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A Really Bad Plan for Reviving the Housing Market

RickAckerman's picture




 

 

For breathtakingly stupid political ideas and catastrophic “solutions” to America’s biggest problems, it’s hard to beat the New York Times op-ed page.  There, joined by such jihadists of the Left as Frank Rich and Maureen Dowd, resides the peerlessly wrong-headed economist Paul Krugman, whose Nobel Prize was as well-deserved as the one Yasser Arafat received for helping to bring Peace to the world. Until yesterday, we might have thought Krugman had cornered the market for the absolute worst ideas on how to revive the economy. Here’s a guy who actually seems to believe, in his heart of hearts, that the reason this has not yet occurred is that the central banks of Europe, the U.S. and Japan have not thrown enough money at the problem. We stopped counting stimulus dollars and guarantees ourselves when the total hit $15 trillion a couple of years ago. That was long after we’d become convinced that deficit spending in such cosmic quantities, far from reviving the economy, would ultimately bury the U.S. in debt. As it has.  Such concerns pose no problem for Krugman, however, since he simply avoids using the word “debt” in his Martian-friendly economic essays.

 

 

There are so many world-class crackpots in Krugman’s chosen field that it was all but inevitable a colleague would surface to challenge the Nobelist for the top spot in the Dismal Science’s Hall of Shame. Enter one James A. Wilcox,  author of a Wednesday op-ed piece that purported to offer  “A Way to Make People Buy Homes Again”.  Wilcox, a professor at Berkeley, of all places, says all that is needed to jump-start the residential real estate market is government mortgage insurance. Specifically, he suggests a one-time premium equal to one percent on the home’s purchase price, or $2000 for a house selling for $200,000.  At the end of three years, says Wilcox, “the government would automatically mail checks to protected homeowners if average house prices in their area were lower than when they purchased their homes.” He’s right about one thing: this would stimulate demand from would-be buyers who have been sitting on the fence waiting for prices to fall even further. Sounds like a good idea, right?  In fact, it is a recipe for disaster. To understand why, let’s consider the main features of Wilcox’s proposal:

 

  • He says mortgage lenders might loosen up if “the government” (aka taxpayers) were to backstop prices. Do we really need easier credit for home buyers?  Have we learned nothing from the disaster this caused in the first place? In fact, the 20% downpayment lenders are now demanding is about as loose as mortgages should ever have gotten. In effect, Wilcox is suggesting that we stimulate the housing market by creating a whole new army of poorly qualified buyers.
  • Evidently unable to chew gum and breathe at the same time, argumentatively speaking, he talks about stimulating housing demand without even considering supply.  Does anyone doubt that there are millions of sellers out there, including banks holding foreclosed loans, waiting for some bids to surface so that they can finally whack-the-mole and get out of Dodge?
  • It should also be clear (to anyone but a university-trained economist, that is) that the moment “the government” guarantees that buyers cannot lose no matter how much they pay for homes, neither buyer nor seller will much care about the home’s true market value.
  • Wilcox says that stimulating home purchases would have a ripple effect on the economy. Only an egghead could fail to see that the ripple would be financed by huge news quantities of borrowing collateralized by a wasting asset that produces nothing.
  • With a straight face, and apparently using Obamacare math, Wilcox informs us that if two million participants were to take advantage of his hare-brained scheme, “the expected net cost to taxpayers would be a few billion dollars annually.” We won’t even comment, since we can hear you laughing at that one already.

 

Unfortunately, Wilcox and the Times’ benighted readers, conditioned by the likes of Krugman to think like left-leaning politicians, would see nothing funny in Wilcox’s nutty idea. But there is no denying its populist appeal. Lord help us if mortgage insurance ever comes up for a vote on Capitol Hill.

 

 

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Thu, 01/26/2012 - 15:50 | 2100626 Cpl Hicks
Cpl Hicks's picture

Surprised that Poppy would have had him, without an Ivy League punch on his ticket.

Thu, 01/26/2012 - 15:03 | 2100462 WallStreetClass...
WallStreetClassAction.com's picture

have an upvote

Thu, 01/26/2012 - 13:26 | 2099983 Whoa Dammit
Whoa Dammit's picture

And what banks does he consult for ? And what boards of financial institutions is he on ? And does the income derived from these two sources not greatly eclipse his salary earned as a professor?

Thu, 01/26/2012 - 12:49 | 2099887 Everybodys All ...
Everybodys All American's picture

A Paul Krugman wannabe or the man himself will be Obama's new Treasury Secretary when we actually need a John Taylor.

Fri, 01/27/2012 - 09:51 | 2102179 Chuck Walla
Chuck Walla's picture

A Paul Krugman wannabe or the man himself will be Obama's new Treasury Secretary when we actually need a John Taylor.

 

What are you sayin? Krugman doesn't pay his taxes?

Thu, 01/26/2012 - 12:43 | 2099862 thomcat00
thomcat00's picture

Wait, so Wilcox is suggesting government insurance against paper losses? Perhaps as a homeowner I should buy two or three such policies on my home! I have an idea to add to that, the Fed government can create an organization to buy bundled mortgages on the secondary market, too. Sheesh!

Fri, 01/27/2012 - 09:50 | 2102173 Chuck Walla
Chuck Walla's picture

Wait, so Wilcox is suggesting government insurance against paper losses? Perhaps as a homeowner I should buy two or three such policies on my home! I have an idea to add to that, the Fed government can create an organization to buy bundled mortgages on the secondary market, too. Sheesh!

 

And let Frank Raines,  Jamie Gorelick and Bawney's love match du jour run it. They got experience.

Thu, 01/26/2012 - 23:29 | 2101607 StychoKiller
StychoKiller's picture

Why stop with your own home?  Buy some policies on other people's houses as well...Oh, wait...

Thu, 01/26/2012 - 20:32 | 2101334 Problem Is
Problem Is's picture

"Perhaps as a homeowner I should buy two or three such policies on my home!"

Like a Credit Default Swap for home owners...

That's it! Genius, thomcat, pure genius!

I'll get Joe Cassano from AIG on the phone for us right now...

Thu, 01/26/2012 - 16:18 | 2100705 BidnessMan
BidnessMan's picture

Then rehypothecate those policies several times to maximize your ROI

Thu, 01/26/2012 - 13:40 | 2100105 XitSam
XitSam's picture

They should issue insurance for any stock market losses! Down to infinity baby!

Wait, I don't want to give them ideas.

Thu, 01/26/2012 - 13:10 | 2099962 theMAXILOPEZpsycho
theMAXILOPEZpsycho's picture

They sould offer me a policy like this on my silver! Those takedowns make me feels less good about myself and in turn I spend less, withdrawing demand from the economy. How about a government guarentee??

Thu, 01/26/2012 - 12:37 | 2099841 Uncle Remus
Uncle Remus's picture

I cleaning my backstop.

Thu, 01/26/2012 - 12:33 | 2099831 kaiserhoff
kaiserhoff's picture

Same Soviet Socialist crap from the dying old media.

Even a worm learns.

Thu, 01/26/2012 - 12:19 | 2099773 WALLST8MY8BALL
WALLST8MY8BALL's picture

ManBernKrug - Half Man - half Psychotic Bearded Kenesian!

Thu, 01/26/2012 - 12:58 | 2099913 The Big Ching-aso
The Big Ching-aso's picture

 

 

They will apparently do anything to avoid uttering that 4-letter word or drawing attention to the only viable solution to housing woes:  JOBS.

Thu, 01/26/2012 - 15:03 | 2100459 cranky-old-geezer
cranky-old-geezer's picture

 

 

What?

They talk about jobs all the time.  Of course they don't produce any more jobs, just talk about it.

Actually falling home prices is the real solution.  Prices fall far enough and people (with jobs) start buying again.  

But prices can't be allowed to fall.   If they did, lots more people would walk away from underwater mortgages, which would collapse prices even more.

A house is no longer part of "the American dream".   It's a rapidly depreciating asset now, like a a car, but way bigger.

It can't be called an asset anymore when most people have no equity in it, and equity people do have is draining away.

It's a liability now to most people.  One they'd like to get rid of.

Fri, 01/27/2012 - 09:47 | 2102165 Chuck Walla
Chuck Walla's picture

Talking is all that's really required when one is running on good intentions. Results?  Whaaa!?!  Don't you dare judge, you racist!

Thu, 01/26/2012 - 20:17 | 2101307 Matt
Matt's picture

There are other issues related to falling prices. You can buy a home in Detroit area for $2,000, but you have to pay several years of backtaxes and $6,000 per year going forward (!?).

If municipalities tax based on current housing evaluations, and housing keeps sliding, their tax base will erode to nothing and they will go bankrupt faster (than they will inevitably anyways).

Also, its a bad idea in general. If the houses are cheap, then when people buy them, its harder for them to move to where jobs are available, so you end up with lots of poor unemployed people stuck in one area (like parts of New Orleans - ninth ward was it?).

Thu, 01/26/2012 - 17:29 | 2100892 The Big Ching-aso
The Big Ching-aso's picture

 

 

Ugh, maybe missing one key point.   Prices can sure drop some more even to the point where your burger-flipper could afford it,  but there's this backlog of frickin' inventory wherein people won't sell because they'll lose their ass.   However, if sufficient jobs with sufficient enough wages were created then that backlog inventory could start decreasing balancing better the supply and demand thingy.  I agree prices need to come down some.  No doubt about it.      And granted, in such a deal you may not make the windfall house profit you expected but at least you don't completely lose your ass if you've already paid enough principal to at least break even.   You move on.    You lick your wounds etc.   But you don't get wiped out either.   Principal has gotta be paid down no matter what or someone else will pay it - as in your taxpayer.   Let the market do its thing, yes.   And this will take time.   A lot of it at this rate.

Dropping house prices to where I think you'd like to seem em' ain't gonna make things better either.   We need higher paying jobs.   And lots of em'.   If burger-flippers and those few with big time cash on the sidelines become the new house buyer paradigm, we're still in deep doo-doo.  It can't be sustained unless everybody involved in building new homes is making pretty much minimum wage just like that burger-flipper.    And then there goes your standard of U.S living into toiletville.   Prices will always re-inflate.   There better be something of job productivity to pay for that someone else's future profit or it ain't gonna happen.

 

Thu, 01/26/2012 - 20:38 | 2101349 The Alarmist
The Alarmist's picture

Maybe not for you, Kimosabe, but when I relieve that piker of his "half-million dollar home" for something on the order of 200 grand and then rent it out to someone like him for $1200 per month, things might actually start to get better.

Shit, houses in the US got way ahead of themselves around 2004, which led too many people to feel they were actually wealthy.  it is really hard to dial that back, but it is harder still when you have King O and his minions doing everything they can to cement the fiction as reality. 

Fri, 01/27/2012 - 02:32 | 2101703 The Big Ching-aso
The Big Ching-aso's picture

 

Really?   That's how it's gonna play out?   Once $500K houses with property tax-collecting dependent high-end infrastructure to cover on $1,200 a month non-property tax paying renters?   Please.    WTF.   Do you have a clue?  I don't think so.

Assuming you indeed buy at $200K, then you must assume you also bought at the bottom.   Pikers think they can time that.   But hey maybe you're one in a thousand, million, whatever.

The point being, if you think you're gonna kick-ass and take names on this gambit because endemically $500K houses drop to that level you better wake up.    That neighborhood's gonna look like shit in 3 years at best with penny-ante I don't give a fuck about your property renters (and their extended family) moving in along with their pit bulls, tank-top 5 kid bitches, and the requisite meth lab thrown in for good measure.    And your over-crowded deteriorating schools will be first to show said shit.   All this will increase your property's value for sure, right?

In effect, you're phucking dreaming chemosabe.  It ain't gonna work out quite the way you & others figure.   You ain't gonna get wealthy by it.  Not this time.  Not likely in your lifetime.   Do it though.   Learn the hard way.   Then afterwards you'll understand what Big Ching's telling ya.    This ain't the road to richez and bitchez.   It just sounds good.

Fri, 01/27/2012 - 17:49 | 2103970 mark mchugh
mark mchugh's picture

Nothing on the planet is easier to time than than the housing market.  You buy when rates are high.  Anyone buying into a low-interest rate environment gets fucked.  Ask Japan, or better yet, learn to use a mortgage calculator.

The cool thing about capitalism is it supposed to puke out stupid ideas (like house prices only go up and are therfore risk-free investments) and send pikers like you back to the trailer park for re-education. 

The ultimate result of shielding men from the effects of folly, is to fill the world with fools.

Fri, 01/27/2012 - 20:19 | 2104368 The Big Ching-aso
The Big Ching-aso's picture

 Yeah, nothing easier.   Sure.

And you're gonna get phucked buying in a high-interest environment too.   That used to work when everyone was gullible like you.   Those days are over for a very long time.  Maybe in about 25 years it'll go back to your when to buy paradigm.   In the meantime stay out of foolishness in a world of fools.   Btw, tell it to the guy above planning on the $200K bargain deal of the century.  I ain't buying right now nimrod no matter how low the interest rate goes.  I know how much shadow inventory is out there, that's why.     Unless it's a helluva deal location-wise.   Speaking of pikers, but I reckon you know about that location, location, location thingy being even more important than your high-interest rate infallible litmus test, right?

I kinda doubt it by the looks of it though.

 

 

 

Fri, 01/27/2012 - 10:50 | 2102392 FEDbuster
FEDbuster's picture

This scenario is already happening.  The home next to mine was built in 2007 (3K sq. ft. 4 bed/3 bath), original list price $525K dropped over the next three years to $325K.  No one even made an offer on it.  At the end of 2010 the owner (who had built it as a spec home) finally rented it out for $1350.  to a multi generation household, Mom, Dad, 2 kids and grandma and grandpa.  Three of the adults working, one retired.  They lived there a year, then the mom, dad and kids moved out of state.  The grandparents rented something smaller in the same sub-division.  Now there are new tenants (after a four month vacancy).  Two adults, three kids and five dogs, paying $1400./mo.  Property taxes about $2400/year. here in AZ.

The next big scam in real estate will be selling bundles of REOs to the REITs for pennies on the dollar to "clear inventory".  Allowing them to rent or flip the homes for huge profits. 

Fri, 01/27/2012 - 12:03 | 2102630 DOT
DOT's picture

If you really want to "clear inventory" go get a bulldozer.

Fri, 01/27/2012 - 14:51 | 2103333 FEDbuster
FEDbuster's picture

They are doing that, too.  Detroit, Chicago, etc...  urban shitholes taking care of their "Community Reinvestment Act" properties. 

Fri, 01/27/2012 - 15:23 | 2103458 NotApplicable
NotApplicable's picture

The old neighborhoods around the car plants in Detroit are insane looking (from Google Earth). There's only a house or two per block in many places, and you can see the the grass on the empty lots has been mowed with a tractor.

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