I have been arguing for the government to step away from propping up the housing market for several years now.

It seems that economists are finally catching up with the idea. Today’s NYT has an article, titled Housing Woes Bring New Cry: Let Market Fall. Only I would argue its not new at all, and some os have been saying this for (literally) years.

Excerpt:

“Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.”

Its not a crash that is needed — it is merely allowing prices to revert to their historic levels.

>

Source:
Housing Woes Bring New Cry: Let Market Fall
DAVID STREITFELD
NYT, September 5, 2010
http://www.nytimes.com/2010/09/06/business/economy/06housing.html

Previously:
Housing Bottoming ? (No) (December 29th, 2006)

Real Estate and the Post-Crash Economy (December 29, 2006) requires free reg.

Propping Up Home Prices, Stopping Foreclosures (November 3rd, 2008)

More Foreclosures, Please . . . (March 25th, 2010)

Why Barron’s Housing Cover Is So Terribly Wrong (July 12th, 2008)

Homes: Still Too Pricey to Stabilize (February 18th, 2009)

No Housing Recovery Before Further Price Declines (February 21st, 2009)

Intelligent Loan Mods & Foreclosure Abatement (February 18th, 2009)

$15,000 Home Buyers Credit Costs $292,000/home (October 22nd, 2009)

Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010)

A Closer Look at the Second Leg Down in Housing (June 24th, 2010)

The $4 Trillion Dollar Question (July 15th, 2010)

Category: Bailouts, Politics, Real Estate, Really, really bad calls

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.

43 Responses to “Letting the Housing Market Fall”

  1. David Merkel says:

    Way cool. Let the markets revert to levels that the cash flows can sustain, with modest leverage.

  2. Exactly

    Ivy Zelman doesn’t quite make her case with this quote: “We have had enough artificial support and need to let the free market do its thing.” but the concept is correct

    Its obvious (to me anyway) that propping up the housing market is counter productive . . .

  3. dead hobo says:

    Yes, but here’s the problem with that idea.

    The Fed wants to maintain a 2% level of general inflation. The Fed believes that all falling prices are deflation, while the rest of us see it as prices normalizing to pre-bubble and pre-inflation levels. By definition, this repudiates the Fed’s most sacred belief and they probably look at accepting the concept of price recovery as an admission of their own personal incompetence.Thus, normal economics and a normal recovery is 180 degrees apart from the Fed’s goals if you measure their goals by their actions.

    Allowing prices to seek an appropriate level based on consumer supply and demand will not be allowed by the Fed because they define that as deflation. By trying to keep inflation as the normal state, they are prolonging the recession. Wages are falling. More and more are unable to afford to live in the Fed’s price manipulated world.

    The Fed helped create this problem over the last 20 years via the sweet smell of inflation making everyone more wealthy by expanding credit. When the value of assets that secure the credit fall, then demand for new credit falls. Had the Fed not inflated those assets a little at a time for a couple of decades, there probably would not be a bubble to have burst in 2000 or 2007. Just as Obama’s housing initiatives pulled housing demand forward a few months to get the tax credit, the Fed did the same for the demand for all assets, but more slowly for over a much longer time period. The after effect for both is the same. Lowering prices and less demand until prices fall.

    The Fed will, of course,never admit a failure in long term policy and will try to blow the bubble back up. This will keep prices from resetting and prolong the recession.

  4. franklin411 says:

    This column reminds me of another great prognosticator who put his faith in a magic army of buyers to suddenly materialize and save the nation, Andrew Mellon. Herbert Hoover and the Republican Congress followed his advice in 1929 to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” The theory was that if prices fell, buyers…from somewhere…would come in and pick up what was left.

    Hmm…how did that work out for us?

  5. jjay says:

    The message in that article is correct.
    The messenger (New York Times) gives me pause.
    Every thinking person knew the housing market was rigged to go ballistic from the start.
    The Government heaped $200,000 tax free capital gains on top of ZIRP, on top of NINJA loans and cheer leading by Greenspan and Bush.
    The NYT and others of their ilk saw nothing wrong with any of that.
    Greenspan was “The Maestro”, America was “a job creating machine”
    That they would change their tune now is to me ominous.
    It looks like a trial balloon, to let the proles know that TBTB are considering pulling the plug on the housing market at long last.
    Along with Biden’s and other establishment types saying 30 years of lost jobs “are not coming back”
    it’s clear to me they are now saying, “You are now a denizen of a Third World Country, get used to it”
    The stimulus fraud is at an end after this Novembers election.

  6. dead hobo says:

    franklin411 Says:
    September 6th, 2010 at 10:32 am

    Andrew Mellon. Herbert Hoover and the Republican Congress followed his advice in 1929 to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” The theory was that if prices fell, buyers…from somewhere…would come in and pick up what was left.

    Hmm…how did that work out for us?

    reply:
    ———–
    Well, the Depression is over so it must have eventually worked. Wars are traditionally a great way to inflate demand and get people back to work. WWII helped here. Eliminating the gold standard, or more precisely, allowing the Fed to print at will helped fix it, but eventually got out of control and helped create a new bubble problem because they really didn’t know what they were doing.

    Also, why wouldn’t you liquidate assets that you don’t need and can’t pay for? Everything is owned by someone. Always. There’s always a price low enough. Someone always gets left holding the bill. Today, the preference is to let Uncle Stupid pay for it somehow and/or ask the Fed and Uncle Stupid to prop up the price long enough to find a greater fool.

  7. philipat says:

    What goes up, must come down?

    Why play with the laws of physics?

  8. dead hobo says:

    Barry Ritholtz Says:
    September 6th, 2010 at 10:14 am

    Its obvious (to me anyway) that propping up the housing market is counter productive . . .

    reply:
    ———-
    Yes, but I think they do this with all assets, including the stock market, in order to keep the pump primed, validate their past inflationary exercises, and try to keep value in a market that people trusted with their savings as honestly priced. A Fed audit will prove or disprove my assertion about Fed stock market manipulations. I know there has been a multitude of denials from them about this, but their credibility is low because their competence is low.

  9. RW says:

    The inventory overhang in housing supply is gargantuan and neither lower prices nor lower interest rates will entice buyers who not only have no need to buy but valid reason to believe that prices could fall even further.

    Generals always fight the last war and supply-side thinking can only lead to nonsense when the problem is lack of demand.

    My 2007 RE shorts were highly profitable and, given how far we have already fallen, I do not anticipate duplicating that resounding success but I will almost certainly re-initiate some positions among the remaining RE survivors if the proposed liquidation program goes forward.

  10. whskyjack says:

    Different parts of the country have different housing issues. For most of us, just get the economy moving and housing will take care of itself. Those folks who foolishly bought into the California market at it’s high or the Florida market, they are in for a long time of pain as they wait for their property to appeciate. But it was a choice for them, nobody forced them to take on the debt. There are a large number of us that opted to stay in our older house or rent and not take on the debt.
    For me The tax breaks let me sell my fatherinlaws house and I’m buying property for rentals. I just need for the housing market to recover and stabilise . Maybe in 15 years it will form another bubble and I can dump it on some enthusiastic youngster and retire to the islands.

    Jack

  11. vader says:

    The other issue is that as assets fall in value what does buyers have to buy with? Even cash holders can be threatened as banks fail because their assets decline in value. A big enough crash and even cash owners will feel so threatened as to put off buying either in fear of assets keeping declining in value or fear of the future in general.

  12. whskyjack says:

    Vader

    I haven’t found money to be a problem even at the depth of the panic we found money available. It nodoubt helps to be credit worthy

  13. RandyClayton says:

    So, how much farther does the Case-Shiller index need to fall before houses have returned to an equilibrium level?

  14. Steve Barry says:

    “Its not a crash that is needed — it is merely allowing prices to revert to their historic levels.”

    Be more specific…any historic level over the last 20 years or more is distorted by an over-arching credit mania and sub-bubbles in stocks and housing itself.

    We rally need the credit bubble to revert to 1950 levels and then see where housing shakes out. otherwise you are treating one tumor and not the whole cancer.

  15. DrungoHazewood says:

    I own quite a bit of real estate, and I say let it go. The stuff is practically worthless anyway as there are no buyers. None.

  16. franklin411 says:

    @Hobo:
    Well, something did happen between 1929 and 1939 that changed the course of events. The New Deal generation was mature enough to recognize that: “our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.” – - FDR’s Inaugural, 1933

    As Eugene Robinson points out in the Washington Post, we’re made of weaker stuff these days. I take it a step further and point to the Baby Boomers as the reason for America’s decline. We have never had a weaker, more selfish, and most spoiled generation in American history.

    When the last Baby Boomer dies, this country will be great once again.

    http://www.washingtonpost.com/wp-dyn/content/article/2010/09/02/AR2010090203992.html?nav=emailpage

  17. JustinTheSkeptic says:

    Supporting prices has never worked we all no this. Can anyone give an example of when it has?

  18. franklin411 says:

    @Justin
    Easy. Just look to American history.

    We used to have farm depressions every decade or so beginning in the 1870s. The worst farm depression in American history began in the 1920s, and it lasted until the New Deal. FDR instituted a program of price supports to stabilize the cycle of farm boom and bust, and we’ve been sticking to that program ever since.

    The result?

    We haven’t had a farm depression since then, and food is cheaper, more plentiful, and safer than at any point in human history.

    Easy.

  19. louis says:

    The problem is with the “banksters” and their minions.

  20. krice2001 says:

    On the topic of Letting The Housing Market Fall – there’s the issue of politics as always. Which administration is prepared to allow or could survive letting most American’s largest asset fall precipitously (further) and expect not to suffer further politcal consequences. It’s not as it the Republicans will back off seeing the President take an approach that many of us believe is correct and necessary. He would be far worse off. There’s no way they don’t know that.

    While many claim to be frustrated by the bailing out of those who in many cases got themselves into trouble and lament “failed” stimulus, I suspect many of those would be more angry when the value of their home and largest asset tumbles yet another 15%-20%. We’re hypocritical that way, weakening the political resolve of our elected officials to do the right thing. (It seems hard enough for them anyway).

  21. algernon says:

    The solution to a bust is allowing prices to adjust. All the stimulus–the gov’t bureaucrats attempting to manipulate “aggregate demand”– can’t solve the problem of incorrect relative prices.

  22. maspablo says:

    The way i see it we have 3 scenarios ( as barry n others have said)
    1) keep on artificially inflating and supporting , try to bring hyperinflation t0 value of homes above purchase costs .( but $ dollar is worthless and creates bigger problems )
    2) keep on supporting and inflating and prices zig zag/flat , not dropping enough to get people who will service the debt and clear the overhang . also prices take at least 10 years to appreciate , souring the American dream
    3) withdrawal support , prices fall , interest rates rise , prices fall more .. pissing off millions crushing American dream , but Debt load will be eventually be serviced

    But , instead of choosing among these scenarios , were going to start with the first , fail go to 2nd fail , then end up with the 3 rd scenario . were going to extend our housing bust into as long as the housing boom, 15 years.

    The main reason is a higher % of homeowers and owners vote and politicians have to answer to them. Try repealing Prop 13 in CA or homestead in FL . it wont happen

  23. “…The result?

    We haven’t had a farm depression since then, and food is cheaper, more plentiful, and safer than at any point in human history.

    Easy.”–f411, above

    f., young chap, take a peek at http://www.organicconsumers.org/2006/log.cfm
    http://www.organicconsumers.org/index.htm
    & http://jeffreydach.com/2008/08/14/genetically-modified-gmo-food-the-great-scandal-by-jeffrey-dach-md.aspx

    the, only, reasonable explaination for your Statement, above, is that you’re long Agri-Tech-, and the ‘Health-Care’-, ICs, or, more simply, you’ve been ‘-washed’ ..

  24. DL says:

    And what about Fannie/Freddie? Shouldn’t we stop putting government money into those entities; should the U.S. government stop guaranteeing their debt?

    There’s also the issue of “QE” by the Fed. Should they buy more mortgage-backed securities? Treasury bonds?

    I agree that the government should stop pouring money into housing. I also think that, at some point, they should also end the mortgage interest deduction (although not right now).

  25. drey says:

    “Its not a crash that is needed — it is merely allowing prices to revert to their historic levels.”

    Historic meaning that we have seen the same circumstances before? WTH would be a ‘historic’ level?

    Better to simply say prices should be allowed to find their own equilibrium without govt interference.

  26. whskyjack says:

    “We haven’t had a farm depression since then”
    Well, it depends what you definition of a depression is. The 1980′s were close enough as the farmers saw the same real estate bubble bursting as home owners have recently, The government also played an important role in the bubble by supplying easy credit for farmers to expand.
    Having been through that real estate bubble probably helped me avoid the recent one.
    Jack

  27. S Brennan says:

    The bottom will be reached when those who have been impoverished by lack of income return to work.

    A lot of working class people would be smart enough to not sell at the “near bottom” if they had options that a real paycheck gives them…they’re just not smart enough to revolt in an organized way, petty vengeance yes.

  28. Marc P says:

    Seems to me that we know we’ve hit bottom in real estate as soon as the TBTF speculators start investing in it. Since that hasn’t happened, and since they effectively now control U.S. economic policy, then we can expect prices to fall. Privately, they don’t call this price normalization or deflation. They call this a profit opportunity. Bet on the downside, then bet on the upside. Betting sure is fun when you control the outcome.

  29. H. Rider Haggard says:

    Yesterday I stumbled across this September 1 piece on Zero Hedge: Are Existing Home Prices Overrepresented By Up To 40%? (http://www.zerohedge.com/article/are-existing-home-prices-overrepresented-40?source=patrick.net#inner-content).

    Briefly, it seems that realtors may have been systematically reporting full-listing-price sales prices for homes actually sold at lower auction prices.

    It’s news to me. Anyone else seen it?

  30. Maseratij says:

    @franklin411 Here ! Here ! My brother, why wait. Let you and I start the arm that will control the hand that puts the blade to their necks. Selfish Baby boomers, the payment for your hubris is nigh! They have abandoned Civil Rights, Women’s Rights, and anything else they believed in the Summer of Love !

    Perhaps the media’s coverage of that small minority on the streets was the beginning of our myopic and pandering media jounalists we live with today. This generation never once made a tough decision, or stood by principle, liberty, or doing the “right’ thing. Why should we suffer for decades with their ruins ?

    Stand up and take back what they have stolen for their coiffures of greed.

  31. kaleberg says:

    According to HUD the median single family house price in Q1 2010 was about $270K, and this was pretty stable. You can get a 30 year fixed rate mortgage at about 4.5%. That’s a monthly payment of $1,370 or $16,440 per year. The average hourly wage is about $19. That’s 865 hours a year. In the 1960s and 1970s, houses cost about 600 hours, but the price popped up to 800 hours in the 1980s and stayed there until the recent bubble. It was nearly 1,000 in 2005, but the real highs were in the late 1970s and early 1980s when interest rates soared. It now looks like prices are getting back in line with wages, especially if interest rates stay low.

    Unfortunately, not everyone has a job, so the effective hourly wage is lower, especially as employers continue to demand pay cuts and pass higher medical costs to employees. That cuts demand and further weakens prices. Who knows, we might see house prices drop to 600 hours a year yet.

    (It’s kind of silly looking at dollars when the actual equation most people use involves hours of work.)

  32. bman says:

    Maseratij,
    Yes I wondered about that sort of thing too, here we’ve had Neil Young formerly of Crosby Still Nash and Young, who sang so seemingly a heartfelt yarn about four dead in Ohio, who in later life still wealthy from royalties of earlier songs, he would write a song called “Let’s Roll” in the drum-up to war. They were called bums and hedonists back then and were told to get a job, I suppose maybe the old folks might have known what they were talking about.

  33. AGORACOM says:

    @franklin411 Says:

    @Justin
    Easy. Just look to American history.

    We used to have farm depressions every decade or so beginning in the 1870s. The worst farm depression in American history began in the 1920s, and it lasted until the New Deal. FDR instituted a program of price supports to stabilize the cycle of farm boom and bust, and we’ve been sticking to that program ever since.

    The result?

    We haven’t had a farm depression since then, and food is cheaper, more plentiful, and safer than at any point in human history.

    Easy.

    ————————

    @franklin411 – Farmers need support because they try to provide critical goods while being susceptible to forces beyond their control. I don’t want them to struggle for such reasons because it threatens food supply and safety. As such, they are a no brainer investment.

    OTOH, moronic real estate investors driven by greed, false mortgage apps and annual re-financing to pay off excessive credit card spending neither require nor deserve any such support.

    Regards,
    George

  34. rktbrkr says:

    The US has been subsidizing housing in various ways since the great depression. I guess stepping back from all these subsidies would be the simon pure solution, no tax deductions, no capital gains breaks on sales, no F&F, FHA, VA and other types of help. Take the big hit immediately, get it over with.

    Think about what happens if RE drops 80% from current levels. You’d get enormous numbers of walk aways, banks might not be willing to write any mortgages, home purchases would be all cash, peoples #1 asset vaporizes, the wealth effect goes in reverse in 5th gear.

    Every banks with extensive mortgages portfolios would be wiped out, if tough love is OK for borrowers then it should be appropriate for lenders too. All the efforts to avoid a full blown depression the past couple years reverses to a “bring it on” challenge to the markets.

  35. DeDude says:

    Not a chance of any further support for housing. The original rationale for round one was to step in to avoid a panic with prices undershooting substantially and dragging the economy down (good politics, good policy). That was pretty much gone by the second round of housing rebates – but they passed anyway for political reasons (good politics, bad policy). At this time they would be outright harmful and unpopular (bad politics, very bad policy).

  36. Nuggz says:

    “Letting the Housing Market Fall”?

    Be prepared to see many, many small to medium-sized community banks to become insolvent, overnight.

    Strategic defaulting will be the hot topic at every dinner table or Happy Meal. Whichever you may choose.

  37. formerlawyer says:

    Before we get there, how do we define an “ideal” level of home ownership?

    Do we aim for Germany’s 42%? How about Australia’s 70%? Or Singapore’s 90%?
    (note: In Singapore this is on a 90 year lease basis see: http://www.smu.edu.sg/research/publications/pdf/SYPhang_OwnerOccupier.pdf)
    see generally:
    http://en.wikipedia.org/wiki/Owner-occupier

    Does it vary from urban, to near-urban to rural areas?
    Does it vary based on the particular region?

    What laws and policies would be needed or not needed to result in such an “ideal” result?

    Or do we just let the mythical market decide?

    Markets are a product of laws and policies no less than any other social phenomena – so who decides?

  38. epupo says:

    “This column reminds me of another great prognosticator who put his faith in a magic army of buyers to suddenly materialize and save the nation, Andrew Mellon. Herbert Hoover and the Republican Congress followed his advice in 1929 to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” ”

    To be fair and “balanced”, Mellon did not believe a huge army of buyers was coming. He believed that this liquidation should occur so that the system that arose from it would be free of the rot that had caused unsustainable stock market speculation in the first place.

    In fact that is something a lot of people (including Barry) have been arguing; rather than artificially holding up the “old world”, let it go and allow it to collapse on its own so a new system arises.

  39. epupo says:

    “As Eugene Robinson points out in the Washington Post, we’re made of weaker stuff these days. I take it a step further and point to the Baby Boomers as the reason for America’s decline.”

    Calling the American people “a bunch of spoiled brats” is not likely to win many fans for the Democrats or any other political party.

    Furthermore the Baby Boomer generation could be argued as being one that was more liberal in their outlook; the Great Society programs came from the postwar generation of liberals who believed American could do anything.

    The issue people forget about the New Deal and the postwar boom is that the productive capacity of most of the rest of the world was blown to bits by WWII. The “buyers” you speak of came from that loss of production.

    I think the problem for policymakers today is how can you “replicate” that type of buying power is the rest of the world is essentially over-capacity as it stands now, in all sorts of things, real estate being one rather large example.

  40. epupo says:

    “FDR instituted a program of price supports to stabilize the cycle of farm boom and bust, and we’ve been sticking to that program ever since.”

    He paid farmers to burn oversupply of certain crops to maintain price stability.

    I am all for destroying whole communities of empty houses and starting over rather than trying to force people to buy homes they clearly don’t want. Why doesn’t the government spend billions of dollars to simply destroy many of the homes that were built in the last decade that have little realistic chance of ever being inhabited?

  41. Nuggz says:

    “Why doesn’t the government spend billions of dollars to simply destroy many of the homes that were built in the last decade that have little realistic chance of ever being inhabited?”

    Nuggz likes this.

    I just shake my head when I see acres of prime farmland get replaced by what some people call “homes”. I call them rat cages, but beauty is in the eye of the beholder I suppose.

  42. rvirmani says:

    While the message is correct, the TBTB seem to have planned this. The game is to crash the US Currency. If you allow house prices to fall, you will effectively remove more liquidity from the economy, as more and more households will effectively become underwater. This would further increase defaults, so yeah house prices should fall, but now is the worst possible time. Hence the NYT is now chaninging its tune. When was the last time that rag was on the side of market forces?

    “The purpose of this financial crisis is to take down the U.S. dollar as the stable datum of planetary finance and, in the midst of the resulting confusion, put in its place a Global Monetary Authority [GMA - run directly by international bankers freed of any government control] -a planetary financial control organization”- Bruce Wiseman