The Obama administration is considering, and the Central Bank appears to support, a plan to help struggling borrowers refinance their underwater mortgages at current low interest rates. This would cut monthly payments and free up cash for other spending, hopefully boosting overall business activity.
, the well regarded banking analyst
, said this about the rumored efforts to fix the housing crisis
The biggest failure is that these people are still working on consumption rather than production programs. Until they figure out that more production is what is required we will continue to take money out of one pocket and put it into another and assume that we have accomplished something.
The key is to fix the jobs crisis first, which will then take care of the housing crisis, not try to fix the jobs crisis by fixing the housing crisis.
Currently, housing prices are back at pre-bubble 2003 levels, and affordability is the best it’s been in 40 years. The problem is that there are not enough people with jobs to take up the excess inventory, and unfortunately many people who purchased homes during the housing bubble are in need of some assistance. Sure, housing has been a catalyst in previous recoveries, but let’s evaluate what we get. An improvement in the housing market and or resolution of underwater mortgages will do the following:
1. Existing homeowners will feel wealthier and will spend more. Homeowners who could not afford their mortgage payment, will now have the certainty of having a roof over their heads, and some extra cash to spend. To the extent that these dollars are not spent on imports, they will remain in the United States, helping to create more jobs.
2. Once the excess supply of housing is absorbed, then new home construction can begin to ramp up to normal levels, leading to jobs in construction and all the industries that supply raw materials, appliances, and realtor services to the housing construction industry.
1. Housing can be considered as an input cost to American competitiveness. Higher home prices mean higher wages need to be paid by companies, who therefore needing to charge higher prices for their products, and who then become less competitive globally. This is why companies that relocate tend to choose cities with affordable home prices. Even China, so successful in creating new jobs and wealth, is now experiencing an asset price bubble and is starting to feel the effects of rising input prices on their competitiveness. Cheap housing is actually good for American competitiveness.
2. Housing is a non-productive asset. It does nothing to generate a residual steam of income, generate exports, or improve the competitiveness of our country. If you were unemployed and had savings of $100,000, would you rather buy a house, or invest in a business or an education that would give you the ability to generate an income so that you could not only afford to buy a house, but also keep your house, feed a family, buy a new television, and take a vacation? While America focused on becoming a nation of MacMansions, China was investing in becoming the world’s manufacturer, and now we’re paying the price.
If we instead focus on creating sustainable jobs, hopefully export related, that create a sustainable revenue stream for the United States, this will lead to more hiring, and more people that can afford to buy a home, leading to more construction related jobs. This is the way to resuscitate the housing market, reduce our trade deficits and enable us to pay down our government debt. Additionally, a change in the corporate tax rates will help ensure that companies generating export revenues will repatriate their profits and reinvest them in America.
If we do provide assistance to underwater homeowners, then that should be in some form of a participating mortgage, whereby the government is paid interest, plus a portion of the future capital appreciation of the home. It’s a lot fairer to the subsidizing taxpayer than a handout.
Fixing the housing market without fixing the underlying issues with America’s competitiveness is only a short term fix. Let’s not put the cart before the horse.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.