Should Congress Let Home Prices Fall ?
"Recent reports about falling home prices have rallied support for the plan." [Rep. Barney Frank, Democrat of Massachusetts] acknowledged that the plan may not do enough to help homeowners or the housing market. Mr. Frank, chairman of the House Financial Services Committee, said that even after a bill like this, “you may need more.”
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Stark housing numbers are coloring the debate in Congress regarding the impending Housing bailout. As of the most recent data, there are more than three million borrowers in "distress" -- typically, 60 days late in mortgage payments -- and analysts forecast a couple of million more will fall behind on their payments in the coming year. Let's ballpark it as 3 million people in some stage of delinquency, default or foreclosure -- and that number may likely go to 4 - 5 million over the next 24 months.
Hence, you can understand the knee-jerk reaction of politicos who
are looking to do something(anything!) so they can tell their districts
why they should be re-elected. -- even if it ultimately makes the situation appreciably worse.
What I find astonishing is that Congress somehow believes they need to do something to help prop up housing prices. When it comes to free markets, the quadrennial Socialists in Washington talk a good game, but push comes to shove, they don't really believe it.
Its the same with half of the "Free-market" pundits on T.V. As long as things are going well, they want no supervision, no regulation, no interference with markets. As soon as the going gets tough, they come crawling to mummy and daddy for a bailout, begging for all sorts of FOMC and government intervention. Hypocrite is too soft a word for this ilk.
Back to Real Estate: Housing prices went ballistic thanks to the credit bubble. If you lend money to anyone regardless of their ability to repay it, you end up with enormous price distortions on that market. Home prices should be allowed to normalize on their own. This will actually be good for the economy, make housing more affordable, and speed up the process of market repair. (I'll have more on this subject later this week). The alternative -- not taking the write-downs, propping up market prices artificially -- damned Japan to a decade plus long recession.
Instead, what we get instead is a giant bailout -- a handout to borrowers who foolishly bought homes they could not afford, and an even bigger handout to banks & mortgage firms, who recklessly lent money to people who now cannot afford to pay it back. This bailout will only serve to keep prices artificially too high, and to encourage more recklessness in the future.
Via the NYT, here's the Ubiq-cerpt:™
"Those stark numbers not only illustrate the challenges for the lawmakers trying to provide some relief to their constituents but also hint at what the next administration will be facing after the election. While the proposed program would help some homeowners, analysts say it would touch only a small fraction of those in trouble — the Congressional Budget Office estimates it would be used by 400,000 borrowers — and would do little to bolster the housing market.
Other proposals that have been floated in Washington include expanding the current plan to make it mandatory instead of voluntary for certain home loans; having the government buy loans outright from lenders; and providing some way and some incentives to let homeowners become renters in their own homes.
But not everyone supports government interventions. Some Republicans, like Senators Jim DeMint of South Carolina and Jim Bunning of Kentucky, say the proposal would use government subsidies to bail out reckless lenders and borrowers. They suggest that the housing market will correct itself more quickly if Congress does not intervene.
The biggest impediment to helping homeowners is the weak economy. In addition to falling home prices and risky loans, homeowners are now confronting a tough job market. The unemployment rate has risen to 5.5 percent, up from 4.9 percent in January.
To take part in the proposed program, lenders would have to lower each debt obligation to 85 percent of the home’s current value. Borrowers would stay in their homes but would have to pay a 1.5 percent annual insurance premium. If homes’ values grow and borrowers sell or refinance, they would have to share the gain with the government.
The program would be managed by the Federal Housing Administration and paid for by the insurance premium, as well as a 3 percent fee paid by lenders and a tax on Fannie Mae and Freddie Mac, the government-sponsored buyers of mortgages. (The refinance proposal is part of a broader housing bill that would also overhaul laws relating to the two companies and the F.H.A.)"
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Source:
As Housing Bill Evolves, Crisis Grows Deeper
VIKAS BAJAJ
NYT, June 29, 2008
http://www.nytimes.com/2008/06/29/washington/29housing.html
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Sunday, June 29, 2008 | 05:30 PM | Permalink
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responding only to the title question, your legislative powers are useless against the laws of supply and demand.
Posted by: Jack | Jun 29, 2008 5:37:13 PM
it is my thesis that rising energy, health, education, food costs will prove to effect a negative gradient on housing costs.
Rents -- and the corresponding home prices -- are always respondent to area after-tax DISPOSABLE incomes.
Housing is the one commodity good that we directly bid up to the point of unaffordability, and beyond.
The only way to prop up home prices would be to:
1) pay direct subsidies to borrowers (and cash-buyers) either via subsidized below-market interest rates, direct tax rebates like the home-mortgage deduction, first-time buyers credit, etc
2) cut income taxes across-the-board again, indirectly freeing more income to go toward new buyers' PITI or reduce property tax levies
3) Stimulate the wage-price spiral like what we saw in the 1970s
Posted by: Troy | Jun 29, 2008 5:54:22 PM
I agree with you 100% on this. Plus, if you think about how the government wants to encourage homeownership (believing that this will encourage them to take part in their community), this has two benefits.
1. When houses are cheaper, more people can afford them
2. When people are underwater, they refuse to sell, forcing them to take part in the community they're in currently. And, wasn't that the point of this whole thing in the first place?
Posted by: Brian | Jun 29, 2008 5:59:35 PM
The sooner they allow gravity to take hold the sooner we can be in a realistic recovery phase. "Saving" home prices is just for the leveraged debt instruments attached to them. They care nothing for the actual homeowner.
Wrapping themselves in a flag and waving it for all to see is getting old....have we not had enough of this???
Let them fall....the irresponsible (both individual homeowners and the I-banks) that refused to account for any risk will be washed out of the market.
.....but I understand the psychology of saving the system from itself....too bad most American's pocketbooks do not.
Ciao
MS
Posted by: michael schumacher | Jun 29, 2008 6:12:55 PM
Foreclosed on people do not go homeless because the do not have NO INCOME, they just don't have ENOUGH income to stay where they are. If they had NO INCOME they could not stay anyway So, they move to a place they can afford and someone who can afford their place eventually moves in. The foreclosed on people have income freed up for consumption again and they new people come in and redecorate, etc. Good for the economy
Loans get written down, figure 5 million x $100,000 per house= $500 billion in write downs. That is doable for the financial system, in fact getting close already.
So, lets let our leaders fall all over themselves turning a $500 billion problem in to a $2 trillion problem that drags one for a decade instead of a couple years.
Does anybody here ever think that we could literally pick 550 people at random from the voting rolls to staff the Congress and we would get a better group than we have now?
Seriously, what an incredible failure in leadership this whole mess is. It would be laughable if it did not have such dire consequences for my kids.
Posted by: Rich Shinnick | Jun 29, 2008 6:30:56 PM
Sorry, I have to disagree with your framing.
Here's a question: Since no one ever talks about any legistlation being for the benefit of large corporations or rich people, does it follow that no legislation is in fact for their benefit?
A related question: Are 'politicos' fools living in a fantasy land that any internet poster can clarify for them, or... are there actions and agendas set by an entirely different set of priorities than their public pronouncements?
Congress (particularly this congress) could care less that 4 million people are under water on their loans. Most congressfolk will get re-elected regardless of the effectiveness of this legislation, or, of their vote on it. How? Money.
Could it be that Congress is really trying to bailout the large financial interests of this country?
Conclusion: The bailout crowd is not just preaching to the infotainment masses on TV, rather, they are in control of the legislative process to an astonishing degree (Can you say Bank of America? I knew you could)
Implication: I agree with your fundamental point: America is now, and has for a long time been a Socialist state for large corporations. What's really ironic is that they forgot that, and push so hard for more power, that they screwed things up just like they always do. And until the perma-naive wake up the effects of their actions will continue to concentrate wealth while annhilating stability.
Posted by: VoiceFromTheWilderness | Jun 29, 2008 6:37:14 PM
let the prices cotinue to fall. As you clearly stated this kind of garbage killed japan, why are we going to repeat the mistake. it just doesn't make much sense to me.
I wonder how many of the 3 million currently behind lied on the loan application when no doc. loans were getting done.
I wonder how many of the 3 million currently behind have no personal savings or reserves in place in case they lose their job.
I wonder how many of the 3 million currently behind thought the house they bought was affordable because 50% of their monethly income went to the interest only payment they chose at closing.
I wonder how many of the 3 million currently behind took a HELOC to pay for the kitchen renovation they HAD to get done.
let them fall.
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BR: I don't know the answer to your question, but the FBI has now arrested nearly 500 mortgage professionals for fraud.
I simply don't buy the Predatory lending meme...
Posted by: ben | Jun 29, 2008 6:47:49 PM
It is the perfect Ponzi scheme - when you run out of suckers, pass the losses to the taxpayers.
Then, to pacify the taxpayers and keep them from revolting, all you have to do is tell the Republicans it was necessary to keep business running normally, while telling the Democrats that it was required to keep children in their homes.
Posted by: Winston Munn | Jun 29, 2008 6:50:28 PM
The Founding Fathers of this nation created the greatest experiment in liberty and freedom in human history. The forces of human nature have destroyed what they so gallantly fought for. I suppose it was inevitable that greed, corruption, dishonesty and a host of other human weaknesses would eventually catch up with us.
The politicians we have now will not be able to fix this, it is way past the fixing point. Freedom and liberty require decency and integrity....I fear we have a severe deficit of those traits in our government and the market place.
We need a viable 3rd party to break up the cartel the repubocrats now have.
Posted by: David | Jun 29, 2008 6:59:02 PM
I'm truly living in Bizarro world. I like Barney Frank quite a bit as a legislator, and DeMint and especially Bunning are morons. But I have to say here that they make more sense to me than Frank does.
Posted by: bluestatedon | Jun 29, 2008 7:14:00 PM
Anyone know how this bill plans to prevent perfectly solvent borrowers from defaulting on their mortgage when they see their less responsible neighbors getting their mortgage balance discounted by 30,40,50 percent simply because they were irresponsible?
Posted by: Bluzer | Jun 29, 2008 7:17:35 PM
Of course the homeowners should get bailed out. The govt. hand out bailouts to big biz all the time so why not for the average Joe?
If the markets were actually "free" then I'd say no, but since it's all Fantasy Island anyway, who cares. The house of cards is crumbling before our very eyes, might as well keep the populace fat and happy as long as possible.
Posted by: Espumoso | Jun 29, 2008 7:21:26 PM
If they're going to bail out the banks, they better bail out average dumbfuck homeowner as well.
Posted by: haileris | Jun 29, 2008 7:32:56 PM
First, this isn't a free market economy. Asserting that it is ignores every possible data point across all asset classes. Second, I think that you have missed the point here. Speculation is a natural part of the market place, free or not. This is not a moral issue. Third, the banks are already insolvent (negative core assets as of Feb 08) and are the ones who really need baling out. It is ridiculous to even mention housing speculators if you are going to ignore the derivatives 'white elephant' in the room. Banks essentially never changed after ENRON. Up to 70 times the assets of BofA, Wells Fargo, Citibank,etc. are off balance sheet items. If the market were really a free one, these items would never have been allowed. As an individual investor, I have no problem screwing people out of their money, but getting 'religious' about it is, well, retarded. Their is no 'right' move here, only a more efficient, productive, accretive, etc. one. The homeowners cannot be bailed out precisely because they are the linchpin in the global trade system in its current incarnation--and this baby's got to go with the dirty water. We need a little 'creative destruction' to wrest away our industrial base from China. Money isn't moral, it's just delayed production realization. The question isn't about the past, but about where we need to be in the future.
Posted by: Darin | Jun 29, 2008 7:37:17 PM
"The alternative -- not taking the writedowns, and propping up the market prices artificially -- damned Japan to a decade plus long recession."
A very good point -- Japan could have finished its economic cold shower in two or three years, and been back on the mend. Instead, a long "progressive disclosure" of bad bank loans stretched out the misery for a decade and a half.
We see the same process underway in the U.S., as government officials still absurdly deny that we're in recession. Meanwhile, in another monumental act of denial, the prevailing doctrine at the Federal Reserve holds that Bubbles can only be identified in hindsight. Yet it is only because house prices Bubbled so far above trend that the collapse now is so severe.
Greenspan, the abominable Pied Piper, should be crucified on a cross of gold. Offer him one last Ayn Rand cigarette, imprinted with a golden dollar sign, before driving the cruel spikes through his skinny, age-spotted, turkey-wattled wrists.
Even on their own socialist terms, Congress is fecklessly failing to vote a timely bailout. They just went on Fourth of July vacation without approving a bill. Yet when the average economic contraction lasts only a year or so, every week counts. These clown-suited, hair-styled jerkoffs couldn't manage a lemonade stand, much less a rescue of housing finance.
Posted by: Jim Haygood | Jun 29, 2008 7:45:50 PM
NO BAILOUT!
My parents never got bailed-out. I never got bailed out (when I lost my ass in 2000) and these people don't deserve a bail-out either.
The free market will handle this problem much more quickly and much more efficiently.
Lastly, all parties need to get off this bit of free markets on the what up and Government hand-outs on the way down. If you can't handle it, then don't play the game. That includes politicians, bankers, investors, speculators and consumers.
Lastly, if laws were broken then those people must be held accountable for that as well. If enforcement agencies are too damn lazy to enforce these laws then they should be dealt with also.
It's time to tighten up and get a little discipline back in the Free Enterprise System. Our entire Financial System is turning into one big p0ker game. Is that what people really want?
Posted by: BG | Jun 29, 2008 8:18:30 PM
A couple of things: The "creative destruction" mentioned above is a horrible concept. It is that Friedman disaster capitalism, no regulation bullshit that got us into this mess. Let's not create a situation in which we allow more wealth to be gutted from the dwindling center buy a handful of the well connected.
That said, hell yes, let housing find its natural price level. Artificially propping up prices just adds more floors to the house of cards; and with borrowed money no less. The biggest difference with this financial mess vs. others in our history is that America is so far in debt that we may just not dig out this time. An overall lower standard of living is the likely outcome. Funny how alleged conservatives have run up virtually all the national debt, and continue to deficit spend as if it were a virtue. Add that to the boomer retirement and the contingent expanding drain that Medicare and Social Security outlays are about to effect (particularly Medicare) and I'd say the pooch is good and screwed and this country will continue to rust away. Unfortunate. It certainly didn't need to happen this way. It was not inevitable that we got to this point. We got here through policies of our own choosing. Raptly following the Friedman dogma and that giggling douche bag Art Laffer's supply side nonsense we put ourselves here. We did. With our eyes wide open.
I'd recommend reading, or rereading, D'Toquville's Democracy in America. His uncannily accurate prediction of the economic downside of human nature mixed with democracy was spot on, and we are voting ourselves into the third world right now. It's a brilliant treatise by a young man (all of 21 or 22 as I recall)who spent only a year here. It and the Federalist Papers should be required reading for every politician, hell, everybody for that matter. Of course, as Civics and History are barely taught in schools these days, perhaps an action comic book series of same would be a necessary device for comprehension. Any one out there think the current occupants of the seats of power have read any of it? Nah, me neither...Although I'd bet W does love action comics.
Posted by: Scott | Jun 29, 2008 8:25:13 PM
..oh, and I know I probably misspelled the brilliant frog's name...but, I was on a roll.
Posted by: Scott | Jun 29, 2008 8:31:01 PM
If you can't handle it, then don't play the game.
Having shelter and food?
Go back to Ayn Rand and your basement fortress of solitude.
Posted by: Douglas Watts | Jun 29, 2008 8:41:59 PM
I for one, can hardly wait to help pay for people's houses who have higher incomes than me. Damn, I'm a sucker. I should have bought some million dollar house and got my fellow tax payers to help me pay for it.
Posted by: Joe | Jun 29, 2008 9:09:55 PM
So let me get this straight - My neighbor who took out a no money down liar loan on a house for $1,500,000 that is now worth $1,000,000 can get his loan balance reduced to $850,000. Instead of sitting on it until it someday rises in value (and he has to give the profits to someone else) he sells it next week. Then he buys the house two doors down. Presto! Out of debt and still own a home (if he can get a mortgage on it, that is).
In the meantime, I put 30% down on my home. I'm not underwater. I don't get any bailout. If I sell now I lose my 30% down payment. My neighbor loses nothing.
Sometimes it doesn't pay to do the right thing.
Posted by: SRQ | Jun 29, 2008 9:11:19 PM
Here we go ... from neocons to neolibs. Something that they both have in common is the religious conviction that only big, very big government can save us from ourselves.
Hey, it might be a good time to host another tea party.
Posted by: jimo | Jun 29, 2008 9:38:22 PM
Even more annoying... in my case laid out above, if the neighbor stays in his home he now only owes $850k on it. He put very little down. I still owe $1,000,000. I put $500,000 down. How is this fair??!!
Posted by: SRQ | Jun 29, 2008 10:16:36 PM
I can understand why Senators from California, Arizona, Florida and Nevada would want this, since most of the “bubble” is in these states. I don’t understand why people in places like North Dakota, Wyoming, Kansas or Iowa would want to underwrite this.
85 cents on the dollar for that toxic waste that the banks are holding? A bad deal for the taxpayers. 60 cents on the dollar would be more like it.
Posted by: DL | Jun 29, 2008 10:37:16 PM
> It is the perfect Ponzi >scheme - when you run out of >suckers, pass the losses to >the taxpayers.
>
>Then, to pacify the >taxpayers and keep them from >revolting, all you have to >do is tell the Republicans >it was necessary to keep >business running normally, >while telling the Democrats >that it was required to keep >children in their homes.
Posted by: Winston Munn | Jun 29, 2008 6:50:28 PM
Brilliant. Exactly right. That is the best summary of what is going on that I have heard.
-philip
Posted by: philip | Jun 29, 2008 11:02:50 PM
