In it’s attempt to stabilize the housing market, there is an 800 pound gorilla in the room that government is not adequately addressing. What is not being addressed is the answer to this question: "What should be our priority? Do we want to fill empty houses with "homeowners" or keep people in their homes?" It is critical to answer this question because we cannot do both.
There are estimates that there is a shadow inventory of seven million units out there- that’s a lot of homes to fill. During the boom the housing industry cranked out more than enough homes for all the credit worthy buyers- and more than enough for those that weren’t. Now a poor economy has hurt the incomes and net worth of many Americans- limiting the pool of credit worthy buyers still further.
The government has a stated goal of wanting to stabilize home prices, and that can’t be done with a massive supply on the market. Government backed lending has basically taken over the mortgage market in by providing easier [therefore riskier] loans than private lenders are willing to provide. As Federal Reserve chairman Ben Bernanke said yesterday:
[I]t is true that the FHA de facto has replaced … the riskier part of the mortgage market. It’s got a very high share now of new mortgages because it’s the only source of mortgages where down payments can be less than basically 20%. And so it is providing mortgage access to a large number of people who could not otherwise buy homes.
There’s a price to be paid for getting all those people into homes though- they can’t seem to hold onto them. According to the Mortgage Banker’s Association:
The percentage of loans with foreclosures started, the percentage of loans in foreclosure and the percentage of loans 90 days or more past due are all records for FHA. While the foreclosure starts rate for FHA loans at 1.15 percent is lower than all other loan types with the exception of prime fixed-rate loans, the FHA percentages have remained low due to a large increase in the number of loans outstanding, the so-called “denominator effect”. If the number of FHA loans had stayed the same as a year ago and we saw the same number of foreclosures, the FHA foreclosure rate would be almost 1.5 percent.
Now there is a bill in Congress to raise the downpayment requirement for FHA loans to reduce defaults. There are those who are opposing it though as it will further restrict the number of buyers. According to Ben Bernanke yesterday:
“You’ve got two conflicting public policy goals here,” Federal Reserve Chairman Ben Bernanke told lawmakers at a hearing today, referring to the FHA. “On the one hand, it’s providing support to the housing market and homeownership. On the other hand, clearly, I think it’s fair to say, given the low down payments, there’s certainly greater risk of loss there that would ultimately be borne by the taxpayers.”
Bernanke said it was a “trade-off” Congress needs to examine.
I rarely agree with Bernanke, but I do agree that this conflict has got to be addressed. It seems that if you talk to a legislator about foreclosures, you’ll get talk about how we need tighter lending standards and tougher regulation. Talk to legislators about falling home values, and they’ll start talking about housing credits and the need to making affordable loans available. The result is a multi-shotgun approach- and the guns are facing each other.
We need to accept that there is a limit to the number of people who can or should be homeowners. Homeownership is not for everyone. It is a mistake to believe that owning a home makes people prosperous, rather, prosperous people tend to buy homes. If government wants to increase homeownership rates, it should be done by promoting economic prosperity- not by promoting policies that put people in homes that can’t afford them.
What about all those empty houses though? We are going to have to accept this unpleasant fact:
Unless we are willing to get out there and bulldoze the silly things, we are going to be stuck with a large inventory of unwanted homes for years. Yes, it’s a situation that will depress home prices. Yes, it will mean boarded up homes and foreclosures blighting neighborhoods. Yes, it’s going to play havoc with the balance sheets of lenders. [And by extension, taxpayers.] If we are unwilling to accept an inventory hang though, what’s the alternative?
At the moment the approach to inventory reduction is to continue to try and sell homes to people who can’t afford them. Unfortunately this just perpetuates a cycle of foreclosures- which depresses prices, blights neighborhoods , and hurts lenders.
Priorities need to be made. There should be a consensus that homes should only be sold to people who have a good chance of being able to hang onto them. Then we need to come to grips with what to do with the rest of the inventory. It can perhaps be bulldozed, sold to investors, sold to government- but it shouldn’t be sold to people who can’t afford to own a home.
Right now policies to stabilize the housing market are reminiscent of Doctor Little’s Pushmi-pullyu- headed in two directions at once, and they are going to keep the housing market from going anywhere.
[Thank you L for the links!]
Right on the money. Excellent post!!! Now fire up the bulldozers.
I’m going to say neither. I am seeing more people sharing and moving in together. It is sad bulldozing homes just to prop the market up.
While people sleep on the street..
Let prices continue down, it’s a supply/demand thing, then at least affordability can return.
Maybe savings are up because people know they have to have a downpayment to buy a home now, where is the poll of how many people are waiting by the sidelines to eventually absorb the inventory? Where is the education for these buyers to make good decisions, the people who come look at my place are pretty naive about buying a home, although some seem pretty receptive to all the information I provide them while the realtor stands their mouth open, trying to usher them away from my FSBO property.
I’m only selling because I don’t need 4 bedrooms, and two bathrooms all to myself, and I don’t care for the property taxes anymore.
Why should the government be involved in artificially inflating prices? We should let housing prices fall or rise based on the market. We should require financial institutions to value their assets at their actual market value. We should not bail out financial institutions that go bankrupt because they failed to require any proof that the mortgages they held could ever be paid back.
Why did the banking industry ever permit people to take out mortgages for 95%+ of the purchase price, then refi a year later and take out another pile of cash from their “equity”? They knew better, but the lure of easy money is impossible for a public corporation to resist and damn difficult for individuals to resist. Re-instituting rational loan standards – 15-20% down payment in cash for example, needs to be enacted into law because obviously the industry is incapable of regulating itself.
The government’s goals here? Well ideally, they should want every American to have safe, adequate housing (whether rented or purchased), they should encourage efforts to reduce our carbon footprint by discouraging new housing developments outside of cities. We must get away from the idea that the building of new houses per se is a desired objective.
Toysarefun-
I agree that there is something wrong about record vacant homes and increasing homelessness. We can’t sell the homes to the homeless, and it creates problems when they move in without heat or adequate sanitation.
There are neighborhoods that were built far from city centers in anticipation of perpetual growth. I suspect some of those are candidates for bulldozing- they are too far from jobs and services to be practical for anyone. I also suspect that there are single foreclosures in closer in neighborhoods that for various reasons are poor candidates for affordable housing programs. If they have no useful purpose, isn’t it better to tear it down? Many cities that face declining populations [Dayton, OH is one] have lists of “nuisance houses” that are destroyed on an ongoing basis.
There are undoubtedly homes though[or better yet, apartment complexes] that would be great candidates for affordable rentals/shelters.
That still means the solution is not to sell homes to people who can’t afford them. It means providing breaks to nonprofits or other opportunities to convert them into something useeful.
Charles-
I agree. If banks aren’t required to take their lumps they will continue to make loans that can’t be paid back.
As I have previously stated, if the statutes of limitations for quieting title (such as California Code of Civil Procedure section 325), such that an adverse possessor could obtain title in 3 years, the banks might finally be forced to take action. Otherwise, as long as they still have cash, the banks will continue to hide their losses in the vain hope that some magical event will cause home prices to rise.
Greg-
I doubt banks really are harboring any hope that prices will rise. They are probably holding out for the more likely hope that the government will believe that they are too critical to fail and purchase the loans at face value- or close to it.
i know it’s costly and unsightly to have the banks continue to own these properties…but bulldoze? couldn’t they just sell them at firesale prices to investors that could rent them out at very modest rates (since they were so cheap to buy anyhow)? i’m sure there’s a million and one problems with my simplistic idea…but tearing down brand new houses (and in some cases entire neighborhoods) just seems counter productive and very wasteful to say the least.
“Do we want to fill empty houses or keep people in their homes?”
Gee, this sounds like it could have been written by that creepy John Ryskamp. You know, that guy who has no sense of moral hazard?
He said it would come to this. Gee I hate people who predict accurately.
Have you read his creepy book, The Eminent Domain Revolt? It reads like Mein Kampf. What does he mean when he says that housing enjoys only “minimum scrutiny?” What does he mean when he talks about “important” facts?
People who talk like that should be put in Gitmo. Or rather, they should be bulldozed!
Now listen, I’m a petit bourgeois idiot who never learns any and doesn’t WANT to learn anything. But I know a commie when I see one.
Cordially yours,
John Ryskamp
AZSALUKI -
Two words: price discovery
Capitalism ended a bit over a year ago, specifically in the afternoon and evening of September 18, 2008, and even after a further year of looting the world’s middle class the big institutions are still hopelessly insolvent. Their accountants would have to announce this and close down if anyone was silly enough to do something to properly value all the mortgage paper on their books. A similar scam is the FDIC specifying that the increased deposit insurance fees don’t have to be “recognized” under some pretense that they’re not an increase, but an “advance.” So smaller banks that had been on the edge and are now insolvent because of the higher fees are allowed to pretend they’re not. Isn’t GAAP wonderful?
RE: greggparadiddle’ #6 –
For more on this please refer to Greg’s guest post “Constructive Foreclosure” (August 17, 2009)
Old Mike (#1) -
Great to see you posting again
(Doomers, we had some amazing flame wars on similar issues years ago, and obviously the questions we wrestled with are still largely open.)
JR -
You may think you’re a tough commenter, but you’ve got nothing on Mike
As you say, the most important thing is to sell homes for those who are ready to buy them… It’s the point. In that so, the foreclosure listings will have less properties
John, John, and Mike,
Should we use bulldozers to handle falling prices on everything?
(John R, I know, this is a should, not a will)
Should we also bulldoze crops when prices fall? (Yes, I know we already do this in one sense and willingly let people starve to death in other countries)
Should we bulldoze SUVs when they are too costly (think cash for clunkers)
Should we also bulldoze Computer Factories when computers become so cheap that existing manufacturers cannot produce without losing money?
Should we bulldoze Microsoft because they give away free browsers?
Should we also bulldoze the homes and offices of open-source software?
Shit, this line of thinking is getting ridiculous! We shouldn’t abandon free markets completely just ’cause we did it last year in a fitful spat of idiocy. It is still the most efficient method of allocating capital (or so we’re told). It’s not that it’s perfect, but that it’s better than the alternative. And, property rights are a slippery slope. That’s why eminent domain is hotly contested. Private capital will flow to locations with sufficient property rights protections.
Meanwhile, we could be bulldozing houses in Victorville while the house-poor are still buying 800K shitboxes just 50 miles away! Seriously… if after a decade we still haven’t reallocated these domiciles, then we can start talking about efficient utilization of land, but until that time, let’s actually let the bubble unwind.
Any intervention at this point is just going to make the problem worse.
Igor says “sad”. I agree
Chuck Ponzi
Before we get out the bulldozers, I defer to Marty Feldstein’s proposal from the WSJ a few months back to force banks to modify the underwater residential loans, especially since half will be in Jacques Cousteau land by 2011. The government can still turn a profit by directly refinancing at rates way lower than those of lenders, and in the process will compel owners to sign *personally* for the privilege.
If we really want to get serious, we need to take a page from the Chinese in their massive investment in infrastructure.
http://multifamilyinvestor.com/hammer-time-former-labor-secretary-hits-nail-on-head/
I’ve got a better idea.
Promise the Chuck Ponzi unlimited funds at 3% rates promised by the Obama plan and I’ll take care of ALL vacant property in the US. Won’t cost the country a dime because I’ll have 10 yr treauries to back it up.
Of course, I get to keep all of the winnings.
Chuck
Igor says “scary”
BTW, Marty was on the Board at AIG’s Financial Products Division… you know, the one with the bailouts from the taxpayer, so he’s talking his book. Of course he wants less housing, he wants higher prices.
Remind me again who higher housing prices are good for?
Chuck Ponzi.
You’re right on the money. What were doing is “liquidating liquidating liquidating” just as Andrew Mellon advised Hoover. Anyone who thinks the “stimulus” bill meant government intervention, is crazy. It was simply looting by the powerful in this country.
That is what is called “circling the wagons.” The next phase is “shoot at the Indians.” That’s us. That’s the phase where the Federal government reduces social programs. I know it won’t seem like it, especially if unemployment benefits are extended.
But it’s not just a matter of benefits. The Federal Government sanctioned credit expansion. Now it is mandating credit contraction.
The Federal Government has left the United States. Wake up.
You’re also right to talk about agriculture. Know what happens when the Federal Government starts withdrawing from the society? The supply chain starts to collapse. And it’s beginning just where it happened after 1929: agriculture.
They talk a lot about housing and commercial real estate speculation, but there was HUGE leveraged finance in agricultural land. As commodities burst, these deals will come under stress, agribusinesses will go under, and supplies will start to be interrupted.
Wait and see.
The only credible alternative regime is one which stresses maintenance of important facts, and enforces that through vastly expanded individually enforceable rights.
Just EXACTLY as I said in The Eminent Domain Revolt 3 years ago.
Too bad the road to the New Bill of Rights is paved with dead bodies. It seems the road to every new individually enforceable right, is paved with dead bodies.
That’s just the way humanity does business.
Tour almost any midwestern city, not just the well known basket cases like Detroit and Cleveland, but places like Indianapolis, Indiana or Columbus, Ohio. There, mixed in with the gleaming new public projects and sports arenas you will find hundreds of abandoned warehouses and factories. The “owners” leave them to rust because it is cheaper than ripping them down, and performing necessary clean-ups to reuse or sell the sites. Civic and environmental officials mostly watch and wait.
Now, add in the block after block of abandoned older home stock rotting in the city core, the crushed dream of urban “homesteading” reclaiming whole neighborhoods back to blight, with the ghost town new developments at absurdly remote locations Twist finds almost as disgusting as they really are, and you begin to see a pattern that looks a lot like a spoiled teenager’s relationship with a bedroom, only with far more grave consequence.
Here in the Sunshine State toxic pools, broken pool gates and overgrown lawns filled with rats and feral former pets are popping up even in locations that were millionaire fantasies a mere 4 years back. Where I bike an OCEANFRONT two story has sat for nearly two years, posted “unsafe-unfit for human occupation”. Some “owners” apparently await the next Cat 3 storm to convert their negative salvage value slum properties into insurance cash. And the civic and environmental officals just wait and watch.
Here, one side promotes “squatters rights” for our “homeless”, raising the nightmare of Chavezista or Rhodesian “solutions” to housing the poor, but really merely guaranteeing the current blight will become permanent and more widespread. On the other side we have folks whining about “sacred property rights” while ironically believing their own, often willful neglect of their own property, should be free to adversely affect the value of their neighbors’ homes. As a wise Duke might say: “A plague on both their houses”.
A bulldozer seems a practical and moderate solution, if deployed only after the minimal process due the “owner” of blighted property is provided before the blade strikes wood or stone. But, of course, that would require civic and environmental officials to do more than wait and watch. But who knows, maybe some kid will have a vacant lot to play ball in, like I did when suburbanization just began, rather than an abandoned building to play gangster dope dealer in instead.
Old Mike-
Thank you- you made my point for me.
Bulldozing thousands of homes with genuine value (even if it is more than 50% off of peak) seems like a very poor solution to prop up home prices.
There are many properties out there however, that are “nuisance” properties- properties that should be bulldozed for safety reasons, not to prop up the prices of the others.
John, thanks for the welcome. I really have enjoyed your cover the waterfront posts on matters macro and those related to the mysterious cult of government paper. And the sidebar is absolutely moderate in tone and content. You were right about WaMu, luckily I’ve always hated equities. I’m getting my new “Chase” checks soon.
I’ve looked in regularly, just to make sure those hurricanes we pushed up your way did no harm. Keep on keeping on. Igor’s word is, of course, “loony”.
“There, mixed in with the gleaming new public projects and sports arenas you will find hundreds of abandoned warehouses and factories.”
This little scene is easy to explain: the gleam is the West Coast Hotel scrutiny regime raping you. The abandoned warehouses and factories are your raped body.
What do you propose to do about that?
Mostly nothing, other than to continue my personal jihad against union labor, seniority based compensation, a decline in personal responsibility, a diluted American work ethic, counterproductive tax and regulatory policy and the costs associated with a growing culture of entitlement with its related, relentless expansion of the public sector. In other words, continue to oppose the root causes for many of the factory and warehouse abandonments in the US. I’d use the Bobby Knight explaination (basically relax when something bad over which you have no control is happening), except I find virtually all analogy references to rape, not actually involving that heinous act, more than a bit offensive and usually well off the mark, as hyperbole often is. I also have zero clue what the “West Coast Hotel scrutiny regime” is, but it might be a good name for a hip hop band, then again, my popular music interests sort of petered out with KT Tunstall. I also rejoice at the growth of the hardworking Chinese and Indian middle class, and a more flat, fast world that may just crush the UAW. I intend my next new car to be a Tata, and I intend to drive it to Walmart. I hope for change in this, my favorite nation, but thus far have found our citizens’ reaction to there no longer being an automatic winning ticket from the sperm lottery just by being born in the USA to be unhelpful. And, of course, I expect few, if any solutions, from government. Sorry if that does not answer you question.
“bulldoze” houses? Doesn’t sound rational unless it is a complete ghetto.
The solution is simple, lower the prices, and people will buy, and the excess supply will go away. I plan to buy as soon as the price is close to comparable to rent, homes are still excessively overpriced where I live for anything other than a few starter homes.
Old Mike – “automatic winning ticket from the sperm lottery just by being born in the USA” – that is the best comment I have seen anywhere regarding increased American laziness, ignorance, arrogance, and the simultaneous continued sense of entitlement.
“West Coast Hotel” refers to West Coast Hotel v. Parrish, a Supreme Court decision under the Hughes-Brandeis court. Read about the case at your leisure…I must tend my garden.
JR – Once again, I have to ask, who was it exactly that forced the purchase of the homes/warehouses/property? Yes, oh crazy me, I’ve forgotten again that people can’t be held responsible for their own actions.
Let’s just for a minute assume that contracts are abrogated and your Utopian revolt materializes. Setting aside for a second the most insidious aspects of Marxism-Leninism (purges, outright murder, and the government-mandated forced starvation of MILLIONS), do you really think the Bolshevik Revolution worked for ANY citizens of the Soviet Union, Cuba, or North Korea besides the people in power? The simple fact is, when you work and the products of your labor are seized by the state “for the greater good,” you stop working – it’s human nature. Which is not to be confused with: If you’re lazy or stupid and you don’t want to work because you’re still getting your welfare check/extended unemployment benefits/food stamps/subsidized housing/subsidized health care, you stop working (still human nature).
Assuming for another minute that the reason for your diatribes on this board is not bourgeois commercialism, how can you be so in favor of principles that are so contrary to what has enabled the country to operate under its constitution for 222 years, namely, the abrogation of property rights?
Agnostic. Thanks, I’ll take a look at the minimum wage case. I get stuck on one great line from Holmes’ currently politically incorrect decision in Buck v Bell everytime I think about the current public policy debate, or absence thereof, on matters regarding personal responsibility. Are three generations of entitlement dependent “citizens” enough? And to your specific point, the mutation of our safety net into a comfortable hammock, I am blessed with a large international community where I live. My Swedish friends who have lived in the USA for a decade or two still often wax nostalgic regarding their homeland’s kinder, gentler socialist paradise. The other evening one such transplant’s brother was over from Sweden, and when she commenced to discuss healthcare and taxes, he explained, in no uncertain terms, how “things had changed” back home. The Swedish model was starting to unravel from exactly the disincentives you identify. Many young citizens, especially recent immigrants, just simply decided not to work. The socialist states in Europe have almost all also begun to discover how much more difficult it is to maintain such “shared wealth/shared goals” policies as their populations drift from 90% native born to a more “diverse”, multi-cultural citizenship with a big infux of north Africans and Slavs into their previous homogenous populations. Trying to maintain a social/economic support network like that of the Swiss in the USA is a suckers bet, and watching the French try to eat that young, male Arab influx grows more interesting every year. In short, you are spot on from my vantage point.
As far as property rights, it is all too short of a journey from negative income tax schemes and raging against bankers and the rich to a Chavezista or Rhodesian type of property owner hell. Thankfully, the recent Fla Ct. of Appeals decision on foreclosure, cited on Doom’s sidebar today, moves in the opposite direction. Even here, in the People’s Republic of South Florida, some of the rule of law remains intact.
Old Mike -
The good folks at DBR were kind enough to e-mail me a link to that story you cite in your last paragraph.
“Foreclosure Cases: Appeal court takes judge to task for ‘benevolence’ “, Daily Business Review, October 6, 2009.
As twist has long noted, with regard to the judge that had granted the one-month reprieve, for all the lawyers, judges and distressed homeowners that may read this, evicting a person or family from their home does not necessarily make them homeless.
Yes John, once again HousingDoom’s Mr. Universe proves to be the most reliable source for “the signal”. Despite reading at least two local Florida newspapers a day, the case was first brought to my attention on your sidebar yesterday. Needless to say the squatters’ rights advocates down here are not talking about it much, in this land where even relatively wealthy folks who are underwater on homes openly talk about “working the system” and living “payment free” for at least one year. As always, you folks were right on top of it.