U.S. Housing Market: Dis-assembly Required

"Declare victory and leave."

--Advice given to Presidents Johnson and Nixon on the Vietnam War by Senator George Aiken, R – VT.

The current administration reached a financial milestone last week. Given all that they’ve spent, now might be a good time to declare victory as they pack.

As Edmund Andrews describes in the New York Times on November 26, 2008, the government has spent “about $1.4 trillion [of $7.8 trillion in direct and indirect financial obligations] … [on] loans, capital infusions to banks and the rescues of firms like Bear Stearns and … American International Group (AIG).”

The table below summarizes these expenditures, and is based on a chart that accompanied Andrews’ article:

The $1.4 trillion total is an interesting figure, particularly if you recall two graphs from my earlier “The Demographic and Economic Record Prior to the Housing Meltdown” piece [See References]. Below are the graphs.

According to the Census, there are roughly 117 million US households, with a median family income of about $62,500, as suggested by the top “Median Family Income” graph.

As described in my “Demographic and Economic Record,” while there had been a relatively stable relationship between home prices and family income for much of the last 30 years, home prices diverged from income beginning in 2001. This reflected both:

• The embrace of alternative mortgage products and the relaxation of underwriting standards; and a
• Generally favorable interest rate environment.

Both of these “compensating factors” have now vanished.

As a result, home prices are now about 18% above that which would be consistent with family incomes. That is, the red and blue home price lines in the bottom graph are each at about 220 (using a scale of 1988 = 100), while the green family income figure is only at about 187 (using the same scale), and (220 – 187)/187 = 18%.

To put it another way, all else being equal, home prices might be “fine” where they are (and would have no “need” to continue declining) if only family incomes were higher. How much higher? Oh, about 18% of $62,500 for each of the 117 million households. Or numerically:

In other words, the amount that the government has already spent to such good effect, $1.4 trillion, exceeds the amount that that the government would have spent had it “simply” given each household a cash gift of $11,250. Might this have been more effective than the current TARP, MMIP, TAF, PDCF, TSLF, TOP, ABCP, MMMF, LF, CPFF?

We’ll never know unless we try.

Positions: None.

Comments

[bricki:]

Isn't it really neutral how the money enters the economy? The added money supply will inflate everything anyway, making it easier to repay the loans.

2008 Dec 02 12:24 PM

[MLKlein:]

Good thought but what do you propose for the following year?

2008 Dec 02 04:43 PM

[exactly:]

yeah -- that is one year - not income over 30 year mortgage

bottom line -- housing prices MUST drop, and all $$ given to their current occupants are a WASTE, cheating those who did not participate in this scam.

2008 Dec 02 05:53 PM

[Ira Artman:]

Good comments both.

Re: bricki - If through government programs, overhead associated with programs (DC, NY) tends to focus funding/benefit to areas where program administrators live.

re:MLKlein - Well, government has only spent $1.4 T of $7.8 T (I believe, these are the NYTimes' #'s). So, if additional help is required could spend the rest (roughly $45,000/household) next year.

2008 Dec 02 05:57 PM

[Pilgarlic:]

But... you're talking about a one-time payment versus the stream of income required to keep home prices and incomes in proportion.

2008 Dec 03 08:33 AM