Should We Force a Housing Bottom? 35 comments
Kevin S. Price
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Some say a recession has arrived. Some say it hasn't yet but will. Some say it never will.
Notwithstanding all the disagreement about where we are not, we've detected near-unanimity on the need for the housing market to stabilize (or "bottom") before the economy stages any kind of meaningful recovery. Which, as far as it goes, is almost certainly true. But the argument has assumed a normative dimension, with many observers claiming that it would be an affirmatively good thing for housing to bottom. Alas, this a question that gets too little attention in the current debate: Should we make extraordinary efforts to force the bottom into place right here, right now?
We think the answer is a definitive no. In the long run, the U.S. economy would be better-served if home prices fell further--much further in some markets, a little further in others--in order to reach market-clearing levels without short-term gimmicks and unsustainable subsidies.
After all, the big problem these days is that too many Americans became overleveraged to acquire (or, more accurately, occupy) unproductive assets. This, we think, is a gross mis-allocation of public and private resources. And all this so Americans could stake partial/leveraged claims to an asset class that historically has been a relatively poor performer.*
Three caveats:
- We are not of the "let them eat cake" school of economics. Not at all. But the castles-in-the-sky fantasies of the last few years served Americans of moderate means very poorly. These are people whose real wages are lower now than they were when we embarked on this outrageous real estate bubble. So bringing real estate prices back to some reasonable level of affordability, for all the dislocations it will cause in the short run, is very much in the long-term interests of working- and middle-class America.
- We aren't reflexively anti-government. By its very existence, government "intervenes" in markets...by creating them!** We do think that extraordinary interventions should have clearly stated objectives and plausible likelihoods of achieving those objectives. But we do think it's entirely legitimate for government to try to smooth out the roughest edges, and mitigate the negative externalities, of market cycles.
- We freely and fully acknowledge that falling home prices do and will hurt in the short run. But we'd rather take the responsible position of focusing on the long-term requirements of economic growth than just applying an expensive short-term salve to the wounds created by the last bubble.
And what are those requirements of growth? Here we'll focus on just one: A higher rate of domestic saving. By slashing interest rates, the Fed has punished saving (of which we need more) and encouraged borrowing (of which we need less). These days, the marginal spent dollar is the marginal borrowed dollar. They're the same thing!***
Only in the most short-sighted sense is a bottom in housing (which we intend to mean a stabilization in the price of residential real estate) necessary or good. A further purging of the truly perverse excesses that have barnacled the American economy over over the last few years would serve us all better in the long run. Less leverage. More affordability. Higher savings rates. More discretionary income for other stuff. More productivity.
No self-respecting elected official will touch this argument, and we understand why. But let's be honest: That doesn't make it any less compelling.
~~~~~~~~~~~~~~~~
* Thanks in part to exceptionally high "expense ratios." If we included the true costs of homeownership (interest payments, property taxes, maintenance, &c.), the return on equity from residential real estate would, in all but the most unusual circumstances (of the sort we witnessed from 2000 to 2005), be remarkably low, even negative in many instances. That doesn't mean real estate is inherently a "bad investment." For several reasons, economic and otherwise, we like the idea of homeownership as much as anyone. But it does mean that as an investment per se, residential real estate isn't especially attractive.
** Through the establishment and preservation of physical and intellectual property rights, the enforcement of contracts, and the maintenance of infrastructure and public safety, among other things.
*** Those stimulus checks now flying toward a mailbox near you? Those are borrowed too, and the feds want you to spend 'em.
Sources
Alison Vekshin, "U.S. House Passes Anti-Foreclosure Bill Facing Bush Veto Threat," Bloomberg, May 9, 2008
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This article has 35 comments:
Another area facing similar mis-allocation is health care. It may sound rather unkind but not every 90-year-old need hundreds of thousands of dollars of care in the last couple of days of their lives. We better spend that money in providing better science education to our kids and retrainig the work force.
Health care is another bubble waiting to deflate. Health care like homes are necessities but they don't build strong nations or economies.
Last couple of decades, America has put the cart before the horse in most critical areas. We are paying for such thoughtless planning.
Productivity depends a lot on the ability to own property - it's what mainly separates Communism from Capitalism.
Poor people are losing the American dream. There needs to be a massive shake-up in wealth to re-establish this dream.
Now billionaires are cornering the markets on commodities...resortin... to propaganda and hysteria which promote the ruse that resources are almost depleted like Goldman Sach's recent oil "super-spike" pump.
Too much manipulation in the markets leads to unrealistic asset valuations - bubbles.
OK, zenalgorithm. Hand over your wealth.
I am one of the poor...:)
Something which would make homes more affordable is to keep property taxes low for your primary residence. All other properties one owns are considered investment properties and taxed twice as much as a primary residence. This would hinder investors from hoarding and monopolizing property.
Interest rate increases are the medicine that nobody wants to swallow. Just how far are prices likely to fall when the real cost of money is so darn cheap?
maybe the fed isn't fighting inflation in order to inflate our way out of the housing crash?
i have an observation regarding what appears to be a near-universal view that our politicians are not only not serving us well but they are actually harming the country. it is this:
it is not just individual politicians who have failed...it is democracy itself. we have both a near-complete polarization between the major parties and a universal unwillingness on the part of elected officials in either to act on behalf of the public interest as opposed to their self-interest, which invariably is reelection.
to use an old but applicable cliche: nero fiddles while rome burns.
tell me...what has democracy done for us lately?
As far as red herrings like "o.k. if you are so liberal give up your wealth", nobody advocates that outside of Cuba and North Korea. All that is required is to stop the corruption, the robbing the middle class and the poor in ways both legal and illegal. But hey, most of us here will do fine and will relocate to China, Brazil or Russia with our investments once the U.S. is in ashes, so as long as you don't give a damn about that, all is fine.
if credit flows at a reasonable rate, there will be enough buyers to form a cushion. this is why the fed had to loosen again. they realized the crash would be deep and hard otherwise. this is also why they cannot raise rates quickly. they can attempt to look vigilant against inflation, pretend that inflation will not be a problem, in the hope that consumers and investors will believe them and stop worrying about inflation. as a result, the global forces of deflation may have a chance to counter any spikes.
if our corporations bring in more dollars and we begin to produce cheaper goods and services to send abroad, our dollars will eventually get stronger and we will live in peace and harmony.
either that, or we'll have to go into a downward spiral of lower prices and lower income and lower status at home and abroad until we just hand over the keys to the canadians and the mexicans in exchange for oil. what the heck, maybe the indians will let us make one last bet in their casinos.
And NOT under any conditions be bailing them out, and letting them keep the gains to reinvest in their next scheme.
Not sure I agree with your conclusions about the returns from investing in residential real estate. Was your analysis based on leveraged or unleveraged returns? Makes a difference.
**LESS LEVERAGE- The Fed/Treasury is trying to reflate leverage with M3 money supply now running 18%, the window's for broker-dealers to exploit.
**MORE AFFORDABILTY- The gov't is trying to arrest falling house prices with massive proposals passed by the House.
**HIGHER SAVINGS RATES- Prudent savers are punished with below inflation returns, all engineered to move money into stocks. Money funds subsidized to prevent "breaking the buck" is hardly safe anymore.
** MORE DISCRETIONARY INCOME- Resulting inflation w/ below inflation interest rates/ plummeting dollar means food/fuel wipes out any excess spending.
** MORE PRODUCTIVITY- The recent GDP/Unemployment stats show more workers now on part-time (and temps), marginally boosting the productivity. The increases in productivity since Bush took office NEVER translated into higher (real) wages like other economic "expansions". The anti-worker media still refers to wage gains as the evil culprit for business and the reason for inflation. I call this what it is- a conspiracy against the working class and organized labor.
As far as the housing market goes, the war on the middle class is being waged from both the right and the left, and the entire real estate policy of the Federal government needs to be reexamined from top to bottom. Entire cities are being destroyed by the cancer of Section 8--which is in fact corporate welfare for slum landlords. It's not a racial issue. Working and middle class families of all races are deprived of life quality and lose property value when too many Section 8 tenants invade their neighborhoods.
When mayors attempt to put reasonable restraints on the number of homes in any area that can be Section 8'ed, the Feds threaten to pull their Federal funds. Meanwhile Federal laws override state eviction laws making it extremely difficult to evict problem tenants, but don't reimburse landlords for damages done to property.
While the housing market was booming in upscale areas, Section 8 landlords were amassing huge portfolios of properties by renting to lowlife tenants who scared out older residents, driving property prices lower in those middle class neighborhoods, allowing the landlords to scoop them up without limitations. Horror stories abound about the activities of many Section 8 tenants, but like all slum landlords, the Section 8 landlords are only concerned about the government checks pouring into their mailboxes, which they use to bankroll more properties.
The combination of unrestrained acquisition, neglectful management and inability to discipline tenants means neighborhoods that were healthy and stable for half-a-century or longer have devolved in less than a decade into burned-out, half-occupied slums.
Unfortunately this is one problem that neither the Democrats nor the Republicans will ever address, so inner city neighborhoods will continue to be rotating slums, destined for the wrecking ball and eventual reclamation by tract housing developers (very far into the future). So even the most visionary mayor attempting to rebuild a blighted city will have his hands tied by the Feds.
rather than tax them, we should merely require that they hire local residents and make it worth the risks they take for being there with credits and subsidies. this would help residents buy cheaper necessities, recognize that business is not trying to gouge them, and give local residents opportunities to escape their environment through job placements and provide role models other than drug users, sellers and pimps. society would benefit on many levels.
As someone else said, the founding fathers intended this country to be a constitutionally limited republic, not a democracy. Democracies are actually very dangerous things. As a wise man once said, 'Democracy is like to foxes and a chicken voting on what's for dinner'. As each bubble inflates then implodes causing more government intervention, less constitutionally limited republic and more democracy is exactly what we're getting.
1) Create new wealth by giving global consumer what they need, cheaper energy (means creating competing oil product), food and metals. The U.S. can export it's way back to health but not without making energy more affordable.
2) Big government must slash spending - Right now we are printing money to cover costs and inflation is the demonstration of bad monetry policy. We can ignore the world and continue ignoring and exporting inflation globally or take our lumps now. I say now but the picture on the ground tells me we are delaying the pain period using socialism.
Either way, foreigners will not continue subsidizing our debts. Since government has refused to cut spending, it is the American people whom will repay these debts, the hard way but I can assure you government will look different by the 2012 election with lots of internal battles fought for budget between States and Federal Government. This will wake some bureacrats up the hard way.
3) American's are and will continue to cut discretionary spending. Consumer's still have some choice on shopping around for discount food and health care but this it has it limits.
American's as a whole are going to continue to see a declining quality of life for the next few years. That we as a culture could outspend our way into a permanent quality of life using global serfs to lead the way has now been proven a failure. Multinational companies whom will accelerate outsourcing and particularly offshoring will do well in essentials but will see Main St. and global recession pulling down growth. Now it is the American middle class and poor that will be serfs (at least temporarily).
4) Banks will fail as they have lent money to people they should not have. America has overexapanded in all areas of the economy but specifically commercial & residential real-estate. If the overexpansion amount were say, 20% then free market economics tells us we must receed 20% to correct. That would be a depression. I am fully expecting one but I do not believe this period will last long as did in the 1930's. America as a whole has six times the food supply of the 1930's. America also have the technical innovation in effeciency to operate at a level where American's will have jobs (even if lower paying without bennies) to get back equilibrium. Yeah, we're going to be working cheap to foreigners but some American's already do (such as working at a Dunkin' Donuts for example).
American's are going to have to learn to sacrifice for one another now and between 2011. I expect we'll see a surge in alternative energy production which will create millions of new jobs while we scale back on non-necessities. Many companies offering luxuries will go out of business. The shrewd will get into essentials now but I am not referring to simply commodities, I am referring to businesses.
Other culprits responsible for the mess we are in are - unions that destroyed auto industry, greedy corporate chiefs moving jobs abroad without any concern for local jobs, wall street crooks leveraging to the hilt with no sense of responsibility on its impact on markets or employees, poor educational standards, medicare/medicaid entitlement mentality, our addiction to being the policeman of the world whether we can afford it or not, politicians on both sides attached to one lobby or another (seniors, teachers, wall street).
It will take at least 15-20 years AFTER we admit that we are in a giant mess.
What should we do? Let the government start buying loans like they did during the Great Depression, and over about 20 years, eventually unload them all and make a slight profit. (Believe me, I'm not saying let irresponsible borrowers get off here, they're going to take a loss, I'm simply saying that housing is a special kind of market; one where you're typically only going to have 1 asset, and that asset is going to be the most expensive thing you own, and its the most illiquid thing you own as well).
That's RealtorSpeak for "every piece of land would be much, much more productive if it had a 100 story office building on it"!
Not only is that a simplistic view--but it puts the values of Corporations ahead of the values/needs of People.
Following this same "logic", then all churches are "unproductive assets", which produce no product or value-added service.
Similarly, all natural places such as forests, streams, meadows, etc. should are "unproductive assets" and should be paved over to build shopping malls.
Wow.
This P.O.V. is sooooooooo lame--and quite frankly--representativ... of people stuck in the 80's.
The 80s: Greedy Selfish People who think everything is about ME, ME, ME.