Common Sense on the Housing Crisis
March 6th, 2008 by Chris KinnanWaPo columnist Robert Samuelson has an oped on the housing crisis that is a breath of fresh air among all the negative headlines. “It’s elementary economics,” he says:
Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don’t sell. We can either keep the price at $1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.
Even many economists — who should know better — describe the present situation as an oversupply of unsold homes. True, there is about 10 months’ supply of existing homes as opposed to four a few years ago. But the real problem is insufficient demand. There aren’t more homes than there are Americans who want homes; that would be a true surplus. There’s so much supply because many prospective customers can’t buy at today’s prices.
By definition, the “housing bubble” meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.
Look at some numbers from the National Association of Realtors. From 2000 to 2006, median family income rose almost 14 percent to $57,612. Over the same period, the median-priced existing home increased about 50 percent to $221,900. By other indicators, the increase was even greater.
But home prices could not rise faster than incomes forever. Inevitably, the bust arrived.
[...]
Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today’s homeowners makes little sense if it penalizes tomorrow’s homeowners. An unstoppable free fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand is affordable prices.
March 6th, 2008 at 11:05 pm
See, now there’s an accurate, hit-the-nail-on-the-head piece that doesn’t mislead. That’s basically what you should’ve written before, Chris. You likely wouldn’t have written this as Samuelson did:
He does, though, agree with you some:
And this is the part that’s debatable. There’s actually not much good evidence that lenders would raise their interest rates or down payments. However, that’s probably exactly what lenders should’ve done in the first place. Their own lending practices helped create this mess. Loan companies making smart, reasonable contracts would help the industry, not hurt it, and go a long way to helping ensure another bubble like this doesn’t appear. In addition, assuming Samuelson’s predictions come true on everything else, this should be a total non-issue, provided the lemmings of American securities investors don’t start seeing stars in their eyes again.
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See, I can debate with that. I can’t debate with scaremongering about cancer, killer cars, and McMansions. I’m sure I’m sounding scolding and like a real ass (I ain’t perfect), but I’m sure you’re getting what I’m saying. It’s the difference between watching Cornell West and Justice Thomas debate Affirmative Action, and going to one of Brendan’s Affirmative Action bake sales. The former’s a place for informed grownups, the latter’s a place for mean kids.
March 7th, 2008 at 9:14 pm
This laissez-faire attitude towards the current crisis will just let hundreds of thousands, if not millions, of homeowners go down the tubes…along with maybe some members of the big and small business community. I don’t think that we can just stand by and let that happen.
March 10th, 2008 at 9:12 pm
Why not just let the government run housing-like in Cuba or the projects. If people can run to a bankruptcy judge and modify terms of a contract they will simply squat on the property, not make payments, then either need government handouts or go rent.
March 11th, 2008 at 6:50 pm
Huh?
March 12th, 2008 at 6:29 am
The people pushing this so-called emergency bill to prevent foreclosures are essentially Robin Hood types. There is no “foreclosure crisis.” Many of the homes being foreclosed were bought by speculators and in turn are being rented out. Huh?
March 12th, 2008 at 5:33 pm
“There is no ‘foreclosure crisis.’”
Wake up and read a paper or something dude. What are all the banks going to do with all these properties that they are going to start rapidly accumulating (that’s if those banks are still in business that is)?
March 15th, 2008 at 6:08 am
Answer; They will rent them out or sell them. People who were foreclosed on will become renters. Less than 5% of mortgages are in foreclosure.
March 20th, 2008 at 7:02 am
This housing/mortgage/credit crisis is putting more and more homeowners with excellent credit “underwater” on thier mortgages. When they give up and start to walk away, what then? We must stop the increasing foreclosures and stabilize housing prices - immediately.
Here’s some thoughts on it:
Current Credit Crisis – A Clear and Present Danger to our Country
Common Sense - Part Two
Introduction:
I’m not Thomas Paine, nor do I pretend to be a writer of anything near his caliber, but I couldn’t help but draw the comparison that the abuses of the monarchy are very similar in substance to the abuses of the financial institutions of today. You could say that the monarchy was acting in bad faith toward the Colonies.
Thomas Paine was a voice for people, not governments. Over the last several months our government has done everything it can to help the financial institutions that are directly responsible for this credit/housing/real estate crisis and literally nothing of substance for the victims. You could say that the financial institutions and the Federal government are acting in bad faith towards average Americans.
It was obvious from the comments of Treasury Secretary Paulson during an interview this morning, Tuesday, March 18, 2008, that the Federal government has no intention of coming to the aid of average American homeowners who may be facing foreclosure, regardless of where the cause lies.
Stabilizing housing prices to protect those owners who purchased homes in good faith only to see their investment be sucked out by this Wall Street fiasco is just immoral and yet, Paulson and the administration, backed by comments of some CNBC “analysts”, see nothing wrong with it.
Of course, the Federal government is now going to “tighten up” mortgage lending and qualification standards thereby further killing the hopes and aspirations of millions of Americans who only want a chance to buy a home or stay in the one they already own. Rather than help a drowning person by throwing a lifeline, the government is going to throw him/her a rock!
It’s not a perfect analogy because there are no new laws involved (yet!) but this does remind me of the Intolerable Acts or the Coercive Acts of 1774. (Wasn’t the British monarch also named “George”).
Is it possible that this current financial crisis constitutes the greatest “clear and present danger” to this country since the days leading up to World War II?
“Clear and present danger” was a term used by Justice Oliver Wendell Holmes, Jr. in the majority opinion for the case Schenck v. United States, concerning speech against the draft during World War I. Since then it has sort of morphed into describing situations whereby the threats to our Nation are immediate and potentially catastrophic – maybe this current credit crisis is an internal threat, not foreign, yet just as serious.
Mortgages are contracts. Mortgagor has the responsibility to maintain his/her property and to make the payments in a timely fashion according to the terms of the contract/mortgage. Question is, do mortgagees have to make a good faith effort to maintain the overall value of the real estate market by not jeopardizing the stability of the financing markets? – if I have the terms correct.
All finger pointing at sub-prime borrowers aside, this crisis is the direct result, and sole responsibility, of the immoral, highly leveraged mortgage-backed-securities industry. How do we fix it without destroying the equity of all the prime mortgagors and unencumbered property owners? These “lenders” are NOT banks in the traditional sense of the word. They are nothing more than greedy predatory lenders, with very few exceptions.
The real estate segment of our economy is arguably the most important. Yet, based on the actions of the last six months, no one seems to know how to fix the problems.
Now having said all that, I have an idea – only an idea because I’m far from an expert.
How about this:
The first thing to do is to buy time and stabilize housing. That means stopping resets, foreclosures and reducing the market supply of already foreclosed housing.
Immediately convert every mortgage and home equity loan to a 3%, 50-year, fixed mortgage! No prepayment penalties, no balloon payments nothing but a straight 50-year mortgage. For a period of the next 18 months - Immediately halt all foreclosures, add the delinquent amounts to the principal of the mortgage, apply the interest rate, and give people a chance to work things out. This should stop the flood of more distressed properties from coming on the market and further destabilizing the housing industry. Does this make sense? Cure the problem by addressing the end result of the credit crunch? Sounds like a “common sense” approach to me – no villains, no victims, gives the real estate markets time to stabilize.
This should stop cold the “resets” that are going to be the final blow to housing.
Ignore Valuations. Since home prices seem to double every 10 years and this is a long-range program, the underlying value of homes should increase once the real estate market is again stabilized. Set appraisals at current market values. Since the potential for upside vs downside is greater, this should work.
To those who can’t afford to stay in their homes allow a one-time 12-month “forbearance to sell” rather than foreclose. This should further stabilize prices by keeping these distressed properties off the markets. My apologies to the bottom feeders.
New mortgages: Allow only 4%, 50-year fixed for at least 18 months. After 18 months allow rates to rise one-half percent, per year, if the market justifies it. This should help sales and revitalize the real estate market especially new construction, which is the key to jobs and economic growth and strength of the stock market.
Fix real estate sales commissions at 4%. Brokers can contribute their share also to help combat this mortgage credit situation, which is a clear and present danger to our country. Believe it or not, some brokers are greedy and might take advantage of this potentially robust market.
It is going to take time, lots of time, and money, along with a demonstration that the Federal government is actually concerned with the well-being of the American family and not just the greed driven credit institutions on Wall Street in order to bring back consumer confidence in the real estate markets.