Housing: RTC 2.0 Will Not Fix the Root Problem

The root problem of the mess in the economy is that housing prices are and remain too high.

The first two graphs are a year or so old but prices have not come down enough to rectify over-valuation.

And from a May 2008 paper published by the San Francisco Fed.

RTC II will attempt to re-liquefy the financial system.  However, as I pointed out yesterday, increasing credit and lowering credit costs to alleviate falling and still overvalued home prices is tantamount to increasing margin lending and lowering margin rates as a response to falling technology stocks in 2001. There can be other positive effects to RTC II but it will not stop declining home prices.

Though RTC II is probably necessary, it will not halt deteriorating credit either.  If, in fact, the ultimate cost of the write-downs is $2 trillion, as Nouriel Roubini postulates, then RTC II will be overwhelmed if RTC II is capitalized with $500 billion as being suggested.

Comments

[whidbey:]

The root problem is housing is too pricey? Wrong!

Its the debt that was created in the process of selling the housing is...... rotten, not transferable (salable), nor even subject to pricing. That stems from criminal real estate agents, working with crooks in mortgages, and the mentally handicapped who ran the banks that bought the toxic junk from the mortgage businesses.

That dear friend is what happened and we need to live with it because it was not necessary or even understandable.

2008 Sep 19 05:16 PM

[MarvinMBA:]

I suppose from a long term historic point of view housing is "too costly" but if you look at building costs and material costs and land costs and the overall cost of living, housing still provides protection against the hyper inflation that will be on its way. Giving houses away to people that cannot afford them drove prices up the wall as everybody here in California tried to grab a house with Alt A mortgages...anybody walking in the door could have a house so prices started going up and nobody cared as long as there was another one in line that did not balk at the daily rising RE prices, Of course the banks were accomodating as well as the FNMA and FDMA taking and packaging all kinds of paper without regards to real world valuations and who was responsible for the mortgage...and of course with policies like this the whole ponze scheme Collapesed...Marvin the Maven

2008 Sep 19 07:55 PM

[true-lie:]

Just watch where interest rates go- imo- long term rates will go up-
mortgage rates will go up - remember the 80's - will this help the
housing market ?? the govt is broke- any comments ??

2008 Sep 20 08:47 AM

[sabbadoo32:]

Maybe you meant "unsold inventory". Housing prices cannot get healthy at all until the excess inventory numbers decline.

2008 Sep 20 08:48 AM

[Mr.G:]

I agree RTCII will not work it will be overwhelmed with the losses that are hidden on banks books and liquidity will dry up quickly - I also agree roubini may be closer to the cost of 2trillion (2000 billion) . and the 800 billion I am hearing about will not be enough to do the job which is already is probably put our existing US cost now very close to 2 trillion already -I think the US govt wont have enough credit to fix this problem and that this money is being wasted -there should not be any govt intervention here because it puts our currency at a great risk of being useless. I would have rather dealt with a cash society and deleveraged assets with no banks for awhile than a country where cash is useless

2008 Sep 20 11:01 AM

[Kelly Liebe...:]

mr.g, I think that you are spot on about the risk of our currency being useless. When our foreign debt holders get spooked (I imagine they are!) they will sell dollars into gold and oil and our dollar will tank.

My move was to preempt them, before my dollars won't buy me the Gold I need to preserve my assets. I suggest everyone think this through very carefully this weekend. Before the sh*t hits their next "plan" to rescue us.

2008 Sep 20 11:45 AM

[Old Dude:]

I feel like I'm on Apollo 13 and after transmitting "Houston, we have a problem", Huston responds, "Who's we, white man?"

2008 Sep 20 12:36 PM

[jetpilot:]

Kelly and Mr G, I feel the same way. I am just a novice watching this... nobody knows what is going to happen. I just know the US extended credit situation will devalue our dollar. What do to ? Does this mean hyper inflation? grow a garden and save canned food. I know I made a move towards GLD and AME.

2008 Sep 20 01:37 PM

[jetpilot:]

correction aem

2008 Sep 20 01:38 PM

[woodsey:]

Better to study the stars than to study the market. We're starting an astronomy club here in small town takes us.

2008 Sep 20 08:34 PM

[sickofthehype:]

Believe it or not the inflationary measures being taken could send real estate prices back up again, and quickly. Sounds nuts I know.

2008 Sep 20 11:09 PM

[raising4dau...:]

"The root problem of the mess in the economy is that housing prices are and remain too high."

High housing prices are symptoms, not the root of the problem.

The root of the problem is the easy credit and free money that people pumped into the housing industry. As with any asset, if it's easily bought with leverage, people will buy more of it, and that demand-supply imbalance causes the prices to rise.

Same goes for college tuition costs. Our idiot pols have made college loans so easy to get that people are taking out $100k in loans to finance an education that results in a job paying $30k per year. Dumb.

2008 Sep 21 01:30 AM

[Jim D:]

To anyone who thinks that housing will protect them from inflation, just one question: Where's the rise in wages going to come from? You'll need that for housing prices to go up. Wages will have to rise. And that's not happening. Cost of imported goods may double, but wages? Nah.

So yeah, I agree completely with this article.

If you haven't called your congressman about the Paulson Bank Bailout, you don't deserve to be called a citizen. Get off your lazy butt and do it.

2008 Sep 21 11:57 AM

[John Preston:]

Why do so many keep trying to "chart" the problem. At least use the correct charts.

Lets look at some simple facts...which are chartable:

1. In the mid-1990's, America's SAVINGS rate, which was declining, was crossed by America's DEBT rate, which was rising.

2. Fannie and Freddie began to expand their underwriting guidelines in the mid-1990's...to expand housing opportunities in the US, and they began to expand their overall market share.

3. Government mortgage program market share, which accounted for 12 to 15% in the mid-1990's, had been reduced to about 3% by 2004.

4. Non-chartable fact...but it is documentable....FHA / VA / FmHA never expanded their guidelines...NEVER.

5. The economy in the mid-to-late 1990's is considered the best in recent memory...deficits down and a developing surplus.

6. Fannie and Freddie continue to increase fundings, profits and market share, dominating residential lending.

7. Not chartable, but documentable, Fannie and Freddie keep expanding their underwriting guidelines via their automated underwriting systems.

This whole process, now playing out, began 15 years ago. It is the story of good intentions gone wrong for perverse reasons...greed, power, short sightedness and ineptitude.

My theory puts Fannie and Freddie at the center of the problem. All lending is referenced to F/F. As F/F expanded their business footprint, other lenders did the same. The expansion in lending guidelines "created" too many buyers...so prices went up...and this should not have happened. It is far to simple to say that prices are too high, and that prices have to go down.

The real issue is the fact that a similar process took place in the 1980's...expansion of credit guidelines, creating an over supply of buyers/borrowers and then a radical collapse of credit guidelines, crashing the market.

In 2004, I began to dialogue with lenders, warning that they should not be expanding the underwriting guidelines unless they are prepared to make them permanent forever.

The expanded guidelines were well beyond what was needed, but my point was that credit guidelines cannot be expanded and contracted at whim or will. Such behavior will pervert the market place...and it did.

The solution is not just lower prices. There are other charts to consider.

2008 Sep 21 12:01 PM