Want a Truly Healthy Housing Market? Here Are the Five Essential Steps (October 28, 2011)
The housing market will remain crippled until we eliminate perverse incentives to financialization and speculation, Fed/Federal intervention and all subsidies/giveaways.
If there is one goal that the financial cartels, their politico apparatchiks and the public might actually agree upon, it would be restoring the housing market to health. This is because the financial cartel, their politico lackeys and homeowners would all benefit from the stabilization of housing values at current levels:
1. SDI (systemically dangerous institutions) a.k.a. too big to fail banks, would avoid insolvency by keeping all their mortgage assets marked to unicorns-and-pixies, i.e. artificial valuations.
2. The political class of toadies, lackeys and grifters would finally free itself of an unsolvable problem that keeps highlighting its incompetence and irrelevancy.
3. Homeowners' most treasured fantasy--that valuations will rebound and thus restore their dreams of "free" home equity-- will be reanimated.
In other words, everyone exposed to losses in the corrupt, speculative apex of malinvestment known as the U.S. housing market doesn't want a truly healthy housing market, they just want a return to the bubble era.
Sorry, folks, ain't gonna happen. (And yes, I own property, too, but it is what it is.) Bubbles do not reinflate, even with the Fed chanting its Keynesian Cargo Cult mantras ("zero interest rates forever!") and waving dead chickens over the embers. The conditions which inflated the bubble cannot be called up by incantations; faith in the system has been destroyed, and only the complete socialization of the mortgage market by the forces of Central Planning--the Fed and the Federal government's Socialized Mortgage Makers, Fannie and Freddie-- have staved off the complete collapse of prices which would have wiped out the banks and cleared the market via actual capitalism in practice, i.e. a transparent marketplace which is allowed to discover price.
Despite the fact that a truly healthy housing market is anathema to the Status Quo and current property owners sitting on huge mortgages, let's lay out the necessary characteristics of such a housing market. A lot of this will strike many of you as counter-intuitive, but that only highlights the pervasiveness of the speculative propaganda that slowly hollowed out our culture's previous understanding of housing and replaced it with a devilishly magnetic financialization model.
In the previous era (when income and prosperity were more evenly distributed), housing was in essence a "patient investment" that offered low-cost shelter and a type of forced savings: by paying a mortgage for 30 years, the homeowner built a nestegg of savings that more or less kept up with inflation. With the mortgage paid off, the homeowner enabled a low-cost retirement (no more mortgage payment, and no rent due, either) and the eventual transfer of a valuable asset to their children.
Contrast that to this era's perception of housing: fundamentally, housing is a speculative vehicle which is available, thanks to low/no down payments, government giveaways and low interest rates, to Everyman and Everywoman. The idea of actually staying in one home long enough to pay off a 30-year mortgage--or even the idea of paying off a mortgage--are as antiquated as stone tools.
Paying off a mortgage? That's Squaresville, man; the name of the game in financialized markets like housing is to buy and sell constantly, churn, baby, churn, with an eye on "flipping" for a quick speculative profit.
Housing isn't a store of value, it's a way to leverage zero savings and a bit of income into speculative wealth.
This financialization of housing was the inevitable consequence of the Federal Reserve's money-printing and low interest rates, as explained in this brilliant essay on Zero Hedge: Winners And Losers: The New Economy:
You obviously cannot print wealth, but if you try that fiat money distorts the entire economy by directing investment to things which appear to appreciate but what is really happening is that the dollar is depreciating. As a result, fiat money and real capital are invested in financial assets because they appear to have greater yields than returns from the production of goods. Prices rise (price inflation) and it creates the inevitable boom which always busts. The fall out is that we are stuck with things people don't want (in the present re/depression it is housing). And we fall for it every time.
If we think this through, then we are forced to conclude:
1. The first step toward restoring a healthy housing market is to eliminate the tools and forces of financialization: low/no down payments, low interest rates, securitized mortgages, government giveaways, Federal Reserve buying of mortgage-backed securities, and the Federal "Socialism Is Good When It's the Mortgage Market" agencies, Fannie Mae and Freddie Mac.
Yes, that is step one: eliminate the Federal Reserve, Fannie and Freddie and all housing subsidy programs. In other words, restore a transparent, private-sector mortgage and housing market freed of Central Planning manipulation, cronyism and corruption.
The goal is her quite simple: restore "patient investing" by eliminating all the perverse incentives for speculation and the resulting culture of rampant cheating, obfuscation, lies, deceit via omission and corruption--the inevitable consequences of financialization.
Requiring a 20% down payment is viewed, perversely, as an impossibly restrictive standard; yet requiring a substantial down payment is the only way to incentivize "patient capital" and squeeze out speculation and its destructive culture of deceit and churn.
2. Focus resources on neighborhoods that can be adequately supported by property taxes at a level 25% lower than current taxes; abandon the unsustainable exurbs and suburbs.
The one thing we can safely predict is that housing values and thus the owners' ability to pay high property taxes are both eroding. Thus property taxes will decline, either via falling housing prices, voter revolt or wholesale abandonment of the properties. That is the basis for anticipating lower property taxes going forward.
The postwar suburban model of development is fundamentally a pyramid-Ponzi scheme based on eternal growth: more homes and more residents will generate higher tax revenues that will enable the future maintenance of the new roads, schools and other infrastructure that are added year after year.
This dynamic is explained in this excellent slide presentation: A Complete Guide To The Ponzi Scheme That Is Suburban America (via Adam T.).
So what happens when growth stops and taxes contract? The model falls apart, quite literally. There is no longer sufficient revenue to maintain the sprawling expanses of roads, schools, parks and the city staffing which also expanded every year along with growth and taxes.
What happens when the tax base contracts? Roads crumble, parks are left to become overgrown homeless encampments and those who can leave for more liveable environs do so. There is anecdotal evidence that the Pareto Principle comes into play: when 20% of homes are underwater, values dive, and when 20% of homes are abandoned, the neighborhood deteriorates.
I first addressed this dynamic about four years ago: The Great Fall: How Suburbs De-gentrify to Ghettos (November 20, 2007)
There is nothing mysterious about the process:
A) There are upper limits on how much increasingly strapped homeowners can pay in property taxes
B) Maintenance costs are relatively fixed and can only be deferred
C) When revenues fall below minimum maintenance costs, the neighborhood deteriorates
D) When 20% of the homes are distressed, abandoned or foreclosed, then a positive feedback loop is triggered: those still able to move will do so, followed by those who give up trying to maintain their mortgages/property
Clearly, those neighborhoods that harbor dense congregations of homes and enterprises offer a compact footprint to be maintained, and a diverse network of households and enterprises to share the tax burden of that maintenance.
3. Require all lenders, banks, the Federal Reserve (a private bank) and all government agencies to mark their housing and mortgage assets to market. This will force two other essential actions: write off all bad, uncollectable mortgages and liquidate insolvent banks, lenders and agencies via open, transparent auctions of homes and other real estate assets.
There is nothing mysterious about this process; the government undertook a similar program in the early 1990s to clean up the savings and loan debacle spawned by corruption and speculation run wild.
This will dramatically lower the value and thus the price of housing in most markets around the nation. There is no substitute for letting a transparent open market discover price. The alternative is a culture and economy constructed of lies, bogus accounting and eventually, a total loss of faith in financial and political institutions.
Another part of the "discovery" process should be the investigation of fraudulently originated mortgages and MBS (mortgage-backed securities), with the perpetrators of the frauds brought to justice and the fraudulent debt liquidated. Messy, yes, easy, no, essential, yes--if you want to restore faith in a hopelessly corrupted, fraud-based, opaque, manipulated market for mortgages.
Needless to say, the murky/non-existent title documentation for millions of mortgaged homes will also have to be addressed on a national level.
4. Owning a home as a patient investor should be cheaper than renting. The down payment is capital invested, and the yield on that capital is lower shelter costs.
The benefit/yield on renting is that it doesn't tie up scarce capital and it does not commit the renter to staying in one locale. These benefits require a premium, i.e. renting is more costly than buying and owning a home as a patient investor.
In a market with too many homes and too few qualified buyers (especially if subsidies and giveaways were removed from the system), this rent/buy equilibrium would likely be established by home prices dropping significantly.
5. A truly liquid market for housing must be re-established, and there is only one way to do so: Only a transparent, private, free market of mortgages and houses will create a truly liquid market that enables buyers to purchase a home and have some reasonable expectation of being able to sell it in a reasonable length of time to willing, unsubsidized private buyers.
Right now, the housing market is so constipated with bad debt, politically untouchable banks, Central State manipulation and the corrupting grip of speculative financialization, that no buyer can be assured that he/she will be able to sell their home in the future.
This leads to a very rational hesitation: in a weak, fractured and increasingly volatile labor market, it is risky to commit oneself to buying a house that could rapidly decrease in value and cannot be sold.
Talk about a bad deal: not only is one's capital trapped, you're physically trapped in an asset which could fall dramatically in value if the constipated market ever clears. No wonder the housing market has been reduced to ill-informed foreign investors ("I can offer you this bridge in Brooklyn for very cheap, cash only"), people with a mere $100 skin in the game (Got A Hundred Bucks? Buy A Home (Or Virtually Anything Else) Using 2,000x Non Recourse Leverage Zero Hedge) or those funded by other government giveaways and subsidies.
There is no other way to restore a healthy housing market than these actions:
1. Eliminate financialization by eliminating the Fed, the insolvent banks, the mortgage securitization racket and all the incentives for speculation, corruption and deception.
2. Clear the market by writing off all bad debt/mortgages and auctioning off all bank/lender assets in a transparent, free auction market.
3. Require 20% down payments and let interest rates rise to what private capital demands as fair compensation.
4. Encourage patient investing, not speculation.
5. Conserve resources to neighborhoods that are sustainable in eras of contracting tax revenues.
Unfortunately for future generations who might like to own a home whose price was set by the market rather than a Central State devoted to "saving" predatory banks and Wall Street's financialization machine, Wall Street and the banks are terrified of a healthy housing market, because an unfettered "price discovery" would doom their marked-to-Tinkerbell house of cards.
The nation, and its future homeowners, deserve better.
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