Three years late, but better late than never, I guess:
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
There was never a way to do that. I've been documenting this for the last three years. The so-called "price appreciation" of the 2000s was false. That is, it was not predicated on actual value, it was not predicated on a reasonable amount of leverage, and it was not predicated on rapidly rising wages.
It was a scam predicated on ever-increasing leverage - a Ponzi scheme that was impossible to continue forward with in perpetuity.
In the early part of 2008 I wrote a white paper (pdf) on this and distributed it to all 535 members of Congress and all major political campaigns for President, including John McCain, Hilliary Clinton and Senator (at the time) Obama. I said at the time:
The unfortunate reality is that home prices cannot appreciate, over long periods of time, at a rate that exceeds the growth in income among the population. That this is axiomatic should be obvious to everyone; attempting to ramp home prices by any mechanism is always a short term phenomena, and leads to a highly-destructive housing crash when the limit of debt carrying is exceeded among the population.
This housing bubble was created through intentional manipulation of appraisal values, dangerous and even fraudulent mortgage practices and willful blindness and tolerance among regulators that enabled the creation of off balance sheet vehicles (SIVs). Dishonest accounting and outright manipulation of credit markets also played a role.
Now the bubble has burst and we are faced with the aftermath.
It is critical that the government address these issues in a prudent and thoughtful fashion. There is a tremendous desire to bail people out, especially taxpayers who are howling in protest to the government in one form or another.
But doing so, whether those howling are banks, investors (bond or stock), homeowners, builders or anyone else would be a serious, perhaps critical mistake.
Yep. More than two years ago. The Administration was stupid, as was the Bush Administration:
The administration made a bet that a rising economy would solve the housing problem and now they are out of chips, said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. They are deeply worried and don't really know what to do.
It was literally impossible for this to have worked on a mathematical basis.
The problem is that even with a rising economy at four or five times incomes, or more, houses are not affordable. Nothing can be done to fix this, other than to dramatically increase wages. That can't happen with the global wage arbitrage that is in place, and even if the government was to decide to fix this (and they should) they can't fix it quickly - it will take many years, perhaps a decade or more.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. Prices are still artificially high, he said. The government is discriminating against the renters who are able to buy at $200,000 but can't at $250,000.
Note that this is a lender. Note what he's not saying. At historical lows interest rates only have one direction to go for mortgages: UP.
Yet it was those historical, ridiculous lows that led to the bubble in the first place. It was 1 and 2% "teaser rates" and Option ARMs that caused the price explosion. Since the rate environment has been artificially suppressed, the price correction necessary to fix the problem has not been able to occur.
We are going to see a huge further decline, folks. It is inevitable. Take the current 4.5% rate available on 30 year money for "well-qualified" buyers. Now move that to a more-normal 7% long rate - not an unreasonable rate at all.
That gives you a payment on a $200,000 loan of $1009.58. If the home has a down payment applied of 20%, the selling price is $250,000. Now let's assume the payment is what the buyer can afford, but rates go to 7%. What happens?
The borrowed amount decreases to $152,633. Again, with a 20% down payment, the house sells for about $190,000.
That's about a 25% drop simply from rates normalizing.
Now add to that the excessive valuation predicated on income levels, and in those places where the bubble was its most extreme, the problem is, quite clearly, nowhere near fixed.
"Let it crash" was the right decision in 2007, it was the right decision in 2008, it was the right decision in 2009, and it is the right, and inevitable, decision today. If you want the housing market to "recover", it must first adjust out the distortions from the previous decade. It cannot be otherwise. In addition, rates must normalize so that a durable bottom can be found and formed.
When will President Obama and his administration come to grips with reality?