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In the end, we can't dodge housing.
The U.S. recession and financial crisis of the late aughts began with housing and the scourge of subprime mortgages, which were so messily dispensed. It spread to Europe and its banks.
For a few years we tried to work around the paralyzed housing sector – the drip, drip of steadily lower home prices, the unresolved status of the wounded Fannie Mae and Freddie Mac — and it seemed to be working.
With the help of a super-easy Federal Reserve, fiscal stimulus and much else an admittedly weakish recovery took hold.
Now that worries mount about an ever more likely return to recession amid a significant equities markets decline, we are hearing again about housing.
There's the foreclosure mess, the underwater mortgage mess, the tight mortgage lending standards and all the rest. There's displaced construction workers. There's consumers unwilling to spend as their perceived real estate wealth evaporates.
There's housing, traditionally the leader out of recession, still generally in decline, and harder to ignore.
Just today, two well-known commentators on the U.S. economic scene weighed in on housing, and it wasn't encouraging.
Warren Buffett, chairman of Berkshire Hathaway Inc., was generally upbeat about the economy. He cited record carloads at the company's railroad, Burlington Northern, and same-store sales increases at Berkshire's retail outlets.
But he was downbeat on housing. The company's housing units are “as bad as they've ever been during this period.” The usually sunny Buffett said he likely would have to amend his view that housing would recover by year-end.
On Capitol Hill, Fed Chairman Ben Bernanke talked about housing as he urged Congress and the administration to in effect join the Fed in attempting to spur the economy.
He said Congress should develop a “future path” for housing, Dow Jones reported.
Given political realities, it's hard to imagine much of a fiscal push, in housing or elsewhere.
But there are reasonable proposals offered from many corners that don't spell stimulus in capital letters but would do some good.
As has been widely pointed out, the “Operation Twist' effort by the Fed to drop long-term interest rates even below their historically meager levels won't do much for housing if too many people won't qualify for mortgages or can't refinance because the value of their home has declined or they don't have much equity.
That has to change. By regulatory fiat, where possible, more people who are current on their mortgage payments have to be able to refinance their mortgages to take advantage of rates near 4%.
That savings for many would go into additional spending, a stimulative measure, and would boost their economic psychology, which is important. Even if they used the savings to pay down their own debt it would do long-term good.
Someone also has to take a hard look at standards for initial mortgage qualification. Obviously, things became absurdly easy as the housing bubble inflated. But pendulums swing too far and experts should determine if there's a middle ground that would allow more to qualify without excessive risk to lenders.
It's time to stop trying to work around housing, and take it on.
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While the article is well-written and argued, the premises are fundamentally wrong: we are in this situation because of an artificially created bubble that burst and left lots of folks unable or unwilling to pay the debt they took on. Trying to tell the market what the price will be, should be, could be, is digging deeper and does not lead to a resolution. For those claiming that it would only make things worse: got news for you, things are already worse. Trying to push the problem off by throwing more money at it is not the solution, it is part of the problem.
Y’all who believe that the government should intervene in the economy need to learn that markets always set their prices at the end of the day. Trying to manipulate them into a politically benign position only annoys markets and leads to a deeper hole. The hole we’re in now is so deep that people only have fond memories of sunshine: stop digging.
Yes, it is going to result in an asset implosion. Feckless government intervention – I know, I repeat myself – always results in someone getting hurt in ways that no one anticipated. The thing is, the implosion is there, just waiting to happen. Better now than later, even if it means a depression. If you think we’re not in one already, then you are deluded by wishful thinking and the sincere and mistaken hope that we won’t have to pay for the mistakes that the politicians have caused.
Yes, it’s a sh*t sandwich and we all have to take a bite. Want it now or when the sh*t’s been festering for another decade? There is no other solution: capital has been misallocated and squandered, massive amounts of it, and you can’t pretend that something worthless is suddenly worth a great deal just because someone paid a lot of money for it because the market price was manipulated beyond recognition by those who had something to gain by it.
And printing long and hard enough to stabilize and foster growth results in the exact opposite: inflation and degradation of growth. This will end in tears.
Just one idea that might get some foreclosures off the banks hands. Offer investors who buy foreclosures and turn them into rentals accelerated depreciation and 0 cap gains taxes if/when they sell.. Might put some money to work and create some demand.
Infusing morality into this equation is about as useful at this point as debating who’s most at fault 5 years ago. We don’t have the luxury morality right now. The truth is some of the best ideas to get out of this mess are to further empower the forces that got us into it….as difficult as that is to swallow… at least for the short term. Yes Greenspan was too in love with hearing himself speak to bother with economic risk management. But someone please tell me who is smarter and less politically encumbered than Bernanke to clean up his mess. Price discovery??? Lovely concept for an even remotely stable world we waved bye bye to about 10 mil foreclosures ago. Heard of negative feedback loop much? You’ll “discover” asset implosion. You’ll “discover” the point of no return.. in less than 30 years anyway. I say we exploit the fact that we have the only currency deep enough to facilitate global trade. Print as long and as hard as it takes to stabilize and foster growth. Find God later.
@ Kris
In a perfect world and perfect economy, yes. But right now we as a global unit and the US in particular, requires the softest landing possible. Your prescription and those alike who’s sentiments are well-intentioned but not up to speed with the reality, would cause a harsh landing anywhere around the world name your country here ____ X and would not be in our best mid-term interests.
As much as anyone would not like Govt to have to intervene and take a slice of the action in open markets, the harsh reality is that we as a collective at large — both private and public — have broken the bank and now we own it. What is needed now is a strategic monetary reset and mid/long-term fiscal restructuring to exit from the unsustainable system of the past 10-20 yrs. Thus, to best extricate ourselves now we will most likely require a strategic backstop, i.e. an exit policy stimulus intervention so we can best find that more sustainable balance (i.e. reset) as a market place – albeit without a disastrous crisis on the side.
We’re in this one together… or we go down together. Nothing more, nothing less.
Housing markets need to be allowed to achieve price discovery on their own. If your house had gone up in value would you have been willing to share the proceeds with the people you are asking to bail you out or who are paying to keep your house price artificially propped up?
Tax money is not free and is not to be used for bailouts — ever.
The GSE’s are now holding most of the two million foreclosed homes off the market while they pay property taxes, maintenance and upkeep out of an open checkbook to the Treasury (c/o Christmas eve Massacre of Dec 2010). And it adds these charges to our ballooning US deficits to be eventually paid by who else? Our kids and grandkids.
The risks we take and the decisions we make are our own. The consequences of free choices belong to no one else but those who make them.
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Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal’s Phil Izzo is the lead editor, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com.
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