting out to those who prefer to rent or who cannot afford to buy.

Setting a price floor is a form of intervention, and can only be justified if and only if the benefits exceed the costs. It appears to me that at this juncture benefits are huge. Allowing home prices to fall much further will certainly lead to more needs for bail-outs of BOTH financial AND non-financial enterprises. That Citibank (C) needed help was unthinkable six months ago. Presently Detroit cries for help, and already General Electric (GE) has been calling for help, though in a much more low-key fashion. Another 10% decline in home prices will certainly lead to more business failures, more bailouts, and higher unemployment rates. The effects on consumption and investment will be much more serious and long-enduring.

My proposal is only for the government to make a buy-back offer at market price on some specified date to owners of existing homes below the median housing price. The cost will be several hundred billion dollars. This is no doubt a lot of money, but not a lot when compared to the 4 trillion dollars already committed. It tackles the source of the problem, and will change the market psychology significantly, thus provides a fail-safe way to avert deepening of the present crisis.

Over the longer term, the buy-back program is also likely to lead to more stability in the housing market. If housing prices collapse excessively, many builders will give up home construction all together. A shortage will appear further down the road, and this will lead to yet another round of housing price boom. This kind of cycle is called the "cobweb" in economics. Setting a floor may well help avoid such a scenario.

Comments

[Roger Knights:]

It sounds sensible to me (therefore it won't be done).

2008 Nov 28 07:14 AM

[TTurk:]

There is no economic benefit in the long run of the federal government opening and maintaining a nationwide real estate management business. You state that unlike grains, "With crops, however, there is the difficulty caused by the aging of the stored up stocks. With homes this is not a problem." You obviously have no idea how much maintaince an empty house requres. The cost of maintaining the property and paying the taxes for one or two years would put every house purchased at a deficit and the very moment those houses are put back on the market, the pressures on pricing would return.

Your proposal is not a solution to the housing problem. It is simply a costly program that delays the problem.

2008 Nov 28 07:27 AM

[TTurk:]

You state "With crops, however, there is the difficulty caused by the aging of the stored up stocks. With homes this is not a problem.

You obviously do not know how expensive it can be to maintain an empty house and you obviously are not considering the cost of utilities and taxes.

Such a proposal does not solve the problem. It only delays the problem and costs the taxpayer a lot of money in the meantime.

2008 Nov 28 07:31 AM

[msoori:]

There are additional costs involved in a buy back program as well, such as insurance, upkeep, etc. Maybe a buy back coupled with a lease to own maybe the answer. This way, the govt owned properties get a ROI instead of eating more in upkeep and the people get a chance to buy the property with the option to buy.

2008 Nov 28 08:10 AM

[Tructor:]

It could be an intelligent plan if well-designed and executed to enable re-sales and lease-to-own deals for qualified renters. In the late '60's-early '70's, HUD had similar urban housing renovation programs that upgraded/rehabbed exisiting homes and apartments and made purchase & leases affordable. These HUD programs saved many a neighborhood from decay and the wreacers ball, and provided entry housing just as the US entered the 1975 recession, which may have been more severe without the HUD programs. It could be done again, and now might fit into Pres. Obama's jobs programs.

2008 Nov 28 08:35 AM

[logicalthought:]

You are insane.

2008 Nov 28 09:02 AM

[vatexas645:]

It sounds like the same plan many parents use for their children. Said children often NEVER learn how to save or spend money wisely, and the problem continues. I think we need to let the housing market take care of itself. Regardless, you are wrong in your perception that housing does not deteriorate - houses that are not maintained (lived in) do deteriorate.
This plan would be better constructed by using a private investment fund or funds that would look after their investments rather than a Federal bureaucracy wherein no one cares about "other peoples money".

2008 Nov 28 09:19 AM

[Lok Sang Ho:]

Thanks tructor for the instructive information. Thanks to the rest too. Yes homes do deteriorate without maintenance, and taxes have to be paid. That is part of the cost. But as I explained many of the homes can be rented out and managed and maintained properly. There is a cost. But with maintenance homes are really durable, whereas crop stocks do not last very long.

I disagree that homeowners in distress today are like children who failed to take care of themselves. Most are responsible people, and default rates among prime borrowers are surging, with dire consequences. Following Citi, other major banks will follow, and then the amount of bailout dollars required will become unmanageable.

2008 Nov 28 09:36 AM

[johnbee:]

Government/s don't need to spend money on this-or very little- as all that needs be given is Goverment guarantee at 80% of the house value(based on local government rating assessment) to the mortgagors. At the same time banks and other lenders need be told that there will be a maximum mortgage rate moratorium on domestic homes of say 6%. This stops banks from their nasty trick of raising rates sharply from the initial offer after a period which has been a major cause of repossessions among the less well off. In addition people should be able to opt to be able to extend repayment for a minimum of 35 years (whatever their current contract) so as to alleviate repayments.This should be mandatory by Federal law. If this reduces banks profits so what? They have been thieves and tricksters for too long. Given these all together:- property prices would be largely restored; the banks loan book underwritten and credit could be greatly restored, and there would be few foreclosures as mortgagees would not have to leave their homes, so little need for the government to pay out anything. I am not sure if the Government would need show the guarantee as a debit in its books but I doubt it and it would be better than printing money in any event.
As an alternative for those not wishing to extnd their mortgages then they should be allowed to stay in the home at a reasonable market rental, and the Government would own the house.

2008 Nov 28 09:45 AM

[axelrod608:]

An additional factor is that liar's loans were still being made in large numbers into 2007. The shortest resets on those loans will be 3 years, the longest 5 years which means that foreclosures will continue at high levels into 2012. Anyone who thinks the decline in home prices is complete is just not paying attention.

I do admit that based on a long history, the government is likely to waste a bunch of taxpayer funds buying up assets that will be worth half what they paid in five years AND will cost 10% per year to maintain. Honestly, when is the last time the feds did anything that made sound business sense ??

2008 Nov 28 11:34 AM

[RJMoran:]

One of the 'unintended consequences' of such a 'buyback', I'm afraid, would be that builders would have NO incentive to stop building. They could keep building, knowing the gov. would eventually step in and buy their deteriorating 'product'.
While I sympathize with the idea of gov. help, we already have the gov. bailing instituions out left and right for failed business decisions they made quite willingly...Having the gov. be a 'buyer' of real estate only delays the inevitable. If renting the oversupply would help, private owners and developers would already be doing it (and are in the case of condo towers laying empty). Cheap money led to a misallocation of resources toward overbuilding/building material price increases, etc and that 'condition' will just have to correct itself over time with lower prices and perhaps government-assisted incentives to get potential buyers 'off the fence' and into buying up some of the overhang.
Even after prices stabilize, they will not go up for years since at every price increase, people will look to sell, attempting to 'sell the rally' like they do in equities. Unfortunately, we're in this for some time...! In the 90s when Southern California real estate dropped 30-40%, it took nearly a decade to recover the prices seen at the then peak...Settle in folks, this is going to take awhile and there will, unfortunately be no SNAPBACK rally in real estate...

2008 Nov 28 12:45 PM

[sr9web:]

The problem right now is that a huge portion of the alphabet soup real estate securities (CDO, CMO, CLO, etc.) were written in 2005, 2006 and 2007 at the top off the bubble.

Because of that, tons of the loans in those CDOs are junk and the CDOs therefore have little value. This matters because these CDOs are on the books of financial institutions and must be written down, imperiling the capital ratios of those firms.

A better solution is to let the chips fall where they may, with the govt. propping up the stronger firms and closing the weaker ones.

Wall Street scammers caused this problem by creating the toxic CDOs - and this problem will not be solved until those CDOs are all written down.

2008 Nov 28 01:10 PM

[OldLimey:]

So, if I understand this correctly, the extant economic model is to be one in which government underpins over-inflated asset values, keeps pushing credit into the wallets of already over-indebted consumers, and bails out its cronies whenever common sense gets consumed by a wave of greed. Any hint of a longer term fix in there somewhere?

2008 Nov 28 01:12 PM

[WAKEUP:]

Here we go, again. Another attempt to deny the obvious, which is that the housing market is shot to hell. There is no way "out." Housing is done for, as an investment, and, for that matter, it's pretty much done for, period. There are so many houses involved in this disaster that soon EVERYBODY is going to realize that houses will be selling at fire sale prices in the foreseeable future. At that point a house will be just another stack of wood, bricks, and nails, and that's about what their value will be. It's pretty obvious at this point, though, that those who have lived their entire lives seeing home prices go up simply cannot stand the fact that the air has been let out of this balloon, forever, and these folks are going to continue writing articles about how to dodge the inevitable. No matter. It's over. Try to get used to it.

2008 Nov 28 02:32 PM

[RZ:]

There should be no more bailouts period. If a bank is destined to fail let it fail. If they have outstanding loans, let them be written off. The people who have them loans are off the hook, They are issued the deed to their house free and clear. No more mortgage payments means they have plenty more $ to spend every month. The economy would start to turn around and the people whos bank didn't fail would probably be able to afford their mortgage once the market turns around. Yes it wouldn't be fair to everyone. some people would get their house for for free and others would still have to pay. But if thats what it takes to turn the market around so be it. I don't care how big a bank is, if they made bad business decisions they should fail. Their debts should fail with them, another bank should not be allowed to buy their debts at a discount unless the discount is passed on to the homeowner.

2008 Nov 28 02:43 PM

[Steven Hansen:]

the houses are too expensive - period. yah, lets have immigrants come here and buy our crap - and lock our kids out of the market. the housing prices rose because people saw it as a way to make money quickly - not a long term investment.

they need to fall to a level the purchase price is competitive with rent. housing should not be something that competes with equities or we will forever be having these bubbles.

mr. lok, obviously you are not a farmer. the only similarity between the program you are suggesting and farm subsidies is that the government is involved.

2008 Nov 28 10:04 PM

[The D:]

Everyone can provide enough statitistical analysis to prove any point or disprove it, but the reality of thsi proposition, in my opinion, is that yet again, we look to the government to avoid recession at all costs. When did a normal cyclical occurrence become such a terrifying prospect. Now before everyone hammers me, I know this is not a "normal" situation, however, I doubt many would argue against the fact that the monetary policy of the Fed and and fiscal policy of government at large, has been to avoid a recession at all costs. Thereby creating one asset bubble after another. Because of this, I am leary of them intervening at all anymore. Let the market wash this crap out, and yes we will all suffer for a while, but we will suffer tenfold if we keep trying to stop everyone from losing money. Not to mention the moral hazard created from attempting to do so.

2008 Nov 29 10:08 AM

[sstro:]

The government is entreched in banking,insurance and soon to be a car manufacturer. So why not take the next step in the socialism ladder and have them sell us our homes. What's next? McDonalds can't sell enough big mac's at 5 bucks so we prop them up till enough people will buy them. Let the market and the course of time make the decision where the bottom is. All this artifical price fixing is going to do is keep the renters and savers on the sidelines until the light in the tunnel becomes clear.

2008 Nov 29 11:56 AM

[Lok Sang Ho:]

Just a note to say that I never suggested the government buy from a builder. The government should NOT do that.

I am not worried about home prices falling per se. I am ONLY worried about the credit crunch this implies, which INEVITABLY will lead to an increase in business failures and unemployment.

2008 Dec 02 08:43 AM