Why My Housing Plan Should Be Implemented - Now

I wrote in October last year in the Economists’ Voice that the first bailout plan, the one from former Treasury Secretary Paulson, served only “to buy time” so that the government can find a way of effectively preventing the continued slide in the housing market. Without finding a way to do so the “fear-fear” spiral will continue, with dire consequences for the US and the global economy. Unfortunately the government did not manage to do this. While the financial market regained stability for some time, it finally succumbed to the dynamics of the fear-fear spiral and resumed its earlier slide. In recent weeks the Dow has fallen back to levels not seen since the mid 1990s.

At about the same time, I started promoting a housing market rescue plan, and I called it a “fail-safe” way to reboot the economy (see my earlier articles in Seeking Alpha and other posts). The proposal involved the federal government obtaining backing from the Fed and making a standing offer to existing home owners in the lower half of the market, promising that it will buy from them at the prevailing market price as of some cut-off date. The proposal is certainly unconventional and was expected to invite criticisms from those who “believe in” the free market. I for one believe that governments should try to avoid interfering with the free market as far as possible, because normally the free market serves us well. But I judged that these are not normal times. The dynamics of the fear-fear spiral is too strong, and there is just too much at stake. Moreover, while I believe we should let the free market work at normal times, I also believe that in the final analysis any government action needs to be justified by cost benefit considerations. If there is good reason to believe that a government action brings more benefit than cost, after everything has been taken into account, then we should not be inhibited by dogmas from taking the socially beneficial action.

My Housing Price Support Plan is an effective and “unintrusive” way to lend support to the beleaguered housing market. The government does not go out and buy actively; it does not buy from developers; and it focuses only on the lower half of the housing market. The cost is small, since the government in return for its payment gets a real asset, not a toxic asset, and since the government pays the market price, not an overblown price. The government’s net cost is only the interest cost of holding onto such assets until the market finally regains health and the government can sell it at or above the original acquisition price. Thus capital gains are expected, and rental incomes can offset the interest cost. The net cost to the taxpayer is small. If you consider the preservation of the value of the typical taxpayer’s major asset, namely his home, it is certainly negative.

Now let us talk about the benefits. I daresay that if something like this had been implemented in October, further injection of money to AIG and the recent bailout plans could have been avoided, while the economy would not have contracted so fast. The benefits are worth trillions of dollars. I am convinced the benefit cost ratio well justifies such an action. I daresay that if such a plan is implemented today, the stock market will quickly rebound, and the housing market will stabilize much earlier. The buy-and-hold strategy means that some of the excess supply today will be lifted away. The standing offer to buy means that much fear is swept away overnight.

Professor Robert Shiller has been suggesting that the housing market will have to fall another 10% or so. I have been questioning whether we can afford such an additional carnage on the US and global economy.

The recent efforts of the government to stabilize the housing market would have been much more effective in October last year. Remember that mortgage rates actually kept rising for much of the last quarter of 2008? There is little doubt that the government and the Fed had finally managed to bring the 30 year mortgage lending rate from 6%+ to around 5%. That is good, but short of a buy-back plan as outlined in this and my earlier articles, there is no guarantee that housing won’t fall more, hurting almost everybody’s balance sheets and particularly those of banks and those who have their hands full of CDS guaranteeing against credit default.

I have seen much criticism, but I have yet to see one that convincingly tells me why my proposal won’t work.

Comments

[CautiousInv...:]

Mr Ho,

I am sure your intentions are noble and wishes are for the best of the country.

Firstly, your case for governemnt intervention could have been stronger had you shared more of the details on the cost-benefit analysis which, in your view, argues for government intervention.

Secondly, I am not sure what you mean by homeowners in the bottom half of the market? Before this is over, just about every demographic group will have been hit though some harder than others.

And thirdly, your proposal may not accomplish what you say it will and may cost more than you suggest. Actually, the more homes purchased by the governement the more price declines may be temporarily checked. Conversely, the fewer homes purchased by the governement the faster prices are likely to revert to some type of long-term inflation adjusted average.

Taking the latter to be the more likley scenario, the governemnt will buy at at current market values and, during the holding period, will take a 12% to 22% hit as this is the amount that home values are expected to fall before hitting bottom. In addition to capital losses, interest, taxes and insurance must be included in the cost of your proposed program.

Under either scenario, though, is it likley the governement can arrest the repricing of an an inflated asset that was part of a bubble; it can defer it, but it cannot stop the inevitable reversion to the mean. And when you add in carrying costs, I think you will find that you will have spent a lot of money and accomplished very little.

Mar 01 02:13 PM

[D_Virginia:]

...maybe this is a stupid question, but what is the "lower half" of the housing market?

Houses worth less than the mean price? You would have to adjust that depending on the city, maybe even the neighborhood. Also, the mean price keeps dropping too.

I agree with ED K, there really isn't enough information here to evaluate such a plan.

Perhaps a couple of examples might be helpful? :-)

Seriously, please expand -- all vaguely reasonable ideas need to be examined nowadays....

Mar 01 02:15 PM

[StimulusABC:]

I took a look at one of your older postings, and it looks like you define "lower half" as houses below the median price, and you suggest buying the existing inventory of those houses. So if I understand you correctly you believe that if the government invests $450 billion or so, it will solve the housing crisis, as it will provide a floor to home prices, which will in turn help all the owners of mortgage related securities. It sounds interesting and relatively simple, but I would say it has at least two major problems.

One of the problems with your assumptions is the one referring to "market price" - almost by definition, if inventory turns continue rising, and prices keep falling, the homes for sale in the market are still overpriced, and have not found a market clearing price. Just in the November to January period home prices have fallen 5.5% according to the National Association of Realtors. You could claim that the housing market is overshooting to the downside, and therefore the government's intervention will put a floor to prices, but that one is a big assumption, and it is probably only true in a few markets, while most are still overpriced compared to other metrics (e.g. median income, rental prices, etc.). Therefore, the government will at best provide a reprieve to the fall, but not a permanent floor. Unless of course you see the government providing this floor to everyone that later wants to sell a house, but then the cost of the program will very rapidly spiral upwards as more and more people that can't sell their homes sell it to the government.

This takes us to the other big problem in your plan, as pointed out before: do you really want the government to be the biggest real estate manager in the land? There is a reason why banks auction off homes at very discounted prices and prefer not to keep them: managing real-estate assets is neither easy, nor cheap. The experience of the housing projects of yore, does not really give you a warm, fuzzy, feeling. Dealing with maintenance, tenants, property taxes, etc., and the oversight of those providing those services would require a bureaucracy of its own. Plus since the housing boom created an oversupply of homes in many areas, the idea that one would easily find tenants for those properties or sell them in the future is unrealistic. Therefore, a large number of properties would sit vacant, and would see their values, and those of their neighborhoods, decrease.

The housing plan proposed by the Treasury, while not perfect, should help people stay in their homes, and provides a better mechanism to avoid prices from overshooting on the downside. And in spite of a lot of the criticism regarding giveaways, it is relatively fair (check out trackthestimulus.com/t... if you want to read a bit more about my analysis on the the plan).

Mar 01 05:41 PM

[IronMeteor:]

The real fallacy is that people still think this is a subprime problem at the bottom. The middle of the housing market 300K - 700K is the problem, at least in California. The middle class who have extra discretionary income and won't spend it because their stocks and house are underwater. Help them and you help the economy.

Help the bottom only and you do nothing. They already live paycheck to paycheck and spend every dime. Helping them will not produce anything extra. In your scheme, most of them would end up selling to the Gov. anyway to avoid Realtor fees. That bottom line price you suggest is already a good deal if they avoid the hassle of foreclosure, taxes on short sell and closing costs.

This is a non-starter. It would actually cause even more vacant homes as everyone sells into this pool of money. What would the Gov. do with 1M empty homes, become a landlord. Good grief, what a nightmare.

The only solution and the one that is coming is for the Gov. to buy down points on home loans. They can't get Mortgage rates down enough via the bond market, so skip that and just pay for the 2% rate reduction. This will spur a huge refi boom and homes sales. Its coming, just wait for the bad news to pile up by the end of summer. Then we will see this plan implemented. Its not Gov. loans, its paying points on every loan. Helps the Banks, Mortgage market and Real Estate. Could be done directly or via a credit on your taxes. (not a tax deduction, an actual credit).

Mar 01 06:05 PM

[Briggsy:]

The federal government buys houses and they become scattered site public housing. All the homeless will need a place to live.

Mar 01 09:21 PM

[Mr. Ed, Jr.:]

A while back, I made a sort of tongue-in-cheek comment that the government should buy up all the vacant homes (a couple million of them) that are throwing the "supply" part of supply & demand out of whack.

After buying them, they should be torn down. Instead of housing starts, the new stat would be housing tear-downs. Presumably, homebuilders (who put them up) would know how to take them down. Plenty of good, honest work as unemployment rises.

Keeping them intact until conditions improve would be expensive. The homeless would move in (That is occurring today in some communities), or they would be looted for "parts". Plus, psychologically, potential homebuyers would know they are still there, and maybe the government would eventually sell them at a big discount-- so they might wait.

If there is no excess supply, we should at least be able to get to a bottom quickly, and probably a nice price uptick, which helps everybody's financial interests (Although I am uncertain whether the taxpayer is helped by this or any other massive spending plan).

Of course, the notion of tearing down 2 million homes has absolutely zero political viability. But, what we are spending now on TARP, stimulus and endless bailouts to come make the "tear down" financially competitive.

Mar 02 01:56 AM

[Kacey:]

I like the idea.

Better yet is to keep people in their homes instead of letting them be trashed along with already blighted neighborhoods.

The root of this problem is cash flow to maintain mortgage payments. Deliver the cash flow in exchange for 50% of the upside. Enables "many" owners to stay and helps new buyers get approved.

All of us, including the homeowner, puts skin in the game along with public and private capital, who created this mess too, to drive payments down to 25%, and have a contractual interest to get the upside.

Taxpayers have an opportunity to get their money back plus some and even Santilli's "Neighbor Next Door" can join in if they have "chutzpah".

Santilli - Stop inciting the "carnivores amongst us" this is not the middle ages and the fabric of our country, our families, are at risk. STOP PLAYING GAMES !!

The Affordable Home Account at USAffordableHome.com

Mar 02 08:40 AM

[Lok Sang Ho:]

I have posted a letter in Economists' Voice suggest that the government stands ready to buy from any existing owner, including financial companies that had foreclosed the properties, of homes valued at $180,000 or less, paying the appraised fair market price as of say mid March 2009. I do not suggest that the government goes out to buy, but that the government buy "passively" from any owner who decides to sell. The standing offer DOES NOT PREVENT real prices from falling over the long run, because inflation will come back. It only protects nominal prices from falling. But this is good enough, as homes will then better serve as collateral, and the nominal wealth of millions of American homeowners will be protected. Financial companies will benefit. Credit defaults will decline. The stock market will rebound. From my understanding of the housing market, of which I have done analysis for much of the past 30 years, the proposal has "leverage" of effect, benefiting many asset classes and will help avoid further deterioration of the business environment.

Mar 02 09:41 AM

[Lok Sang Ho:]

I noticed I have not replied to an earlier comment. Realized losses need to be absorbed by investors. I do not suggest that the government "bail out" investors for their past mistakes. I am suggesting that the proposed buy back offer can help provide a floor to home prices as of now, so that the economy can heal, after taking the realized losses.

Mar 02 09:44 AM

[Lok Sang Ho:]

I noticed I have not replied to an earlier comment. Realized losses need to be absorbed by investors. I do not suggest that the government "bail out" investors for their past mistakes. I am suggesting that the proposed buy back offer can help provide a floor to home prices as of now, so that the economy can heal, after taking the realized losses.

Mar 02 09:44 AM

[rm:]

[The cost is small, since the government in return for its payment gets a real asset, not a toxic asset]

Clearly, you haven't bought a lot of homes in the "bottom half" of the market.

[...and since the government pays the market price, not an overblown price. The government’s net cost is only the interest cost of holding onto such assets until the market finally regains health and the government can sell it at or above the original acquisition price.]

Okay, buy a distressed asset in a declining market, and your net cost is only the interest cost. Hmmmm.

[Thus capital gains are expected, and rental incomes can offset the interest cost.]

Obviously, you haven't bought many homes and rented them with the expectation of re-selling them.

The costs of converting them to "ready-to-sell" would eat you alive.

You might spend some time talking to property owners in AZ, CA, and FL and ask them how well this approach works.

In addition, you have costs of sale and upkeep during the marketing period.

There's a difference between researching the housing market and actually getting your hands dirty buy playing in it.

Your theory works great in a vacuum, just not in the real world.

Mar 02 09:51 AM

[Lok Sang Ho:]

I have considered the scenario of the federal government eventually buying up 5 million units and losing 20,000 dollars in interest cost and maintenance cost net of incomes and capital gains. The sum total is only 100 billion dollars, still a palatable amount compared to the cost committed in other schemes that fail to avert the housing price decline. To the extent that the proposed offer is credible, the market will believe it. Buyers will come back to the market and many sellers will hold back their sales. Market psychology is changed, and that is what counts. CDS, CDOs, MBS, homes, stocks, etc., will improve. It is of course still be costly in the short term, but not doing something effectively to hold back the housing price declines could spell disaster for many families and businesses. I invite readers to ponder the alternative.

Mar 02 11:01 AM

[Lok Sang Ho:]

Why "tear them down" when they are real assets that will serve American families well over the long run? The number of American households is still increasing. All that is needed now is for some of the excess units to be held back. The housing market is well known for its "cobweb" nature: overbuilding and shortages alternate in turn. Some "buffer stock" will smooth out the the damaging fluctuations.




On Mar 02 01:56 AM Mr. Ed, Jr. wrote:

> A while back, I made a sort of tongue-in-cheek comment that the government
> should buy up all the vacant homes (a couple million of them) that
> are throwing the "supply" part of supply & demand out of whack.
>
>
> After buying them, they should be torn down. Instead of housing starts,
> the new stat would be housing tear-downs. Presumably, homebuilders
> (who put them up) would know how to take them down. Plenty of good,
> honest work as unemployment rises.
>
> Keeping them intact until conditions improve would be expensive.
> The homeless would move in (That is occurring today in some communities),
> or they would be looted for "parts". Plus, psychologically, potential
> homebuyers would know they are still there, and maybe the government
> would eventually sell them at a big discount-- so they might wait.
>
>
> If there is no excess supply, we should at least be able to get to
> a bottom quickly, and probably a nice price uptick, which helps everybody's
> financial interests (Although I am uncertain whether the taxpayer
> is helped by this or any other massive spending plan).
>
> Of course, the notion of tearing down 2 million homes has absolutely
> zero political viability. But, what we are spending now on TARP,
> stimulus and endless bailouts to come make the "tear down" financially
> competitive.
>

Mar 02 11:09 AM

[Mr. Ed, Jr.:]

The author asks...

"Why "tear them down" when they are real assets that will serve American families well over the long run? The number of American households is still increasing. All that is needed now is for some of the excess units to be held back. The housing market is well known for its "cobweb" nature: overbuilding and shortages alternate in turn. Some "buffer stock" will smooth out the the damaging fluctuations."



If the homes are left standing, there is still an excess of a couple million homes. Even if you had 2 million willing sellers to the government, the government would be under intense pressure by many special interest groups to do something with the homes. And everyone would know the homes are still there, and must someday soon (homes need regular maintainance) be put back on the market. People will wait it out.

Another problem with just leaving them vacant--Right now, there are homeless advocacy groups that are using vacant homes as homeless shelters. Apparently, they believe they have squatter's rights. Expect this sort of thing to increase-- not decrease. This cannot be good for home values in any community.

I have no belief that my "plan" would ever be initiated, for the very reason that your valid argument that they "will serve American families weel over the long run" would be the outcry from many.

They will argue that the homes can be given to the poor or the homeless, or charitiy.....and on and on. So it wouldn't ever happen. But it would solve numerous issues that plague our economy:

1. Homebuilders would have something to do--- but in reverse.
2. Lots of jobs involved in tearing down 2 million homes (Why, it might even work so well that we could start tearing down occupied homes to keep unemployment low. Just kidding.)
3.The supply & demand issue is solved once and (hopefully) for all. That means home prices start back up, banks can stop foreclosures and their worthless mortgages become valuable assets again. And homebuilders can then start building new homes (Although we might want to have a little chat with them first)
4. All this and--wait, there's more-- The stock markets roar back and 401k's are getting back to where they were. Voila-- global depression solved.

But, as I said before, too many people would scream that a good use could be found for the homes, so it won't ever happen. But I think it would solve a lot of problems.

Mar 02 09:08 PM

[1234987:]

Housing solution!

I, Remove 2 million homes from the MLS (for Sale) that financial institutions currently have
for Sale. Any Institution that received TARP funds will be required to first offer the home
to the RTC for purchase. RTC will not purchase any home above $417,000. No Jumbos.

2, Government Resolution Trust will purchase these homes from these institutions for 20%
less than original first Mortgage amount. No negotiating.

3, 600 billion dollars to buy these homes (app $300,000 each average) will come from the sale
of long term 30 year bonds. (Currently app 3-5%) issued by Government.

4. RTC will send these homes to the local HUD offices for disposition thru voucher program
(rentals). $5000 will accompany each home for repairs & upkeep. eventually as the MLS
system reaches certain inventory levels (i.e. 30-60 days) HUD will be allowed to place these
homes on the sale market. If the inventory increases HUD will remove homes accordingly.
This will be a local HUD market decision, differing from region to region. Rental Income will
help cover expenses such as maintenance, insurance and property taxes.


Pro's:


Supply/demand economics will create a bottom in the housing market once 2 million homes
for sale are removed. Prices will start to increase.

Local governments will see a bottom in declining values and revenue will increase as values
slowly stabilize and slowly increase.

Individual homeowners as well as other sellers will find a housing market ready and able
to absorb the inventory.

Banks will now have a fresh source of funds to lend on homes that are not declining in value.

Banks will be able to clean balance sheets of hard to liquidate assets.

Lending/leverage/credi... markets will slowly begin to return to normal. Applications will
increase, appraisals, home inspections, title work, all types of stimulating activity for business.

As home prices stabilize and increase the local HUD agency selling homes over a 3-7 year time
frame will see prices rise for properties purchased by the RTC. HUD will only be required to
return to RTC the original amount of the purchase price plus the 20%. Or the original amount of the
selling banks first mortgage.

Once the RTC is closed and all homes sold, all losses (if any) will be covered proportionately
by the selling institutions. All financial Institutions selling homes to the RTC will share the loss
at the RTC as a percentage of total homes purchased and homes sold to the RTC. That percentage
will be the Banks percentage for covered losses. These losses will be paid by the banks over a 30 year period liquidating the original bonds sold to finance the purchase.

Other agenda items:

Mark to Market accounting will only apply to non performing assets.

Spend 50 billion each year for the next 3 years rebuilding infrastructure. Bridges, Roads, tunnels,
water plants, dams, levies anything to create jobs.
Stimulus checks for $300 only help pay a credit card bill once.

Any comments?

Mar 03 02:13 AM

[1234987:]

Your comment is actually right on the money. The only missing link
is what to do with the inventory? HUD!!! Section 8 housing. We are
already huge landlords (gov) accross the country.

You do not realize just how right you are!!!

BUT, The gov. deliberately wanted to reduce home prices to income
levels. The average income could not sustain the house price.

And the bottom is not there yet. There is a solution, just no-one wants
one.


On Mar 02 01:56 AM Mr. Ed, Jr. wrote:

> A while back, I made a sort of tongue-in-cheek comment that the government
> should buy up all the vacant homes (a couple million of them) that
> are throwing the "supply" part of supply & demand out of whack.
>
>
> After buying them, they should be torn down. Instead of housing starts,
> the new stat would be housing tear-downs. Presumably, homebuilders
> (who put them up) would know how to take them down. Plenty of good,
> honest work as unemployment rises.
>
> Keeping them intact until conditions improve would be expensive.
> The homeless would move in (That is occurring today in some communities),
> or they would be looted for "parts". Plus, psychologically, potential
> homebuyers would know they are still there, and maybe the government
> would eventually sell them at a big discount-- so they might wait.
>
>
> If there is no excess supply, we should at least be able to get to
> a bottom quickly, and probably a nice price uptick, which helps everybody's
> financial interests (Although I am uncertain whether the taxpayer
> is helped by this or any other massive spending plan).
>
> Of course, the notion of tearing down 2 million homes has absolutely
> zero political viability. But, what we are spending now on TARP,
> stimulus and endless bailouts to come make the "tear down" financially
> competitive.
>

Mar 03 02:18 AM