Obama's Housing Policies Are Killing Growth

Excluding the current recession, the ten since WWII have lasted on average 11 months - the longest lasting 16 months. At 32 months and counting, this one appears radically different. That has prompted pundits to ask - "what's different this time?" Many have answered: President Obama's economic policies.

But pundits are missing one crucial piece of the puzzle - Obama's housing policies. These policies have stunted the spending of tens of millions of consumers who continue to pay high interest rates on unsecured mortgage balances which, absent those policies, would have been compromised and written off long ago.

Obama's housing policies have greatly reduced consumer spending - as a vast population of consumers has been denied lower housing costs as a result. In addition, because these consumers continue to be shackled to homes they cannot sell - their mortgage balances exceed current home values - they are unable to relocate to other areas of the country offering better job opportunities.

Consumer spending accounts for 70% of GDP, and we are trapped now in a vicious negative feedback loop - though housing got us here, it now is alternately effect and cause of our economic woes. Without jobs, housing continues to falter; and with housing faltering, consumers don't spend so businesses are afraid to expand and hire.

At the height of the bubble, affordable home ownership policies pushed the homeownership rate to 69%. Today, due to foreclosures, it has fallen back to 66%. Given a population of 310 million, that means that 205 million live in homes they own.

Previously 1 in 5 and now - due to foreclosures - still more than 1 in 4 households are underwater - their mortgage debt exceeds the value of their house. Likely 60 to 70 million consumers live in houses whose owners have no recoupable net equity after brokerage commissions and closing costs.

Millions of consumers are paying far more in housing costs than they would had they lost homes to foreclosures, given their banks deeds in lieu of foreclosures or closed short sales - and then rented or even re-purchased comparable housing at reduced market prices and interest rates.

This population of negative or zero-equity homeowners cannot realize the benefits of vastly lowered housing costs brought about by market declines in housing prices and interest rates because they are trapped paying loans they took out before the bubble burst.

Pundits speak of the "moral hazard" created by our bailout mania-we hear about "strategic defaults" by homeowners who have the money to continue to pay their mortgages but choose not to. But what about the reverse-strapped homeowners hanging on longer than they normally would?

Creditors experience collection problems all the time. They work through a process of rational compromise based on market realities. Free markets clear away uncollectible debt and collateral is sold. And it normally happens quickly.

But Obama's modification program, by giving underwater homeowners false hope, has delayed free-market clearing processes. They believe that if they just hang on, and keep paying interest, even on the portion of the debt exceeding the value of their house, Obama will rescue them.

But Obama's program failed. While he promised 3 to 4 million modifications, he has produced less than 10 percent of those, and even more program dropouts. Yet the failure of Obama's program does not stop people from continuing to hope...and pay.

The program also gives banks false hope. They won't take short sales or accept deeds in lieu of foreclosure and have delayed foreclosure proceedings because they too hold out false hope for bailout-subsidized modifications. And, because Obama has been a vocal critic of banks who don't work out modifications, they fear regulatory reprisal if they take back the homes.

While the program has delayed inevitable free-market clearing processes by giving false hope to lenders and borrowers alike, 60 to 70 million consumers with no recoupable home equity have depleted their savings and continued to pay housing costs far higher than they needed to, in a desperate effort to preserve "their home equity." But they lost their equity long ago - that happened when the bubble burst.

By delaying free-market clearing processes, Obama's housing policies have siphoned off into our banking sector vast amounts of consumer spending power that otherwise would benefit other sectors of the economy.

If households containing 60 to 70 million consumers continue to pay $500, $750 or even $1,000 per month in above-market housing costs as a result of Obama's program, that means that by killing the program we would see a stealth stimulus of tens of billions of dollars annually. The vast majority of those cost savings would get spent on dinners out, vacations, cars, furniture, clothing and electronics - a recurring stimulus at negative cost to the taxpayers (we would be spared the current giveaways).

Also, by keeping underwater homeowners in their homes longer, the program prevents the unemployed from relocating to find employment. Although unemployment rates remain high throughout the country, rates vary widely. In June, North Dakota had an unemployment rate of only 3.6 percent while Nevadans suffered with 14.2 percent. By delaying market clearing processes, jobless homeowners in regions with high unemployment rates cannot relocate to regions offering more jobs - they continue paying interest on their unsecured mortgage balances because they can't possibly sell their houses for what they owe.

That means much of the extended unemployment benefits are going directly into the pockets of lenders who hold unsecured debts they refuse to write down, as jobless homeowners use their benefits to pay interest on unsecured loan balances, instead of relocating to seek job opportunities.

Free-market clearing process can be delayed but not avoided - Obama's housing policies only kick the can down the road. But we pay for that dearly in the form of reduced consumer spending, depleted consumer savings (which means future increases in savings and reductions in spending), slower growth and greater unemployment.