There seems to be this idea going around — both parties, both candidates, lots of economists — that the way to “fix” the economy is to stabilize home prices.

This is incredibly misguided. Prices are still terribly elevated, and until they revert back to levels that are affordable and clear out the massive excess inventory of new and existing homes, there can be no stabilization.

Of all the wrong lessons to take from the mortgage, housing and credit crises, this remains the very worst one. If you remotely believe in a free market — even one where players are regulated to prevent their own worst instincts from getting the best of the them — the last thing one should be doing is targeting asset prices. That is what Greenspan did throughout the 1990s and in the early 2000s, and it one of the primary causes of our present woes.

Yes, you can regulate behavior; No, you cannot regulate prices.

For a classic example of this, have a look at California home sales last month (see chart, top right). Home sales shot up a huge 96.7%. Why? Because home prices fell 40.9% in September alone. Foreclosures and forced sales are driving prices back to levels that are attracting buyers, and are affordable to potential buyers.

Its not just sale prices that reveal how overpriced homes still are today. Have a look at this chart, via Ed Leamer. It was part of a paper he presented at the UC Berkeley – UCLA symposium last week. This chart also shows that prices remain significantly elevated versus rentals.

Chart via Edward Leamer, UCLA

Until price reverts back towards historical norms, the excess inventory will not be removed, the foreclosures will not stop, the total sales will remain depressed. The sooner Washington D.C. figures this out, the better off the economy, and the homeowners and buyers in the US will be.


Moral Hazard of the Coming Mortgage Bailout (October 31, 2008)

C.A.R. Reports Sales Increased 96.7 Percent; Median Home Price Fell 40.9 Percent in September
BUSINESS WIRE, October 24, 2008

Why are the Cycles in Homes and Consumer Durables So Similar?
Edward E. Leamer
October 2008

Florida’s Existing Home, Condo Sales Increase in September 2008
Florida Association of Realtors, Oct 24, 2008

Category: Bailouts, Markets, Psychology, Real Estate, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “Propping Up Home Prices, Stopping Foreclosures”

  1. jasong609 says:

    Just an FYI… The videos below are not working.

  2. Renting in Mass says:

    I hope you’re right, but why can’t they stop foreclosures? Didn’t lenders (JPMorgan, Bank of America) recently put moratoriums on foreclosures and vow to give everyone new mortgages? Isn’t that stopping foreclosures?

  3. grumpyoldvet says:

    Renting….if I read a recent report correctly (think it was Calculated Risk), JPM will only consider mortgages it is holding on its books. So the real numbers are probably quite small as to how many will be ablme to renegotiate.

  4. grumpyoldvet says:

    ablme??? What hell is that. S/B able….Fat fingers I guess

  5. grumpyoldvet says:

    BTW……anybody watching CNBS this past few days. Seems they have every hack on that’s a “supply sider” pimping for McCain. Welch mst have threatened them with their job. Kernan is absolutey going nuts throwing anything and everything he can into the mix promoting this failed 30 years “experiment”. Almost as bad as listening to someone talk about how evolution is only a theory.

  6. Winston Munn says:

    The vast majority of our elected leaders are not interested in what is right but in what will sell – they are not statesman or even politicans but have transformed into advertising executives. The only want to know who is paying for the ads, what do they want to sell, and how do we spin it to make ourselves look good.

    The Rebuplicans will want to stop foreclosures because its good for business; the Democrats will want to stop foreclosures for the sake of the children. Neither will tell you the truth – they are targeting asset prices because asset prices affects their sponsors’ wealth.

    We need are more statesmen, fewer politicians.

    On a related note, I don’t know why anyone would be surprised at a Fed Chair targeting prices – the whole idea of the Fed is to attempt to use price controls on credit. Price controls have never worked and never will – (see Fed interventions for proof) – but that won’t stop them from trying over and over to “get it right this time”.

  7. Patrick Neid says:

    “Yes, you can regulate behavior; No, you cannot regulate prices.”

    That lesson remains to be learned. We will know when they are getting there when the light bulb goes on and they realize that policies that speed up the foreclosure process will get us to the bottom quicker.

    Like so much that passes for economic thought during these days of of central planning 101 the stark reality remains, “the coverup is always worse than the crime”.

  8. austincompany says:

    Economic pain is something this generation has no stomach for. Like all bubbles, citizens of California began to expect and demand that their home prices always increase by double digits every year. The thought of a falling home prices never entered their minds.

    Therefore they wine and moan to their Senators and Representatives to stop the slide and give them back their west coast nirvana. In summary, it’s not the politicians that are blinded from truth and pain, it’s the citizens that enjoyed the trillions and trillions of dollars in inflated home sales, second mortgages and home piggy banks.

  9. constantnormal says:

    I think you may be misconstruing a lot of the efforts to stop the foreclosures as efforts to prop up prices.

    Restructuring mortgages (best done at the federal level, via Congress — guurrk! — because they have the ability to set rules on a national basis) would do little to prevent home values from declining, as that is being driven by the oversupply of for-sale houses (courtesy of the foreclosure madness), and increasingly, rising unemployment.

    The problem with restructuring is that it is messy, with no good way to contact all the holders of pieces of the commoditized mortgages that were packaged into CDOs. One solution is to recall all existing CDOs and swap them for newly-minted CDOs with better linkage to the component mortgages (which may or may not be the same mortgages as were contained in the recalled CDOs). Then the mortgages can be restructured, and whatever impact this has to the payments being produced by the CDOs can be passed along.

    OTOH, if you are referring to efforts to simply “buy up” the failing mortgages, making the CDOs healthy because they are now (like everything else) backed by the generous taxpayers of the USofA, admittedly a simpler process, then maybe this could be looked upon as trying to stabilize housing prices.

    But it will fail to stabilize housing prices, because supply and demand is what regulates housing prices, and we have a ginormous supply with very weak demand at the moment, so prices will continue to decline. Buying up failing mortgages is just socializing the losses of the borrowers and lenders, at a huge cost to the taxpayer. I hate that sort of thing, but frankly, I’m kind of numb to crap like this by now.

    I think that the only kind of government action that could stabilize housing prices would be for the Congress (or national finance Czar Paulson) to institute price controls on home sales, and while I do not rule out such folly, I have not (yet) heard of any attempts to do so.

  10. Vermont Trader says:

    House prices have another 10 -15% downside here in Vermont, at least.

    ISM sucked this morning. Not a good start to the week.

    I’m watching volatility this week. I think that if the bulls want to succeed this week they have to squeeze some of the volatilty out of the market first. And that includes all markets, not just stocks.

  11. constantnormal says:

    I left out one important item — no reason why people can’t have mortgages that are under water, the important thing is that they are able to make the payments.

    Paying for something that has proven to be worth a lot less than we anticipated is nothing new for Americans — we do so every April 15th.

  12. rtol says:

    At some point, buyers who WANT to buy and can QUALIFY to buy using loan programs that will not BANKRUPT lenders (or the government) need to be a part of the solution. Want to buy is determined partly by reducing fear of further market declines. Ability to buy (and to qualify in today’s financing world) depends mostly on having a secure job and a down payment. We can’t do too much about the job, but we can do something about the down payment.

    We can do this by allowing a down payment of up to 20% of the purchase price of an owner occupied property to be removed from existing or hereafter established retirement accounts without tax penalty or immediate tax consequences. You could put some kind of 10 year repayment scheme in place where if the withdrawal was paid back it would not incur any tax until final distribution, or make the tax due on sale or possibly even refinance of the property. I guess you could even extend the program to allow principal reductions on existing loans being refinanced, although for many homeowners that may be a poor decision.

    Beyond the purely economic aspects of this, the psychological elements could also be significant. Lower prices are a disaster to sellers and lenders, but they are a real opportunity to the millions of families that would love to own their own home but have been priced out or are just now entering the market. Making home ownership possible for entry level borrowers on a sound and sustainable basis could be the first step to greater market stability.

    I would appreciate any comments or criticism of this thought.

  13. jason says:

    “Like all bubbles, citizens of California began to expect and demand that their home prices always increase by double digits every year. The thought of a falling home prices never entered their minds.”

    I wonder where you got that sentiment. I have lived in CA since 1997 and the only thing I ever hear is people moaning about how ridiculous the home prices are and that it makes no sense that most people cannot afford a simple starter home. Most people I know were driven by fear in the real estate market. Buying for fear that prices will just keep rising and they will never be able to buy, these are the middle class people who know little about economics and only used the last ten years as a gauge. A small minority, the wise, sold for fear that the end was near. Yet, most people that did buy were driven by one fear overwhelming the other, the fear that they would never be able to buy a house overcoming their fear that they may be buying at the top.

    I was in the middle, I wanted to sell but my wife resisted the idea of renting, and with three school age kids and a small business moving out of the area was not an option we wanted to consider. And no we are not under water we still have a 25% cushion.

  14. leftback says:

    You are completely correct that house prices must be allowed to fall to affordable levels, and realistically there is no way that the Fed or the US government can prop them up. Of course you can expect to see some band-aid attempts and some reflationary monetary policies that will do little more than slow the process down.

    VT Trader: Last week I poined tou what looked like a head and shoulders in the VIX, and as long as we get moves in the 1-2% range we should see a continued decline in volatility and that should be good for the market in the medium term. Of course we will all be reloading our favourite short trades once the VIX gets back into the 30s and 40s. Speaking of shorting, my election arbitrage is to short the health care industry if we have an Obama victory. Those companies have been feeding at the trough and fueling massive inflation in medical care prices under Bush – they will not be able to go on doing so for much longer. So now I have two reasons to be cheerful. Long RXD.

  15. Winston Munn says:

    Boy, after seeing that ISM it’s a good thing we shipped our manufacturing base to the China division or we really would be in trouble – now, if we could only import some more consumers with low credit card balances we’d snap out of this trough in no time.

  16. KidDynamite says:

    Bravo Barry, now how do we get congress and the Fed and the Treasury and the presidential candidates to understand this simple concept?

    @RTOL: the whole point is that we need to STOP the cycle of excessive leverage. borrowing from 401k’s is the exact WRONG solution. When housing prices come to levels where the willing buyer can afford them, he will buy. Barry’s point is that it’s a mistake to try to stop the home prices from falling by subsidizing the willing but not able buyer… That’s why we’re in this mess: we gave people houses by gifting them creative mortgages which didn’t hide the fact that the houses still weren’t affordable.

    prices need to come down to levels where they are affordable. then people buy them. rinse, repeat.

  17. DL says:

    Using taxpayer dollars to prop up real estate prices. Very bad deal for the taxpayers.

    For those who opposed the Iraq war on financial grounds, I think this is worse.

  18. ron32 says:

    Excess inventory is narrowly defined as listed homes forsale both resale and new. Tax treatments has created significant investor owned property rental,vacation, 2nd,3rd etc homes. These investor owned properties will during recession periods, margin calls and other negative economic times be dumped onto the market further eroding price. We could also discuss the whole shadow inventory culture but enough evidence exists to support the concept that significant over building of SFR during the past 20 years is contributing to the current RE market price fall.
    Excess inventory will be the main stumbling block to keeping the RE prices inflated going forward and as investor desire for foreclosure property finally ends we can expect real demand for SFR to fall below 4 million units of sales velocity further causing a deeper shakeout within the mortgage/RE industry.

  19. Mannwich says:

    @ron32: Agree with you. Am hearing several stories from people who are hanging onto those mulitiple properties for dear life via their original ARM financing terms. Once those ARM terms reset over the next 1-3 years, many of these people will be dumping investment properties onto the market en masse, further depressing the real estate market as a whole.

    @leftback: Agree with you about RXD. Bought some a couple of weeks ago. Probably a bit early but I plan on slowly re-loading over time if it continues to drop.

  20. Well.. You _could_ raise wages so that the wage/price valuation standards get back in line..


  21. ron32 says:

    Mannwich: considering the economic impact of homebuilding in the burbs as it generates the shopping malls,schools new communities etc the excess inventory of SFR impacts more then home prices. Noboby wants to talk about the massive overbuilding that has taken place which could only be accomplished via home speculation and the supporting tax deductions to make it work.
    I expect the builders to start using the cheap lots to build relatively lower cost housing in the 75K to 150K range here in Calif, which will be another nail in the price curve!

  22. babycondor says:

    California may be a leading indicator. Things tend to happen here faster and bigger (more people) but the scenarios may play out in a similar fashion nationwide…but hopefully, not in such an extreme manner.

    Anecdotal: Last weekend we drove through the eastern LA basin (Riverside, one of the hardest hit foreclosure areas). Saw many brown lawns, hallmark of vacancy, in the nice upper-middle class subdivision where inlaws live. A few for sale signs. MIL casually asks SIL: “So, did ____ let the house go into foreclosure?” Must happen all the time these days around there.

    ron32: Already happening. We saw several large new developments further out in the desert north of San Bernardino (cheap land), with prices in the mid-100K range and even one developer offering BRAND NEW RENTAL HOMES for $995 a month. These homes were obviously not getting any purchase offers and the developer decided to just rent them out.

  23. ron32 says:

    babycondor: thats for the feedback, looks grim for the builders!

  24. willid3 says:

    i don’t think housing prices can go up until wages have. the root cause of our problems is that wages have fallen to the point that even with easy credit (now gone) they had no support. With out growing wages, there is only one direction for prices (of just about every thing) and thats down. And that could lead to that problem of deflation. I think of it of just the equalization of the world economies. which we can’t escape. any more

  25. rtol says:


    You may have missed my point. Excessive leverage in real estate is clearly the problem, which is why I am approaching this as a way of minimizing acquisition leverage by making down payments more accessible to first time home buyers. Housing equilibrium has to be about more than lower prices, it has to involve increasing effective demand.

    Right now, besides the psychological burden of buying in a falling market, it’s extraordinarily difficult for any “normal” owner occupied buyer to finance property, partly because of the recent 50 bp uptick in mortgage rates, and even more so because of the paucity of affordable and economically sustainable low down payment financing. Housing prices have to do more than come down to the level a willing buyer wants to pay, it has to come to a level he can QUALIFY to pay, and a big part of qualifying to pay in the current financial market involves the size of your down payment.

    Most current plans involve taxing renters (and others) to support housing prices, in part by having the government guarantee high risk low down payment loan programs (like FHA loans). This means that from a renters perspective they are paying to keep housing unaffordable, a deeply unfair arrangement. My thought would not contribute to that, and would in the long run have minimal tax costs, at least as I see it.

    Thanks for your comments, anyway.

  26. batmando says:

    willid3 Says: “With equalization of the world economies, which we can’t escape…”

    @ Leftback, Dead Hobo, Mac E., Mark Hoffer and/or any of the rest of you much more acute folks with a better handle on this, critique this, please:

    We are in a world labor market with our wages headed down toward the median wage level?
    The only way U.S. wages become more competitive will be a weaker dollar?
    Which we’ll see, after intermediate term deflation, when all the re-flating TARP, alphabet soup facilities, etc dollars come back in (runaway?) inflation?
    Then cheaper dollar = higher oil and other commodities?
    Along about the time the C-o-L takes off, then “rising” wages will meet falling housing prices at the magic 3 – to – 1 price to income ratio?

    or not?

  27. flipspiceland says:

    The policy wonks in DC have already figured it all out. There is little they don’t know, including that they should allow the market to work.

    What we need to know is why they refuse market oriented solutions.

    The specter of world wide economic catastrophe is the usual mantra that is offered up as to why they insist that they vmust interfere.

    I don’t believe a single syllable let alone one word from D.C. There is something else going on in those backrooms where they plot and scheme.

    But it it not ignorance of the speediest and most effective solution. If we follow the money, we will likely know the why markets are not being permitted to operate.

  28. Mike in Nola says:


    Your reasoning for RXD sounds good, but when I checked the chart, it’s amazingly thinly traded. Only 150k shares outstanding. Doesn’t smell good.

    Hoping this rally continues so I can get back into SRS. Have a buy set at 82.

  29. batmando, you should read what ‘flipspiceland’ posted.

    but, the idea that there is a ‘World Labor Market’, is a canard. Simply, if it were so, we’d be Importing Machine Tools from Bangladesh, not Germany, or Robotics from Sri Lanka, not Japan. Simply, Labor Cost is but one component of the, multi-variate, expression of Value.

    and, to encapsulate ‘fsl”s post, future ‘valuations’ will be, even moreso, predicated by the fiat of the Fiat boys.

    The only thing I would bet on is: Higher costs of Inputs, and, not necessarily Wages rising as fast..

    Though, with this: “much more acute folks with a better handle on this”, I’m not so sure I’d belong in that grouping..that said, I do think, though, we’re travelling in some, seriously, different days, and with that, it’d behoove us all to 2X the hatches and overstock the Galley..

  30. Pat G. says:

    I read somewhere that the median income seven years ago was a couple of hundred dollars more than it is now at $52K. Adjusted for today’s inflation median income should be around 64K. Rework mortgages, if possible. Going forward, there are still a number of people who are going to lose their jobs & then thier homes. So we’re not through this yet. It is only going to get worse.