Why Santelli Is Right, And Wrong, About Housing

by: Felix Salmon

In what Zero Hedge calls one of his top 3 rants of all time (beginning around 5:40 in this clip), CNBC’s Rick Santelli unloaded today on Steve Ricchiuto of Mizuho. The ultimate cause of the rant was a quote from Pimco’s Bill Gross, saying that he would only buy mortgages sans a government guarantee if first-time homebuyers were forced to make 30% down payments.

The immediate cause of the rant, however, was Ricchiuto, who was proposing that the government solve the problem that people can’t refinance their homes. “They’ve got to go out and change the ability to refinance,” he said, prompting Santelli to ask why. When Ricchiuto responds that it’s “because the banks won’t do it”, Santelli’s rant arrives:

Banks won’t do it because the government has subsidized lending to a level no rational person — you wouldn’t, with your money, sir, let somebody buy a house with nothing down and basically a free ride to risk on an unsecured loan.

Richhiuto is game enough to respond, saying that government intervention is “the only way to get the housing market going.”

Santelli, however, is having none of it:

Then the housing market’s no good, and we should let it seek its bottom. The government can’t fix it.

Putting aside the sheer volume of the exchange, Santelli has a good, substantive point here. The housing market is being artificially inflated by underpriced government funds and guarantees, and every day that continues is every day that taxpayers in general, and renters in particular, subsidize homeowners in general, especially those in states with high house prices like California and Connecticut.

Which doesn’t mean that Richhiuto is wrong. On the contrary, Santelli is angry precisely because he’s right. The government does need to get the housing market going, because the alternative is unthinkable: if the government just kicked away the housing market’s multi-trillion-dollar scaffolding overnight, as Santelli suggests it should, then the entire banking system would become insolvent, and we’d soon be reminiscing wistfully about how painless and shallow the 2008 financial crisis was, compared to the one of 2011.

I would love to see a world of much more affordable housing, where lenders underwrote mortgage loans without government help. The problem is that there’s no way of getting there from here without causing an unacceptable amount of pain. Homeowners would hate it, of course — they love it when property values rise, and are very upset when property values fall — but the biggest losers would be the lenders.

Which is why my long-term forecast is for house prices to decline steadily in real terms over a few decades: that’s the amount of time it will take to get back to a system which can sustain itself without artificial government support. The Santellis of the world won’t like it, but I can assure them that they’d like the alternative even less.