If you read the news this morning, you’ll find Realtors all over the country rejoicing that President Obama has surged into the depressed real estate market on a white charger, bearing with him an heroic plan to rescue everyone — borrowers, lenders and especially Realtors. No discouraging words? To the contrary. Some Realtors think Obama’s promise of $275 billion in mortgage bailouts does not go far enough.
Here are two important questions to put the matter into perspective:
1. By how many dwellings will the standing inventory of housing be reduced under Obama’s plan?
2. By how many households will Obama increase demand for housing?
Since the answer to both of these questions is zero, we can predict with certainty that President Obama’s housing relief plan will do nothing to relieve the housing crises.
What will it do? The true essence of the plan is Rotarian Socialism for lenders. Obama’s hope — probably hopeless — is that if lenders take a lot of small hits now — by refinancing homes for substantially less than is owed on them — they can avoid a lot of much bigger hits later — by not having to foreclose on those homes.
But the real problem — in Phoenix, Las Vegas, Sacramento, South Florida, the Rust Belt, etc. — is that the residential real estate market is overbuilt. There are more houses seeking homeowners than there are homeowners (or tenants) seeking houses. The real estate crisis will not end until supply is reduced, demand increases — or both.
Obama is trying to shove a floor under home values. But since this does nothing to correct the systemic problem — oversupply — he is simply pissing away money while delaying the ultimate and unavoidable market correction.
Want a true housing relief plan?
Here in Arizona, we could do ourselves a huge favor by repealing the employer I.D. check law that drove all of our undocumented friends out of the state — just at the wrong time.
And it would make great sense to make immigration to America easier and faster. Imagine having neighbors who work hard, pay their bills on time and can spell correctly!
But those are sensible, economical reforms. We can’t expect anything like that out of Washington.
So how about a $15,000 tax credit for tearing a domicile down? Landlords in the Rust Belt could have their first profitable year in years.
How about another $15,000 tax credit for turning a single-family home into a commercial structure — with no live-in employees?
But the absolute best tax credit of all would be $15,000 a head for every new infant born in the United States. Those babies can force move-up home purchases now, and they’ll come in handy later when we need slaves to pay down all this new debt.
Yes, I’m joking. Government created this mess, and everything government does to “fix” it will only make things worse. Americans will once again have the kind of prosperity they have always known when they wake up to the fact that robbing the ants to pay the grasshoppers means that everyone will starve when winter sets in.
Technorati Tags: real estate, real estate marketing
Keith Thompson says:
I couldn’t agree more. All of this mess was caused by Washington insisting on meddling in the market and when things go back the brainwashed populus looks to Washington for the solution. It is akin to watching a drunk crash his car into a tree and when he gets out you give him the keys to your car along with a six-pack and expect him to get home safe.
February 19, 2009 — 9:41 am
Greg Swann says:
Here’s the worst of it, and I take this up in my Republic column this weekend: The artificial floor on home prices plus the $8,000 tax credit in the “stimulus” bill could result in the outcome we can bear least: New home building, further increasing supply.
February 19, 2009 — 9:46 am
Grog says:
I love posting here. I guess I will be one of the schmucks taking advantage of Obamas plan. As I stated in previous posts here, I have great credit, make payments ahead of schedule, but don’t have the equity in my home or the 20k needed at closing to refinance. So for me and my family this will be a life saver. You guys can make fun of me now :o)
I’ll still keep coming back because I think you are a swell guy.
February 19, 2009 — 11:01 am
Greg Swann says:
A title company rep we know is selling her home in a short sale, then leasing it back from the investor who is buying at less than half her mortgage payment. As Hamlet said, “Thus does Rotarian Socialism make opportunists of us all.”
February 19, 2009 — 11:16 am
Jessica Horton says:
“The politician attempts to remedy the evil by increasing the very thing that caused the evil in the first place: legal plunder.”
– Frederique Bastiat
February 19, 2009 — 11:20 am
Brian Brady says:
“You guys can make fun of me now :o)”
I’d make fun of you if you DIDN’T take advantage of this. If there is one thing I’ve learned from the last five years, it’s that becoming “too big to fail” is VERY profitable.
February 19, 2009 — 12:14 pm
Michael Cook says:
Brian,
That does not work for governments, FYI.
February 19, 2009 — 12:52 pm
Kari says:
Re: Yes, I’m joking. Government created this mess, and everything government does to “fix” it will only make things worse.
Oh, how soon we forget. Everyone that is associated with real estate created this mess. As a mortgage lender for 24 years…I know of what I speak…Also, the notion of a bailout originated under the previous administration.
February 19, 2009 — 1:22 pm
Teri Lussier says:
>So how about a $15,000 tax credit for tearing a domicile down? Landlords in the Rust Belt could have their first profitable year in years.
A few of us here have been chewing over this problem ourselves, and that’s the same solution we’ve come up with. If there is a better way to deal w/vacant properties right now, in Dayton, I’d very much like to hear it. The cost of keeping these properties standing, derelict, abandoned, stripped, defaced, is both monetary and emotional, and devastating either way.
February 19, 2009 — 1:58 pm
Bob says:
“By how many dwellings will the standing inventory of housing be reduced under Obama’s plan?”
We have taken a few short sales off the market and loan mods are going forward. At least a few more foreclosures will be averted.
If I have a seller in a $400k loan on a $300k property, either it sells to a new buyer for $300k or the seller keeps it with a new value of $300k. The loss to the bank, ultimately absorbed by the Feds, is the same.
The unerlying issue is that what is being called a “credit crisis” is really an “asset crisis”. Until you are able to stabilize the downward spiral in value to the point where you can attach value to assets, you cant move on to the credit part of the problem. Its why we have such a huge spread between conforming and jumbo.
February 19, 2009 — 2:15 pm
Dave Shafer says:
I got a theory. Here in my part of Florida, real estate values are still going down, but at a much lower rate (5% last 8 months). Supply is down to 9 months from over 12. I think our real problem was sub-prime loans (easy credit) combined with amateur speculation (bubble mentality). The stimulus package will do little to stimulate buying because most people if they are underwater are underwater way more than 5% (105% LTV limit on refi’s). What it will do is help folks who are having problems making their payments by lowering their interest rate. Perhaps they are in an option arm loan or even a 30 yr fixed at 6 1/2%. Those folks will have a little more money at the end of the month. But they weren’t going into foreclosure anyway! And if folks are looking at being 60K underwater, why would they stay? Walk away and start over, rent for a few years while you get your scores back up.
February 19, 2009 — 2:48 pm
Dave Shafer says:
part 2 (accidently hit post)
So we are already started into recovery (unless more job losses drive foreclosure rates up even more). Homes are more affordable. Sales are up. And the politicians can argue over if the stimulus did it.
But we all know it is really about supply and demand. We had several years with artificially high demand and now we are back to normal demand and high supply. Over time the supply will drop and all will be forgotten! At least here in Florida, with net increases in population!
February 19, 2009 — 2:58 pm
Dan Connolly says:
I have had a theory that I have been pushing for the last couple of months:
1) Force banks who made sub prime liar loans to refinance all of them at 5.5% 30 year fixed, assumable, qualifying. Add any back payments to the loans (Since they essentially were a party to fraud, refinance or stand trial for fraud) Some people will now be able to afford their homes, and some will be able to sell.
2) Drop capital gains tax on investor real estate transactions. The investors will then buy a shitload of foreclosed properties. Lots of people have their money liquid now that the stock market is in the toilet.
I think that would begin to solve the problem.
February 19, 2009 — 3:01 pm
Brian Brady says:
“That does not work for governments, FYI.”
Doh !
February 19, 2009 — 4:11 pm
Greg Tracy says:
What the Stimulus Package will do is help reduce the amount of NEW foreclosures that come on the market in the next 24 months.
Millions of new foreclosures coming on the market will hurt much more than helping those millions of people to keep their homes by allowing them to refinance and the fed absorbing the bad debt.
I am all for less government, but I am even more for leadership in a time of (financial) chaos, which, if you look around you will find, we are in.
Before we all throw the new plan to the wolfs and declare that everything is going to hell in a handbasket, let’s give it a breathing chance.
Sure, tax payers have the burden (and I am in the highest, “who-cares-about-them,” tax bracket) but I’d rather be burdened with helping fellow Americans than burdened so we can blow up shit in the desert.
But that’s just me…
February 19, 2009 — 6:16 pm
Joe Strummer says:
The financial incentives in this country have long favored real estate. Two examples: 1) preferential tax treatment for interest in primary home mortgages, and 2) the anti-cramdown feature of bankruptcy code. When an individual enters Chapter 13, the individual presents a plan that allows him to adjust his obligations to the amount secured by the asset. The creditor takes a hair cut.
But in the 1970s, when the modern bankruptcy code was first being drafted, the mortgage industry lobbied gov’t to prevent the bankruptcy code from allowing the same cramdown granted on virtually every other asset for primary home mortgages as well.
But why should primary homes be treated any differently than any other asset? It’s just a bit of preferential treatment for a particular industry.
February 19, 2009 — 6:27 pm
Greg Tracy says:
“But why should primary homes be treated any differently than any other asset? It’s just a bit of preferential treatment for a particular industry.”
Joe, I feel bad for your children…
February 19, 2009 — 6:33 pm
Joe Strummer says:
I have had a theory that I have been pushing for the last couple of months: 1) Force banks who made sub prime liar loans to refinance all of them at 5.5% 30 year fixed, assumable, qualifying. Add any back payments to the loans (Since they essentially were a party to fraud, refinance or stand trial for fraud) Some people will now be able to afford their homes, and some will be able to sell.
I’m not sure that these subprime borrowers could afford even 5.5 percent rates. The whole idea was that they would be able to flip the house. But those days are long gone.
More to the point: we’re well beyond the subprime crisis. Now we’re at a point where near prime or prime borrowers who could otherwise afford their homes, are being laid off. They can’t meet their mortgage obligations, so re-financing them doesn’t help. Or they need to sell the home in order to relocate to a better market for work. And if they’ve bought in the last 10-12 years, they’re finding that they can’t sell it for what they bought it for.
As painful as it is, this recession is going to be worse because 1) gov’t is inflating the currency to pay for stimulus and bailouts, 2) gov’t won’t let banks fail, 3) gov’t measures mean that the real estate market is not finding a bottom.
The longer the real estate market doesn’t find a bottom, the longer we all are in this limbo where people can’t sell homes, people won’t buy homes, and people can’t move on with their lives.
Phony-baloney solutions like letting people refinance loans at 5.5 percent interest for 30 years while merely forestall the inevitable foreclosure/bankruptcy.
February 19, 2009 — 6:41 pm
Joe Strummer says:
Joe, I feel bad for your children…
I don’t have any, but why? I don’t understand how this part of the bankruptcy code makes sense, or why real estate ought to be privileged.
February 19, 2009 — 6:43 pm
Greg Tracy says:
Joe, a home is different from other assets and if you had children you may understand that losing your home and trying to find somewhere for your children to live is very different than finding a new set of wheels to drive.
There is still such a thing as empathy in this world for some of us.
Foreclosure- It’s not just about credit, it’s also about people’s lives…
February 19, 2009 — 7:39 pm
Greg Swann says:
> There is still such a thing as empathy in this world for some of us.
That ad hominem, Greg. It has nothing to do with the issues.
February 19, 2009 — 7:45 pm
Dave Shafer says:
“And if they’ve bought in the last 10-12 years, they’re finding that they can’t sell it for what they bought it for.”
Wow, that;s some bad markets. We bought in 2000 for half what is is worth now and our market has gone down 35% since peak! Somehow I think most markets have gone up in the last 10-12 years and if they had a amortizing loan their principal has been reduced 20%!
February 19, 2009 — 7:48 pm
Greg Tracy says:
That ad hominem, Greg. It has nothing to do with the issues.
Not true- I am responding to Joe’s question, “But why should primary homes be treated any differently than any other asset?”
My response is that homes are different than other types of assets in the way I described. That is my reply to the question.
I mentioned empathy simply to infer that those who have some didn’t need my explanation in the first place.
February 19, 2009 — 8:02 pm
Joe Strummer says:
Well, my proposal for a cramdown for homes would treat homes the way we treat other assets (cars, incidentally, are generally exempt from cramdown). That would allow more people to stay on their homes, although the argument goes that cramdown would make it more difficult for credit to flow into real estate in the future. But that’s a different problem.
February 19, 2009 — 9:44 pm
Sean Purcell says:
Joe,
I generally agree with you, but here’s some food for thought. Lenders are able to develop reasonable expectations of earnings due to stability in the redemption of mortgages (well… not so much right now, but generally speaking) and current BK laws contribute to that stability. Credit card companies do not enjoy that luxury – which is priced into their business model. If you wish to remove a level of consistency for the lenders, you must also accept rates closer to the double digit, risk-based rates we see from credit companies.
February 19, 2009 — 10:52 pm
Greg Swann says:
> you must also accept rates closer to the double digit, risk-based rates we see from credit companies.
Or fewer loans to better borrowers. Either way, the people seeking to benefit from the transaction are the ones bearing the risks and costs.
February 19, 2009 — 10:55 pm
Joe Strummer says:
Sean,
I agree mostly. I don’t think “consistency” would be a problem with a new cramdown provision. I think the low rates for real estate would disappear since the loan would be subject to modification if the debtor went into bankruptcy.
So you would see consistently higher rates for mortgages going forward.
But Greg basically has my rejoinder, which is that allowing a cramdown would require creditors to be more picky about who they lend to and to charge higher rates.
If you think that it’s important that people own their homes, then you might have a problem with that. If you don’t think it’s important that they own a home – and I’m one of these people – you’re less concerned about the effect on home ownership.
The dilemma is that loans were issued in an environment where creditors believed the BK law would prohibit cramdowns. So there would be a good deal of unfairness to creditors. But that’s the case with any change to the BK law, so I suspect we’d survive.
February 20, 2009 — 6:21 am
Thomas A B Johnson says:
It is what it is, and stupidity and corruption is in control. So, how do we dance on bridges during this Obamination?
February 20, 2009 — 7:10 am
Greg Swann says:
> So, how do we dance on bridges during this Obamination?
Cultivate indifference. Pursue your own values. And endure. As dire as things might look right now, by means of the internet serious libertarian philosophy and free-market economics have never had a better rostrum from which to move the world. The worse Obama does, the more open American minds will be to a consistent alternative to socialism.
February 20, 2009 — 7:23 am
Karen Highland says:
Having a liberal President and liberal Congress will be like an enema in the long run. I predict one-term for Obama, and a mid-term firing of Congress. People are already p.o.’d and its only been 30 days. After 100 days we’ll start hearing from moderates the uneasy “is this the change we voted for?” comments.
That’s my sunny side talking:)
February 20, 2009 — 8:30 am
Michael Cook says:
“Ad hominem, Greg. It has nothing to do with the issues.”
While I agree that it is ad hominem, it does have something to do with the issue. The whole reason all of this foreclosure legislation is being bantered about is because of ad hominem reasoning.
No one talks about those same people putting their families at risk by buying a house they could not afford or worse, buying a house while signing documents they did not understand. Because I care for my family, I read documents and do my best to manage my finances to avoid significant trama.
If a child touches a stove and never feels the burning sensation, how does he/she learn that touching stoves causes serious damage to his/her body. Children learn through consequences. If a family gets evicted, its a tradegy. But more importantly it is a life lesson for every person in that household. They should learn to read contracts, save for a rainy day (or even a thunderstorm). I would argue foreclosure is the most compassionate thing that could happen to people.
I learned the most when I almost lost two houses in Detroit and from the paper losses I am suffering from my home in New York. There is an ad hominem argument to be made here, but it is not made by allowing people to stay in their primary residence.
February 20, 2009 — 9:09 am
Joe Royall says:
Hmmm, this blog post seams more like political propaganda than a discussion on housing economics. As Greg says
“1. By how many dwellings will the standing inventory of housing be reduced under Obama’s plan?
2. By how many households will Obama increase demand for housing?”
The real question is how much will inventory increase if the late pays and foreclosures in the pipeline come thru. There is well over $1 Trillion dollars in inventory that we could see if we don’t stem foreclosures.
And there already a lot of good news in the market. Buyers are coming back. In Florida, one of the worst hit markets the inventory has dropped from 12 months to 9 months. If the feds can keep more inventory off and the current trends continue we will see price support and that will drive strong demand.
Also, the Obama administration is very smart by making the banks take a hit when receiving the funds. They will be able to judge weather it really makes good sense to rework each particular loan.
Greg says “Obama is trying to shove a floor under home values. But since this does nothing to correct the systemic problem — oversupply — he is simply pissing away money while delaying the ultimate and unavoidable market correction.”
uhh, reworking loans is not shoving a floor under home values, this statement makes no sense.
Greg says “So how about a $15,000 tax credit for tearing a domicile down? Landlords in the Rust Belt could have their first profitable year in years.”
How does that fix the over supply problem in FL, AZ and CA? Actually, our oversupply problem is greatly exaggerated. Construction was running at double the rate that would have been supported without investor float. However, we only build a million or so homes a year with a national inventory of over 100 million. The problem has been affordability, not need. As prices come down and population increases, those extra homes will be purchased and used.
Moving forward we have seen sufficient decrease in prices to fix the affordability problem we just need to temporarily decreases supply. As supply and demand balance out prices with stabilize. When prices stabilize buyers will loose fear and come back in droves. The number one issues in recovering from a recession is overcoming consumer fear.
February 20, 2009 — 11:08 am
Sean Purcell says:
Joe,
I won’t answer for Greg, but I do have a comment on this:
This is the problem with most government thinking. Things are already getting better… without any intervention from the very source of “unintended consequences.” Why in the world do we want the heavy-handed government wielding it’s butcher’s knife in an operating room? Is there an opportunity for a little precise surgery to help the situation. I’m sure of it. Is the governemt capable of this? Absolutely not.
“Things are already getting better” is a statement that should never be followed by “and all we need now is a little government intervention.”
February 20, 2009 — 11:31 am
Joe Royall says:
Scott,
Since the great the depression we have always had the government involved in economics. In fact, its the lack of involvement for the last 8 years that got us here.
The reason we have the best housing opportunities in the world is because of our government programs like Fannie/HUD/FDIC/Community Reinvestment act.
I’m not suggesting that we should have price controls like Nixon. But capital injections are important. And moving forward we should set much higher standards on what banks can lend on. We need heavy regulations on hedge funds. The fed needs to be much more aggressive on fixing vertical market bubbles like housing in future.
February 20, 2009 — 12:04 pm
Nancy says:
This market got what it deserved. Numbers don’t lie. The growth could not be sustained when a large chunk of America’s money – made possible by the ATM folks were living in – was going overseas to buy crap made in China. Instead of producing – we consume. Period.
The housing bubble was pure greed, plain and simple – helped along by many people that rode the wave. It’s unfortunate that our government chooses to prop up Wall Street and the banking industry instead of arresting ALL of the lying SOBs that broke the laws and lined their safe deposit boxes with gold.
And if you think opening the border to Mexico will solve the problem, it will only make things worse. America needs to learn how to live within it’s means. And until we do, we’re screwed. The answer isn’t to let in the illegals to do the menial tasks just because they are warm bodies to fill all those empty boxes decaying out there now. Remember, we’d be throwing away more tax dollars to educate, heal and grow up the ones that don’t want to work and incarcerate the ones that find illegal activity stimulating and more profitable than mowing lawns and flipping burgers. I don’t recall seeing a great number of Rhodes Scholars high tailing it back over the border because they couldn’t provide documentation.
People have to learn to live on what they earn. That’s the message the government SHOULD be sending. If your education, drive and ability affords you merely a job at McDonalds – get a roommate to split the expenses in a studio apartment. Rent – I know THAT’S a dirty word around here. Get a part time job to supplement your income. Become familiar with PB&J and Ramen. Stop having kids you can’t afford. STOP blaming everyone else for YOUR problems.
Too many people just above the poverty level or even middle class think they are entitled to live in million dollar homes, drive a Hummer and watch a 52′ flat panel just because they want too. MTV Cribs and Flip This House said it was all possible. Way too many people out there told folks they could – just charge it or better yet – refinance!
Can you tell I’m bitter? People that did the right thing – lived within their means – saving money – as always got stuck holding the bag and paying the bill. It sucks to see my hard earned money paying for other people’s stupid mistakes.
February 20, 2009 — 8:53 pm
Tim Johnson says:
Let the free market work – throwing 75 billion at a 100 trillion dollar real estate market is another waste of tax dollars. Home values and stock values shot up in the last 6-7 years and have corrected – if you did not sell your home or your equities – you only had paper gains that never really existed. The difference is – having recently lost 50% in the stock market I have only stock certificates to show for it – my home value has dropped 50% but at least I have a place to live.
I’m truely sorry for those who had to sell their homes recently or are in foreclosure – these are the people we should help transition into other housing.
Trying to artifically prop up home values is a waste of tax money!!!
February 21, 2009 — 6:01 am
Maureen Francis says:
As a Realtor in the rust belt, I don’t think that opening the flood gates to new immigrants is the answer. We don’t have enough jobs here to support those who are already here, so how is letting more people in going to help. Believe me, I have always been one for open borders, but I find my self becoming less open as I see all of the unemployed people here. Certainly there are Americans who can do many of the jobs that H1B visa holder have? I couldn’t have imagined myself saying this a few years ago, but now I am not so sure.
As for the credit for tearing down a house, there could be some merit to that, but the number is too high. With houses in Detroit selling for less than that, we would certainly be tearing down half of the city in no time at all. I guess that might help me as a suburban landlord, but I am not so sure.
March 4, 2009 — 11:39 am