If Housing Is Booming - Why Do We Need Another Fix

Submitted by Lance Roberts of Street Talk Live blog,

President Obama recently stopped in Phoenix to deliver his latest diatribe on how he is going to fix the economy.  Yes, that is correct, another round of "campaign speeches" that, as has been the hallmark of this Administration to date, have generally wound up mired in an abyss of a broken congressional system.  What really struck me, however, was his comprehensive plan designed to further boost the housing market including:

  • Helping responsible families save $3,000 a year by refinancing while mortgage rates are still low.  
  • Take executive action to cut red tape so responsible families can get a mortgage.
  • Fix our broken immigration system to increase home values [WTF!]
  • Rebuild communities hit hardest by foreclosure.
  • Create and preserve affordable rental housing by passing a bipartisan Senate proposal.
  • Put private capital at the center of the housing finance system
  • End Fannie Mae and Freddie Mac's failed business model so taxpayers are never again on the hook for bad loans and bailouts
  • Ensure widespread access to safe, responsible financing like the 30-year fixed rate mortgage
  • Support affordability and access for renters and homeownership for first-time buyers, in part by continuing the historic affordability role of Federal Housing Administration (FHA)
  • Ensure all prospective homeowners receive a single, simple three-page mortgage disclosure form
  • Increase incentives for lenders to deliver high quality loans and products.
  • Level the playing field for financial institutions of all sizes so borrowers can work with the lender right for them.

Excuse me?  Another plan for the housing market.  The housing market has been inundated with programs including HAMP, HARP, tax credits for first time home buyers,"fraud-closure" forgiveness, trillions of dollars injected to artificially suppress interest rates, bailouts of banks, etc. which have resulted in a surge in home prices. The Federal Reserve, the White House, the media and every housing and real estate related organization have been crowing over the resounding housing recovery over the last couple of years.  If this is the case then why do we need another housing support program?  

The reason is because, as I have been writing about over the last couple of years, the housing recovery has been a facade of speculative investors flooding into the housing market. I specifically discussed this issue recently in "Housing - Is It Really Recovering?": 

"While the Federal Reserve and the current Administration have tried a litany of programs to jump start the housing market nothing has worked as well as the "REO to Rent" program. With Fannie Mae/Freddie Mac, and the banks loaded with delinquent and vacant properties, the idea was to sell huge blocks of properties to institutional investors to be put out as rentals. This has worked very well.

 

The chart below shows the number of homes that are renter occupied versus the seasonally adjusted home ownership rate.

 

 Housing-Ownership-Renters-072513

 

Do you see the potential problem here? Speculators have flooded the market with a majority of the properties being paid for in cash and then turned into rentals. As this activity drives the prices of homes higher, reduces inventory and increases rental rates - it prices out "first time homebuyers" who would become longer term home owners. The problem is that when the herd of speculative buyers turn into mass sellers - there will not be a large enough pool of qualified buyers to absorb the inventory which will lead to a sharp reversion in prices.

 

Maybe this is why the Federal Reserve, and the FDIC, are looking to relax the regulation put in place after the last housing bubble which required banks to have "skin in the game." By removing that restriction banks can now go back to providing mortgages to unqualified buyers, pool them and sell them off to unwitting investors. Haven't we watched this movie before?"

That last paragraph is central to the real issue at hand.  While Obama continues to focus on ways to stimulate the housing market by manipulating the process; he continues to miss the real issue - employment.  

A real focus on fiscal policy in Washington that would lead to a real recovery in employment would negate the need for the ongoing bailouts of the economy and housing.  Increased employment would:

  • Lead to a stronger economy negating the need for ongoing QE programs from the Federal Reserve.
  • Higher wages which would lead to increased savings and higher rates of home ownership.
  • More individuals on company sponsored healthcare plans reducing the need for "ObamaCare" which is impeding employment.
  • Increased aggregate end demand which would encourage more productive investments.
  • Increased tax revenues which would reduce the budget deficit.
  • Allow for reductions in government spending which would lead to a balanced budget and eventual budget surpluses.

There is hardly a single issue that higher levels of employment won't eventually fix.  Yet, the focus continues to be applying "Band-aids" rather than curing the patient.

Another housing bailout program is the last thing we need.  The "American Dream" was never about "home ownership" but rather the ability to come to America with nothing more than the clothes on your back and build a successful life for you and your family.  The reward for achieving success in America was owning a home.  Home ownership is a privilege - not a right.

It's time to stop trying to fix what is broken by trying to cure the symptoms rather than the disease.  In the past four years we have destroyed 200 years of contract law, we have engaged in unprecedented economic experiments and forgiven criminal actions in the name of financial stability.  Our "Founding Fathers" would be ashamed of what has been done to the country they sacrificed everything for.  Maybe we should return our focus back to what made this country the "land of opportunity" to begin with:  life, liberty and the pursuit of happiness.  It is within that simple phrase that generations of legal immigrants lived their "American Dream."