Monday, November 24, 2008

If you Insist

As many of you know, I am not real keen on the government deciding who wins and who loses in the marketplace. I prefer the government to create a business environment with a level and equitable playing field (through regulation and oversight).

If the government insists on getting involved, I normally prefer to rescue people (providing safety nets, like unemployment and retraining), and not corporations (i.e. the big 3 now begging for a handout).

There seems to be a growing chorus for the government to get to the "root" of the economic problem: the housing market. My earlier recommendations, are still highly relevant, but I have some additional observations, based on recent data.

Today on Calculated Risk, there was an excerpt stating over 50% of modifications are defaulting. This is a rather astonishing number, and makes me wonder if workouts are really worth pursuing. It suggests that workouts only prolong the housing correction, as many of us have suggested. (For the record, I do support workouts for people who bought their home using at least 10% of their own money, paid their own closing costs, and whose income situation has not changed materially.)

Today's WSJ discusses a new tactic, help the buyers, instead of the owners. Of course, given my situation, I am a rather biased in favor demand-side solutions. However I think it has some legitimate merits as well. Offering subsided interest rates to home buyers, basically neutralizes my gripe from last week (home buyers have to pay market rates for mortgages and market value for homes, while workouts "homeowners" receive below market interest and principle).

So if the government insists on meddling in the housing market (which they have already done to a large degree), leveling the playing field so that buyers and owners enjoy the same perks, seems like an entirely reasonable thing to do.


Max said...

So are you guys holding off until Obama announces his "stimulus" package? My wife and I are afraid to buy now if there's some kind of first-time buyer incentive coming down the pipe soon. Might be worth waiting a few more months in any case, since prices keep falling. :)

Some encouragement: I've been reading anecdotes about rents falling despite the housing downturn, which might put a dent in the investment buying we're seeing. My gut tells me that 2008 was more like the knife-catching year, with 2009 looking more like a real bottom.

Buying Time said...

To be honest, if we find the right house, right neighborhood at the right price, we will buy regardless. Its the homes on the margin that the stimulus could affect our decision. For instance we found a fantastic place, in one of our favorite neighborhoods ....but the price is still 15% more than we feel comfortable paying. If the stimulus somehow makes that home more attractive financially, then we would love to bite!

I sure hope you are right on a 2009 bottom, as my oldest starts kindergarten next fall, and I would love to be settled by then.

whidbeydog said...

Everyone seems to be forgetting that the economy has created a huge category of 'underemployed' people who are no longer able to make enough money to pay their mortgages.

Modifying the loans DOES make sense. Some will not make it, but at least it postpones the perhaps inevitable, towards a more stable time.

The key is consumer confidence -- and the bailouts seem intent on building corporate confidence, which simply isn't quick enough for consumers.

Start from the bottom and work up.

sacramentia said...

I agree with a bottom up approach to solve the problem.

I don't agree with incentives exclusively for first time buyers - it is the same as picking the economic winners. Those who have not owned a home the last 2 years have gained plenty of economic ground on those who have.

I'd rather see direct stimulus and let people choose how to spend the money - not targeted stimulus.

Buying Time said...

"Everyone seems to be forgetting that the economy has created a huge category of 'underemployed' people who are no longer able to make enough money to pay their mortgages."

Modifying a mortgage essentially "traps" folks in their home. Thus their prospects for full employment limited by what their local economy has to offer. If they do not have an albatross around their neck, then they are able to move to where their skills are needed and better rewarded.

Vanda said...

We definitely have not hit bottom yet, especially in overheated markets like California. The bottom could come in 2009, but it could also be 2011.

The various schemes to re-inflate and prop up the housing market are completely missing the point. Despite of popular misconception the housing meltdown was not the cause of the economic downturn, but a symptom of it. To fix the housing market, we need to fix the economy first. People will buy homes when they can afford it. Obama has the right idea with fiscal stimulus and job creation, but if it succeeds the effects will be gradual and they won't solve all the problems.

I'd favor help for home owners who took out normal loans with down payment and all that, but are now in trouble because they lost their jobs. Their numbers are increasing. They should be able to defer their payments for a fixed period (6 months?) to give them a chance to get back on their feet. I don't oppose changing variable rate loans into fixed rate of 5 or 6% or even stretching out the repay period to 40 years. It would help only a few, but that's fine. Principal reduction should not even be on the table, unless the bank volunteers to take the loss without any bailout money used.

Giving bigger tax credit to buyers is fine, but again it would do little. For starters, it's a credit, eventually you have to pay it back, and depending how the economy goes it could hurt you more than it helped. Still, it could give some boost to the buyer, but it won't help with the fundamentals. Potential buyers still need to be able to find a home that is reasonably priced, they have to qualify for a loan, and have to be financially secure enough to make the leap. In a seriously wobbly economy with rising unemployment rates the pool of potential buyers is shrinking.

anon1137 said...

I think this is looking less and less like a housing or credit problem and more like a problem of declining American dominance in the global economy. When you have the biggest names in American capitalism, their executive suites filled with the brightest stars from the top schools in the country, falling right on their faces and begging the government for help, there's more going on than just a little cyclical downturn. This is a systemic crisis. It's not going to be over in one year or even 10 years.

sacramentia said...

"Despite of popular misconception the housing meltdown was not the cause of the economic downturn, but a symptom of it."

Really? What was the cause?

Max said...

This is a systemic crisis. It's not going to be over in one year or even 10 years.

No one really knows. If income starts falling, all asset classes are in danger. I do think the Obama reinflation will have an immediate to mid-term effect though. We could hit bottom and stay there for a long time.

Another sign I've been looking for is psycological capitulation, and I think we're still in the denial stage. People are secretly hoping that somebody (government, Obama, God) will do something to save them. Once they realize there's no help on the way, the real bottom will occur.

patient renter said...

I'm feeling more alone nowadays with my position that nobody should be helped, not buyers, not sellers, nobody. The reason is simple, in helping one person, you hurt another. Always.

A market economy will perform worse and bring about less overall prosperity/wealth as a result of forceful intrusions. But true longterm prosperity doesn't seem to be the goal of any of this nonsense.

Buying Time said...

To qoute myself on Max's blog last week: Unfortunately, I think we have some serious sytstemic problems with in our economy that will take a lot of time and belt-tightening to work out. The 18 month figure I keep hearing seems way optimistic.

On govnt spending/interference preferences: I prefer infrastructure/job stimulus spending over giving everyone a check.

Vanda said...

"Really? What was the cause?"

Look around you. We have a huge trade deficit. The country is trillions dollars in debt, the consumer debt is over a trillion dollar. We have been boasting of a strong economy the past decade, but we have been measuring strength and growth in consumption, not in production. Meanwhile the median income have been stagnant over the last decade. So how have we managed to spend more and more every year? By borrowing. The government did it, the people did it. You can't keep digging yourself deeper into debt and expect it not come crashing down on you eventually. If the US was a person it would be filing for bankruptcy right now.

Why do you think the big 3 automakers are in such big trouble right now? It' not because of the housing meltdown. It's because they have been making oversized, overpriced gas guzzlers for decades. They first got hit by the high oil prices, then the economic downturn and the credit crunch. They had no plan B, no foresight. That's just bad business management. The entire US economy was built on the assumption the consumers will keep consuming despite of logic and common sense. We are now experiencing a reality check.

The housing crisis is like the part of the iceberg that sheared open the haul of the titanic - without of the rest of the iceberg being there it wouldn't have happened. There were multiple triggers that could have started the economic downturn, and it's been long time coming. If you want to know more read "Crash Proof" by Peter Schiff.

sacramentia said...

Vanda - I think Mr. Schiff has a theory, not *the* Theory. Look at the Australian Dollar. Euro-Pacific isn't doing that well this year and I think it is because his fundamental assumption of decoupled economies is wrong.

I agree with most of what you wrote, but do think this current mess was triggered by housing. I believe we could have gone on much longer with our debt pyramid had the debt not grown so fast.

Here is a counterpoint on Schiff:

PeonInChief said...

The housing bubble was the proximate cause of our current woes, but we need only look at the declining wages (since 1973) and the expansion of credit card debt (since the mid-1980s) to see that there were underlying problems. The housing bubble may have been an attempt to solve the credit card problem, in that people could pay off their credit cards with home equity withdrawals--and they did.

Dean Baker calls the bottom in mid-2009. I don't think it exact bottom is all that important, as I think house prices will rattle around there for several years. We are quickly getting to the point, though, where 56% of the population can afford the median-priced house, assuming that our unemployment rate moderates next year.

Vanda said...

What PeonInChief said... The housing crisis was the catalist, but it alone would not have cause an economic meltdown of such proportions. I don't agree with Schiff on everything, expecially his crash and burn idea to solve the crisis. I prefer Paul Krugman's propositions. However, we are at the beginning of this mess, and some more of Schiff's predictions still easily come true. The current relative strength of the dollar is supported mostly by good faith and not much more. China could still decide to cash in a couple of our IOUs to finance their own economic stimulus.

It seems at the moment the rest of the world is propping us up, like we do Wall Street, because we are "too big to fail," but it could change. This roller coaster ride just have started, and many things could happen.

Vanda said...

Forgive my atrocious spelling. Coffee has not completely absorbed yet.