Jul
27
Fixing America’s Housing Crisis
No doubt about it, we’re in a fix as far as housing goes. While some short sighted analysts are pumping up recent data alleging a growth in home sales, the fact of the matter is that in raw numbers of houses sold, we’re clearly in a housing Depression. Prices continue to drop, foreclosures continue at a rapid pace, and the incidence of strategic default (ie, people walking away from homes they can afford because the market value is so much less than the mortgage balance) continue to rise. Rosy housing scenarios have us maintaining prices right about where they are now, but I fully expect major reductions in home prices unless we some how change the dynamics of the market.
Here is the terrible scenario – we’re already in the dumpster on home prices and as this dumpster spreads, it pushes more and more people “underwater” on their mortgages, thus stressing their willingness to keep up consumption and/or making them more likely to just walk away from their homes.
Continually falling consumption leads to an increasingly slack labor market which, in turn, puts more and more more people in to the position of being unable to maintain their mortgage payments. As foreclosures and strategic defaults continue to spread, the “shadow inventory” of foreclosed homes (homes owned by the banks but kept off the market for fear of really killing home values) will grow, thus providing even more downward pressure on home prices. The circles continues, ad nauseum, until houses are selling for a tiny fraction of their peak price.
This is a classic supply and demand event. There is too much supply of housing and too little demand – so, prices drop. Demand is suffering from a lot of things – most notably, of course, high unemployment, but also such things as demographic change (Boomers are retiring thus looking to downsize their houses rather than upgrade, eg). Supply suffers from over-built conditions (a lot of houses were built until the crash hit – and home builders are still working at a pace to put hundreds of thousands of new homes on the market this year) and, of course, the very large number of foreclosed homes. A balance must be struck, or things will just continue to get worse.
Bringing down unemployment would be the ideal solution, but that will take a major shift in national economic policies which are unlikely under a liberal, Democrat Administration – and even if we get those policies, it will be a few years before they bear substantial fruit. Additionally, even if we get back to full employment it doesn’t mean we’ll see a huge surge in home purchases – people are gun shy and unwilling to take on a great deal of debt. This is wise, but it complicates efforts to prevent a complete collapse in housing.
We’ve tried tax credits to spur home purchases but all we ended up doing was front-loading home purchases, thus making things even worse on the demand side down the road. Essentially, increasing demand is not something we can do in any time frame that will work. And, meanwhile, the longer we go on, the worse it gets.
If you can’t do much with demand, then it is to supply we must turn. How do we lower the supply of houses actually or potentially on the market for sale?
You turn them in to leased houses.
Millions of potential home owners cannot buy homes because they are out of work, have reduced income or have wrecked credit. With all that, they still have to live somewhere, and while some of them are in desperate straights, most of them have some sort of income (and, in a lot of cases, just as much income as they had before they lost their homes). Can’t buy? Rent.
The trouble is that banks don’t want to be land lords. This is understandable, and I wouldn’t ask them to be. But they can put the houses in to corporate structures which do manage rental properties and which can use at least part of the rental income to provide a revenue stream for the banks. We can put a big incentive on this by making the revenue from rental housing tax free for five years. The key is that time frame – though we can go as low as two years: but we want these houses off the market until we have at least a chance of reviving the economy and thus providing a solid base for home demand.
The idea here is to take the massive number of foreclosed homes and lock them away for two to five years – to get out of the housing market the houses which simply don’t have a buyer, and won’t have a buyer for some years to come. But we can’t just let them sit there unoccupied and deteriorating, nor can we expect banks to just sit on things which don’t produce any revenue. We also don’t want to increasingly force the banks in to fire sale prices for the homes they hold as that will just accelerate and make worse the problem we have.
For the renter, incentives can also be provided – perhaps by making part of their rental payments tax deductible? But aside from any direct benefit like that, the fact remains that a lot of people want to live in a house but can’t at the moment. We can even set up the system so that someone who is being forced in to foreclosure can have an option to lease the property from the bank for two to five years. If a man loses his job and thus gets his home foreclosed, he can then continue to live there, paying rent to the bank and after five years, if he’s been at all careful, he might have restored his credit rating to the point where he can re-purchase his home from the bank.
With the foreclosures off the market, the housing market will become a lot smaller and prices can at least stabilize. Stable home prices will help provide a level of security which is currently lacking, thus affording more opportunity for a return to economic growth. After two years, banks can slowly start to release houses – which, meanwhile, have been well maintained and generating at least some revenue – and keep that up for years, taking advantage of what is hoped to be a reviving economy to sell the houses for a lot more than they would have received had the market collapsed completely.
The final beauty of this is that the expenditures by government would be relatively small. Action would have to be taken to modify tax and regulatory codes and the housing provisions known as Section 8 (which helps people with rent when they are simply unable to meet the full rental charge for their area) might have to be expanded a bit, but we’re not talking a trillion dollar bail out – certainly, not a bail out of banks but, finally, some direct help to the people actually being hurt in all this.
Anything is better than just letting this spiral out of control or, even worse, having the government step further in to the housing market. We’ve got a spreading crisis which threatens to take down the whole economy and we need to think anew and act anew if we’re to get ourselves out of this mess. We can pull ourselves out of this mess if we just show a bit of courage and imagination.
