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The Housing Market
THE HOUSING MARKET.....Barack Obama talks to the New York Times:
He said that he intended to propose a broad overhaul of financial regulation by April, and that he was working with Congressional leaders on his promised plan to limit foreclosures in the wake of the mortgage crisis.
"We've got to prevent the continuing deterioration of the housing market," he said.
But that's not true. Housing prices are still well above where they ought to be. Unfortunately, they need to deteriorate some more.
This is the big problem with efforts to rescue homeowners rather than banks. It makes sense that if banks have lots of assets that are toxic because they're based on uncertain house values, then rather than bailing out the banks directly we should just do something to make house prices more certain. Mortgage-backed assets would become easier to value, bank balance sheets would firm up, credit markets would start to ease, and distressed homeowners would get relief in the process. It's a win-win.
Except for one thing: we don't want to prop up housing prices at their current unsustainable levels, and we probably couldn't do it even if we wanted to. Rather, we need to find ways to help out homeowners even though prices are going to continue to deteriorate for a while. That's pretty tricky, though, since anything you do to rescue homeowners also has a tendency to keep house prices propped up.
Still, some things are better than others. Programs that motivate lenders to reach workout agreements with owners who are underwater probably have the biggest bang for the buck, and hopefully that's the kind of thing Obama has in mind. But whatever it is, it better not be something that tries to hold back the tide of falling house prices. It didn't work for King Canute and it won't work for President Obama either.
This is very tricky. Some regions of the country may be near where they should be, others like the Northeast, mid atlantic and Northwest are still in partial bubbles. The FEDS have trouble administering regional differentiation in their programs but any program that treats all regions the same will create significant inequities and not meet a test of fairness. With the risk of seeming callous, it is probably best to go very cautiously here. Seattle and Portland probably need another year for houses to be near historical norms.
One problem we've heard again and again is that no one knows who really owns any specific mortgage, because so many people own a slice of a mortgage.
It might be a good thing to see a program put in place for all those slices to be merged back together.
An ebay-like registry modeled after "go fish" or "gin" where financial institutions can throw in their hands of mortgages and try to put whole ownerships back together. I think the effect of that would be to make it easier for bankers (and shareholders and regulators) to understand what they are holding on to, and it would make the holdings themselves that much more valuable in that with one or few owners, it would be easier to make the mortgages more liquid providing more flexibility to the holders of that mortgage.
"Got any Irvine Ranch?"
How about an across the board increase in tax deductions for mortgage payments? Would help those who are going under stay afloat and provide some extra to those who aren't, without being attacked as being 'unfairly' aimed at the people who took on mortgages they couldn't afford.
Reinflates bubble and fucks us renters over by a) giving more money to mortgage owners and b) making it harder for us to buy. Thanks but no thanks.
I'd prefer we just burn down empty homes. That would take inventory off the market making surplus less and increasing prices, it would warm people over the cold winter, and it would create work for ash haulers and recyclers. Better yet, we could auction the right to torch an empty home off to highest bidder and let them bring beer and make a night of it.
People wouldn't have to worry about foreclosed homes rotting in their neighborhood, and instead could celebrate the new urban open spaces.
The whole housing thing is very problematic. There's a perception that houses losing value is a problem if you have a loan, but that's not reasonable. We don't think that way about a car, about a flat screen TV (I bought one three months ago for $799 that I can now buy for $599), about a table saw, about a color laser printer. The real issues lie with the sleaze merchants like the mortgage lenders, mortgage brokers, real estate agents, appraisers and Wall Street because they portrayed housing as a permanent growth market. As a result, many people bought homes they should not have bought. But still, those buyers' experiences were no different than those set by the car salesman who told someone their Escalade could always be traded in.
As a result, it's not as simple as saying some people should be bailed out, to some extent that is saying people aren't responsible for what they do. On the other hand, the people who created that market and lured and cheated people into homes they couldn't afford over time are not being punished. There must be some equitable way to fix this (I like the increased deduction suggestion above as a start) and at the same time penalize the perpetrators. Instead, we are "bailing out" the same institutions that lied and cheated the average person and simultaneously pretending that there is no personal financial responsibility. Without some accountability, whatever is done will leave the future open to exactly the same kind of scenario.
"S.3 -- Homeowner Protection and Wall Street Accountability Act of 2009. This bill will include a moratorium on foreclosures, Senator Dick Durbin's plan to allow for easier reworking of troubled mortgages by bankruptcy judges, new regulations for the credit card and financial industry, and investment in the Small Business Administration to provide loans for small businesses in need. It also makes TARP -- the Wall Street bailout -- a larger part of foreclosure reduction." - Tim Fernholz's report on the first Ten Senate bills from yesterday
Nickpick: King Cnut didn't think he could hold back the waves. He heard a courtier saying that cnut was so powerful he could hold back the waves, and he staged the attempt to hold back the waves to show how foolish said flatterers were.
Jerry says: "One problem we've heard again and again is that no one knows who really owns any specific mortgage, because so many people own a slice of a mortgage.
It might be a good thing to see a program put in place for all those slices to be merged back together."
Here's my idea for that: have the Federal government identify every mortgage it can with a face value greater than the approximate value of the property, and have it acquire all those mortgages by eminent domain at, say, 95% of the current property value, issuing new 30-year mortgages to the borrowers based on those current values.
The government can put the reimbursement for the mortgages in an escrow fund, and let the lenders fight it out over who owns what piece.
Meanwhile, since the government would have (by fiat) acquired the mortgages at actual value rather than at face value, the lenders would pay the price for lending at bubble prices.
If someone can't make their mortgage payments, why not just extend the duration? Turn a 30 year mortgage into a 60 year mortgage with lower monthly rates. This is such an obvious idea that I suppose there must be something wrong with it. Why not do this?
Rather than propping up housing prices, why not allow homeowners who are underwater a way out of their mortgages?
Let the feds buy homes from them where necessary and charge the occupants rent- at levels similar to current local rent prices. If the homeowners are unemployed, they would qualify for rent subsidies.
This would help the market settle and would not throw people out on the street. At the same time, it doesn't reward anyone for bad investments made on unsustainable real estate. It also, over time, would make houses into homes rather than investments.
Another plus is that the government would be getting income back for its outlay to purchase the homes. After a few years, this income could be helping the government turn a profit on the investment. Later, decisions about whether to keep or sell off the homes could be made on a non-crisis timeline.
Low-tech Cyclist's eminent domain idea is one of the two tricks for allowing the housing market to find its bottom, while reducing foreclosures. The other way is to allow cram-down in Chapter 13.
Low-tech's method can be implemented by the states, which also have the eminent domain power. Bankruptcy cram-down, I think, is probably more practicable, and nicely filters out those who can afford to pay their mortgages from those who cannot.
The problem is too much debt that people can't pay.
The solution is to cheapen the debt by debasing the currency.
Inflation, say 15% a year for 5 years, would do that.
Some have touched on a problem created by the housing market. It is the lack of voluntary mobility of workers, either in taking a transfer/promotion or seeking out a new career or change. How much stangnancy is being created in the jobs sector because people are upside down on their mortgage and therefore, when possible, refusing a transfer or promotion or eschewing a career move? I have friends in this very quandry, staying put on their current rung on the corporate ladder. Some will pay a penalty in management's eye for not wanting to move up, treated forever afterword like they're not a "team player". Many corporations have withdrawn programs whereby they agreed to purchase employee homes under certain criteria in order to facilitate a promotion. Kevin, have you seen this damage quantified, or is it even possible to assign a value? My guess is not.
Any bank, wallstreet firm, and insurance company that received Bailout money should have to restructure and be broken up into smaller firms that don't give CEO incentives and have to account for their policies to the stockholders. The entire system is based on big bucks for the CEO's and that means fast and furious fraudulent loans and trades1 Let's get back to Anti-Trust Laws that stop this kind of nonsense before the entire Country goes bankrupt for the company heads to get millions of dollars for screwing up their companies!
Bill: Let the feds buy homes from them where necessary and charge the occupants rent- at levels similar to current local rent prices.
I think that's basically a good idea, except that the banks should be forced to own the house and rent it to the current occupants. Basically that's Dean Baker's Own-to-Rent Plan.
I have to take exception to Kevin's statement "Housing prices are still well above where they ought to be". This may true in some areas, but certainly not in most. And this is one of the reasons that a federal housing policy would be difficult to implement. Here in Colorado, some neighborhoods are seeing stable prices or even modest appreciation, while going a few blocks down the road we see 20% declines.
We must keep in mind that any national housing policy isn't just about bailing out homeowners, it's also about bailing out the home building industry. And that means we can't let the price of existing homes fall significantly below the cost of building an equivalent new home.
A better housing strategy is to stabilize home prices at or near where they are now, free up credit, reduce unemployment, and increase the median wage.
Allowing home prices to deteriorate much further is asking carpenters, plumbers, electricians and laborers who in real terms took a 50% pay cut over the last 25 years to take on further cuts in the face of a recession. Enough is enough. We've all benefited from the inexpensive housing subsidized by these lower wages; it's time to pay up.
We need more tent cities to take up the slack.
jerry,
I'd prefer we just burn down empty homes.
I like how you think outside the box.
In a similar vein I've suggested we rescue SS by reducing the SS payments as needed, but allowing people over 65 to purchase pharmaceutical opiates for their own use with no penalties. Then they wouldn't mind the reduced benefits as much. I mean it's not like the old farts are expected to do any productive work. They need to sit quietly in the corner, that's all.
Jerry - you're like me. You're a renter. Therefore: NO ONE CARES WHAT YOU THINK. We are non-existent in this debate. I have yet to see even a single blog post devoted to those of us who 1) got blocked out of home ownership by wildly escalating prices, 2) did not do the irresponsible thing and get a mortgage we couldn't afford, but rather 3) kept on renting, which meant doing without the significant tax benefits of ownership. And now the debate rages on without us: how do we keep home prices up so no one loses money on their home? How do we make sure we assist responsible home-owners while not enabling irresponsible home-owners? Renters aren't on the radar. We don't matter. And I have plenty of sympathy for people who lose their homes, I really do. But I've had to move out of two different apartments with a single month's notice because the landlord sold the building. I packed, I moved. Now I keep hearing people saying they're "homeless" because they lost their house to foreclosure and now they're renting. Sorry you're having a tough time, your situation sucks, but you're not frigging homeless. You're just renting. Be glad you have a damned roof over your head.
I have to take exception to Kevin's statement "Housing prices are still well above where they ought to be". This may true in some areas, but certainly not in most. And this is one of the reasons that a federal housing policy would be difficult to implement. Here in Colorado, some neighborhoods are seeing stable prices or even modest appreciation, while going a few blocks down the road we see 20% declines.
I empathize with this sentiment (we're also Coloradans, and we recently had our house bought in early 2007 appraise at about 4% higher than our purchase price), but looking at national numbers, homes still need to depreciate by about 12% if the appreciation over the past 10 years is going to match historical norms.
Interesting thread, including the "out of the box" thinking that re-invents the neighborhood block party as an extravagant BBQ ;)
First, as several have noted, home prices do not need to come down per se (nor do they need to be propped up). In fact, any effort to try and "fix" prices will only create more distortions in the market (viz. Nixon's price controls in the 70s). What's needed is to decrease the number of foreclosures.
What is the worth of my house? I have no way of actually knowing unless I put it on the market and sell it. If houses around me are selling for high prices I might perceive my house as being worth more, if not so good then less. Even an impartial appraisal is just an opinion -- in my experience not always an expert opinion -- on what the house would sell for if the owner tried. Unfortunately, those perceptions can feed on themselves: if I perceive my house as being worth less and my mortgage resets then I may choose to default, which throws the house into a situation where it IS worth less, as well as making all my neighbors perceive their houses as being worth less which continues the cycle. Basically, a foreclosure takes a loss -- the perceived fall in value of my house -- and compounds it -- the house is worth less after foreclosure than with me in it, plus my neighbor's houses are now worth less.
For most of the population, a home is both an investment and a place to live, i.e., something to save and something to consume. As Realspear noted, we don't walk away from (most) other comsummables just because we think they're worth less.
The simplest, least distorting way of addressing foreclosures is to give those individuals facing foreclosure an opportunity to keep their place to live at a reasonable cost, as well as encouraging them to take the "long view" on their investment.
To that end my suggestion for some time has been that the federal government should offer a simple program whereby anyone in the country can turn in their current mortgage and get a new 40 year mortgage at face value. The feds would pick up the closing costs (cheaper since they'd be buying in bulk and there would be no need for an appraisal). This would give strapped homeowners some breathing room while getting them to re-commit to staying in their home and waiting for the market to improve.
One thing the Mortgage Backed Securities market already knows how to do is handle early payoffs, so a lot of the old potentially "toxic" loans would start coming off the books. Plus, a 40 year term is a standard (if rarely used) mortgage vehicle, so the market already knows about them. They're rarely used because the principal gets paid down so slowly, so people getting them would also get a better tax break, helping their cash flow even more (Similar to what Josh G proposed)
The program should be available to anyone on their primary residence (a) to make administration easier, (b) since the economy is in need of stimulus, it offers a tax break to those households that want to avail themselves of it -- people (like me) who would rather get their principal paid down quickly would forego the program -- and (c) making it universal gets us out of the unproductive arguments about punishing people who made "bad" choices and rewarding those who were "good."
And can we all try to let go of that? Yes, there were predatory lenders, yes, some people bought houses they shouldn't have (sometimes out of greed or stupidity or because they were tricked). But the world is going to hell in a handbasket; better to focus on solutions than argue over deck chairs on the Titanic.
Will this eliminate foreclosures entirely? No way. If I perceive my house as being $300K under water then I should walk and the sooner that loss gets recorded the better so the markets can start to factor it in. But for a wide swath of people this lets them stay in their homes and stabilizes the market until, over time, rents and home prices come back into historic ratios.
BTW, on Sunday Kevin pointed out Joe Nocera's interesting article in the NYT Magazine on Risk and the financial meltdown. What he didn't point out was an equally interesting NYT article by Michael Lewis and David Einhorn on "How to Repair a Broken Financial World". It's long, but towards the end of the second part they put forward a plan fairly similar to the one offered above.
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?pagewanted...
Thank you Kevin!
May be a few people have made the point that you make in this post. However, it seems most people want to put in government price controls. This type of policy has an incredibly poor track record.
Now, as to the actual point of price equilibrium, I do not know. And I think that the government should help home owners. Calculated Risk has been talking about allowing "Cram Downs", and I think that makes obvious sense. May be people smarter than myself can think of some good ways to do so. This should aim at preventing an "over correction" of the market that would unnecessarily hurt the economy more than it already has been. So it is not simply altruistic policy to do this, though I would not be against that too.
DWN
I was all set to agree with jerry and pyewacket and oppose government intervention to bail out homeowners who paid too much for their houses.
But I could get on board if the rescue plan is expanded to my investments, too, and not just housing. I've taken a huge loss in the stock market lately. It wasn't MY fault! I deserve a bailout, too.