Guest Post: Want a Truly Healthy Housing Market? Here Are the Five Essential Steps

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Want a Truly Healthy Housing Market? Here Are the Five Essential Steps

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.


This has led to the phenomenon that Messrs. Frank and Gross describe: the financialization of the economy.

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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
SheepDog-One's picture

All good common sense and all, but that has no place in the US anymore.

Ahmeexnal's picture

Deus ex Nuclear Machina.

Housing bubble in the US (and other countries) could receive an unexpected oxygen tank in the form of 127 million Japanese evacuating their country and urgently seeking to purchase a new home.

Shit's about to hit the fan in the land of the rising sun.

Cyrano de Bivouac's picture

Good idea-we should ethnically cleanse Oregon and Washington  of Americans and let the Japanese settle there-we should pay reparations to them for the bombing of civilians during WW2 anyway.

redpill's picture

The 800 lb gorilla in the corner is princple reduction/forgiveness, which would not be an unreasonable requirement of banks that received bailouts.  And instead of applying it to the people who got liar loans, have no job, and are on the brink of foreclosure, it should be for people who got full doc loans and have stayed current on their payments.  The reasoning behind that is the first group were somewhat of a party to the problem, whereas the latter did it the right way.  Additionally, helping the first group isn't going to improve the housing market but helping the second group would.

Troll Magnet's picture

i agree with this.  and to keep public outrage to a minimum, they should offer incentives in the form of 1% (15 yr) & 2% (30 yr) interest rate mortgage loans to all new home buyers. 

RockyRacoon's picture

"They" who should offer those low rates?   What part of 20% down and market established rates did you miss?   You're advocating more intervention in what are supposed to be free markets.   Yeah, "they" should just fix this mess.    JFC.

Deadpool's picture

houses and especially mortgages should NEVER have been securitized...didn't anyone at Merrill and Goldman read "Liar's Poker"...guess not. But then again had they not been the billions in fees and bonuses would not have been created either and less Lamborghinis would be parked in the Hamptons. That would be a pity. The mistake was Stan O'Neal at Merrill believing his own bullshit and holding the bonds on his firm's balance sheet instead of selling them out the front door as fast as possible...when the music stopped his firm folded. Dominoes fell. here we are. Food, Shelter and Clothing...needs, not speculative investments.

FreedomGuy's picture

Stan exited with $160million and all his Lambo's didn't he?!? By the way, Ferrari is having a record year this year. Somebody has recovered from the recession.

Deadpool's picture

probably because italians are buying hard assets, like exotic cars. Soon there will be ABS on cars we can short.

DeadFred's picture

"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."

Duh! Of course in won't work if you forget the important details. You MUST use a cage-free red chicken, and the incantation has to be done in the first week of the waning moon. No wonder the housing market is a mess!

Cpl Hicks's picture

It's not sufficient that you use cage-free chickens- the appropriate Kenyan-Indonesian voodoo rituals must be scrupulously adhered to and DOJ-mandated disclaimers that no actual chickens have been harmed must be posted.

Some of the problems in the past have been that archaic middle-American rites (a la Mark Twain) involving stump water gathered at the dark of the moon have negated the new, effective mantras of the ascendant mulatto administration.

Just trying to be helpful!

jdelano's picture


The Big Ching-aso's picture

Want a Truly Healthy Housing Market?

Simple answer:   Lots More High-paying Jobs

Idiot Savant's picture

The simple answers are laid out in the above piece. No one even needs to read this to know it's true; it's just common sense. Simple doesn't mean painless.

thewhitelion's picture

And it doesn't mean it would get our current crop of stooges reelected--and isn't that all that really matters?

Robot Traders Mom's picture

I've been practically giving my house away for the last 6 months and no takers in a supposedly great area. Unreal.

On an unrelated note, I need to vent to ZH'ers. There is a 40 year-old asshole in my office wearing a graphic dress shirt today, think Affliction meets Brooks Brothers. He is the type of guy that I'm sure trolls this website. I would really like to punch him in the face.

Just sayin'...

Capitalist10's picture

"abandon the unsustainable exurbs and suburbs"

You've got it backwards.  Abandon the sociopathic inner cities.  They are already bulldozing much of Detroit.

The suburbs and exurbs have good schools for $5000-7500 per pupil.  The cities have bad schools for $10,000-15,000 per pupil.  The cities also have higher expenses due to lots more crime, welfare dependancy, etc.

Big Corked Boots's picture

If the flow of (imported) energy ever shuts off then the cities will be filled with starving yuppies demanding grain shipments from China "since they're so good at making stuff."

Within a week they will be eating each other like zombies. (Just getting into the Haloween spirit.)

The exurbs and suburbs will be a lot better off.

Bananamerican's picture

...until the zombies wander into exurbia looking for all those tasy brainiacs

Capitalist10's picture

Not a problem.  The suburbs and exurbs are much better armed.

TheSilverJournal's picture

"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."


Why require anything? End the smokescreen of the FDIC and more importantly the Fed backing of the FDIC, and allow depositors of banks that fail to lose their money. Depositors will then actually care that their bank is sound and making good loans before giving a bank their money.

jmcadg's picture

No true graphic designer would wear a graphic design shirt, I'm one too. Punch him in the mouth for me.

flacorps's picture

1. If a home is not up to code, it needs to be torn down if it would cost too much to get it up to code.

2. If a house is significantly obsolete and it is a mobile or modular home or capable of being moved, it should be put on a barge and shipped to Haiti, along with donated rehab materials.

3. Foreigners who have the means should be encouraged to buy U.S. homes, either as vacation homes or as footholds for eventual immigration.

4. The pre-Nobelman cramdown of principal for primary residences in Chapter 13 should be restored. This will put a floor under housing prices.



jmcadg's picture

Miss read, punch him anyway.

FunkyOldGeezer's picture

There is one HUGE FLAW in this argument.

Those people who can't afford a mortgage are expected to rent and yet owning a house (paying a mortgage) should be cheaper than renting!

If people can't afford a mortgage, how on earth are they expected to afford the even more expensive option, of renting????

It's the same flawed logic that drove the speculators to expect to buy a property and have soemone else pay for it, in it's entirety. Surely, to stop speculation, rents need to be (legislated) lower, so that property owners don't get a free lunch?

jcaz's picture

Who says the owner has a mortgage?

If people think they're gonna cash-flow positive by taking on a mortgage and then renting out the property for more, they're speculators, and take on that risk.

Yeah, more legislation- that's the answer, cause it's worked so well up till now.

Free market really works, when it's given a chance.

Aarnog's picture

Surely the point is that purchase prices are now way too high; they should fall a long way yet.
Thus, rents could be lower than current mortgage payments (and so more affordable), but still higher than the eventual level of purchase price discovery.

JLee2027's picture

Needless to say, the murky/non-existent title documentation for millions of mortgaged homes will also have to be addressed on a national level.

Can't be. Property laws are at the state level.

So much for this article. 

flacorps's picture

The constitution is what the Supreme Court says it is, not what you or I see when we read the document. Money talks, bullshit walks, and if you don't think that can work at the Supreme Court look up one Abe Fortas.

In short, should Congress see fit to fashion some kind of national housing title solution, the Supreme Court will bless it if they feel it is in the best interests of the country, or if the envelopes are fat enough.

JLee2027's picture
That is completely 100% inaccurate. There will be no national solution.  If it was possible, it would have happened years ago. Why hasn't it? DOH!
jcaz's picture

Sounds good, but will never happen.   Too many networks on TV expounding the bullshit of "wealth via infinite real estate appreciation";

Just watched a show about a couple who are buying a shelled-out 400 year old cow barn in Italy for $800K as an "investment"-  gee, I wonder why Italy is screwed up?

Can apply that same story to almost anywhere in the world the past five years.

Sad part is, too many people drink this Kool-Aid. 

The cure won't be pretty.

Caviar Emptor's picture

One problem with the above: cost of homeownership is accelerating beyond capacity given declining real median incomes. And there are now huge unpredictable variables introduced into the ownership equation that were never considered before: energy, building/replacement/upgrade materials, insurance, taxes, security, education for the kids. Finally, the most unpredictable variable of them all: where will tomorrow's jobs be? That should make lots of people hesitate to buy, especially young families who need maximum flexibility in this environment. The old work/income paradigms are dying and that means you need to be nimble to survive the changes

jcaz's picture

Since when were those things never considered in the home ownership equation?

If people- since the beginning of time- haven't considered those things, then they're too stupid to own the house, and get what they deserve-  that's how markets work, they weed out the weak and stupid.

FreedomGuy's picture

I partially disagree. Government keeps changing the rules, the taxes and many of the costs associated with ownership. It affects renters indirectly, too.

Caviar Emptor's picture

If people- since the beginning of time- haven't considered those things, then they're too stupid to own the house,


You don't get it. Nobody had to think about gasolie when it was 25cents/gallon. But now they do. None of the costs of ownership were considered a barrier to ownership as long as they were predictable. And when incomes were rising there was always room for error. Now they're not. And sudden price jolts as we've seen could make the difference between a house that was affordable and one that breaks the camel's back. 

You'll understand these realities when you grow up

jcaz's picture

LOL- skipped a few grades, eh?  Like 10th, 11th, and 12th?

Gasoline wasn't cheap when it was 25cent/gal, Einstein.   Try doing some regression analysis on the effects of inflation, and figure out the TRUE cost of gasoline when it was priced at 25 cents/gal.

And if you think your parents didn't consider those factors when they bought their home, then it's clear that genetics are the issue here.

I thought this board was for people that have a clue? 

You're exactly the problem, dude.

Caviar Emptor's picture

You flatter me that I alone am responsible for the entire country's problems :-)

As a certified moron you fail to see, and I know this is way above your level, that there are TWO comepting forces: DEClining incomes and INCreasing cost structure of homeownership. So there's a DOUBLE WHAMMY, to put it in words that you can understand. 

COSTS? UP. INCOMES? DOWN. Affordability of a house at THE SAME PRICE as before: WAY DOWN!

But the joker in the deck: prices are accelerating. And the decline in real median income has accelerated too since the recovery (down 9.8% since the start of the recession with the bulk of that since 2009). SO houses are still WAY over-priced

jcaz's picture

LOL-  you're right, I can't argue with what you just tried to type-  truly, you are the best way for me to make my point.

Wow, you can Google?  I thought you needed to be able to spell to do that....

I'm not certified as a moron yet, but if I keep reading your stuff, I'm pretty sure I'll get there- wish me luck!


Seriously, how do you read the majority of this blog?  It's gotta be like, so far over your head.....  Explain to me what a CDS is, in your own words- and no, it's not sumpthin yew put yer money in when yew go to the bank on Tuesdays......


zerozulu's picture

Current houses do not last longer. After 30 years, these houses are worth nothing. Bring back brick and cement construction. Maintenance will be low and there will be something left for next generation.

Benjamin Glutton's picture

well, if by "housing bubble" you mean a liars market coordinated by various financial criminals on behalf of a cooperative government desperate to get fresh money into circulation then I must disagree.


it will happen again with housing once enough time has passed. in the meantime other bubbles are just around the corner.

Fox-Scully's picture

Remove the large multinational developers from the market and return it to local builders.  The local builders are not trying to meet corporate goals to help inflate the stock that you see with a multinational company, hence the price is more realistic.

jcaz's picture

Why- because the local guy is less concerned about a profit that a multi-national?

My local builders are crooks and thieves-  I demand the ability to seek a builder outside of my area.

Unless this is the Middle Ages again, then I'll get my serfs to build it....

BTW- nothing stopping your local guys from dropping their prices to compete- sure, they prolly wont' be able to live in the house nicer than the local heart surgeon anymore, but there ya go- free market system is funny that way.....

Cpl Hicks's picture

Don't know about your locale but around here the "local builders" appear to have crews that have a distinct south-of-the-border look to them.

Don't know whether that put them in the 'crooks and thieves' category or just smart, bottom-line capitalists...

jcaz's picture

True, but then that's the same thing Bernie Madoff says too, eh?  "I'm just a Capitalist".

My builder lives better than Bernie did- while the houses he built are lined with funky drywall.

I only want him to live as well as Bernie does now.


MiningJunkie's picture

Hear, hear! Brilliant!

Chicken_Little's picture

I paid half down in 2006 and got a good FLL townhouse to get away from Miami Beach condo ass

s. Then I found out my new townhouse was infected with Knauf Chinese Drywall. This shit is really bad...

ddtrader's picture

The main points are right on.  Allow the housing market to clear by getting gov't out and forcing the liquidation of overpriced assets.  This would clear the market in 3 years. I disagree however, with the premise that owning should be less than renting.  Total ownership costs should be equal to or slightly higher than comparable rents.

JR's picture

Americans were corralled into housing because it was the only financial door left open to them..

All I know is I used to be happy here, excited even, to live in the land of the free where I had a handle on my life—where I had real choices. I was content to live with the results of those choices, because they were mine.

But, now, I feel trapped, almost hopeless I’m trapped by a government that uses me as a powerless rabbit to be chased into a financial box canyon and skinned by financial hunters, and then blocks all the exits. If I put my money in savings it is at high risk; in equities, high risk; in bonds, high risk; in cash, high risk; in a 401(k), high risk; in my real estate, high risk; in education, high risk; in my small business, high risk; in gold stocks, high risk… And, now, even gold and pensions are becoming high risk.

And all the while, as I and others try harder and harder--spending more time on the internet, reading, researching, attending seminars--to make better financial choices, the net worth for most of us deteriorates, going lower and lower. At the same time, the ‘investment’ bankers, with their control of the money supply and the Congress, grow richer and richer as they manipulate and control every aspect of our financial lives from their insider positions. Yet, they toil not, neither do they spin.

Americans are in a financial box canyon. With all the exits blocked. Either we fight for our very economic survival to regain the reins of our government—or we will be become as slaves to the moneylenders, in the land our forefathers bequeathed us.

Financial life for the average American now rests on a throw of the dice, and the dice are loaded.