Housing: A Government Solution Is Likely to Be Necessary

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

Note that consumer spending does not need to turn negative for the economy to experience a recession (see, for example, 2001). However, since consumer spending is such a large portion of GDP, a sharper decline in consumer spending in the next few months would make a recession much harder to avoid.

While many have fretted over adjustable rate mortgage resets, the bigger fear in the housing sector is a further decline in home prices. An increasing number of homeowners are experiencing negative equity. In the last few years, easy access to home equity lines of credit has led to even higher equity-to-value ratios. It doesn’t take much of a decline in home prices to evaporate small amounts of home equity. For those who have been in their homes for more than five years, the drop in home prices will probably not have much of an impact. However, the drop in home prices is already having a severe impact on state and local government budgets.

For the credit markets, the fallout in subprime mortgages should have been no surprise. However, a broader drop in home prices has a negative impact on conventional mortgages and on agency securities (Fannie Mae and Freddie Mac) in general. A government funded solution is not yet in the works, but one is likely to be necessary at some point.

Comments

[mertmj:]

Bull-pucky! We're in the bail-out as we speak! The Fed dumping $200 billion, lowering rates, and guaranteed put they gave to JP Morgan to swallow Bear. Not to mention the GSE's getting more leverage...capital requirements are 2%!!!!! You can't buy a house with 2% down (anymore), and we're going to let the GSE's...which are a little stretched based on their recent liquidity grabs in the marketplace, lever up more! Meanwhile, banks are modifying loans, refi'ing ARMs to fixed rates, and tightening down lending standards. I'm not sure what more the government could, or better yet, SHOULD do, but I feel Adam Smith's economic theories and a "reversion to the mean" is taking place in the marketplace...as it should.

2008 Apr 01 10:14 AM

[Scorpio69er:]

I must've missed that part where this magical "government funded solution" is explained.

As I wrote on Salon.com back in August of 2007:

"Any attempt to allow troubled homeowners/speculators to re-fi using government money is doomed to failure, becuase it ignores the simple fact that present prices are totally out of whack. This is even more true now that lending standards for would-be homeowners are tightening, returning to traditional requirements for down payments, income-to-debt ratios, etc. A return to traditional lending standards neccessarily means a return to traditional pricing. Thus, even if people can manage not to default on their home loans, they still will never be able to sell their place at today's artificially inflated prices because no one can qualify to buy it, nor will the source of lending that pumped prices up to the current level any longer be there."

letters.salon.com/tech...

And, as I wrote on MarketWatch.com back in January, regarding efforts to help troubled homeowners stay in their homes:

"All this does is delay the inevitable for these folks. Most people only live in a home 3-5 years before changing circumstances (divorce, job, etc.) compel them to sell and move. So keeping people in homes that were bought at inflated prices only means that they'll be foreclosed on when they try to sell it and find out they can't because the market has collapsed and they're in a negative equity position."

www.marketwatch.com/ne...

There is, in fact no solution to this problem, except to let this bubble deflate as it must. As with the Titanic, once it struck the iceberg no amount of bailing was going to stop the inevitable. This ship is going down, so head for nearest lifeboat.

2008 Apr 01 02:43 PM

[Robert DiAl...:]

Please let my government help the home buyers. Real estate needs all the help it can get at this point.

2008 Apr 01 06:40 PM

[BlueFire:]

Please, please, please do NOT let the government get involved. Too little too late. Prices have to come back into sync with median incomes. A one time $600 raise from the government is not going to do it. And what ever happened to personal responsibility and caveat emptor? Home buyers are grown ups who entered into contracts to borrow money. Live with it. Upside down? Who cares... stay in the home you bought at a prices you felt willing to pay at the time you signed the dotted line. In ten years or so, you will no longer be upside down. It's your house, not your ATM!

2008 Apr 01 06:50 PM

["Magazine-C...:]

My tennis shoes are getting old, and I think they have declined in value.

Perhaps it would be best for a government solution to this problem.

Also, I feel my car has declined in value also, and frankly, that's a bigger problem than even my tennis shoes!

Finally, I'm very concerned about some people feeling that their house has declined in value. I think we should all force the current folks that haven't bought to pay prices at least at the early 2007 level, regardless that some would whine that it would devestate and destroy their finances.

Stop whining renters! And step up and do your duty to home sellers!

2008 Apr 01 10:21 PM

[FreeMkgGuy:]

No government intervention. period. Let prices get back to where they should have been in the first place without all the "funny" money floating around.

Government did nothing while there was widespread fraud and manipulation at all levels from 2002-2007. There is no need to do anything now.

Where are the free market proponents when you need them?

2008 Apr 03 01:49 AM