Housing Market Cure

How to Fix the Housing Market -- Really!

I never worked for Goldman Sachs, so ipso facto I'm probably disqualified from proposing any solutions to the worldwide financial crisis/credit freeze/housing bust. See, "The Guys From 'Government Sachs'" (The New York Times; 10/19/08).

However, it does seem that, at least at the moment, the government's response(s) are a bit disorganized and ad hoc. So, maybe a little outside advice would be appreciated just about now.

In that spirit, here goes.

Treating Symptoms?

What little consensus there is so far is that falling home prices are at the heart of the financial meltdown. In turn, the housing market's problems are traceable to an imbalance of supply and demand. Solution? Do something -- directly -- to correct that (vs. indirectly, like shoring up banks' capital structure, buying their bad paper, etc.).

Specifically, the government should act to soak up the excess supply of housing.

Once some sort of equilibrium is restored, prices should finally stop falling. Given what's currently happening in the new construction market -- according to the Sept. numbers, absolutely nothing -- it will then only be a matter of time before demand once again outstrips supply, and home prices start rising.

What's the fastest way to help Buyers absorb all the excess supply? Make it cheaper for them to buy a home.

Unintended Consequences

To date, the effect of all the government bailouts and guarantees has been just the opposite.

The credit markets know that trillions in new U.S. debt will create a glut, and are requiring higher interest rates to compensate for that. Result: mortgage rates have climbed steeply from around 5.5% to 6.5% percent since Summer. Way to go, Goldman Sachs alumni.

Since the Treasury is now opening the money spigot, with everyone from Detroit to the state of California lining up (give Ahh-nold credit, literally), why not direct some relief to home buyers? Specifically, create a federal subsidy to temporarily bring the cost of mortgages down to 5%.

While such a program would seem to only benefit current home buyers -- hardly fair -- in fact it would undergird the entire market. Just ask someone whose block has a couple foreclosures on it whether that's affecting their value.

A Modest (12 digit) Proposal

How much would such a program cost? Surprisingly, a lot less than recapitalizing Wall Street.

Last year, about 5 million existing single family homes were sold. If that number gets to 6 million this year, things will definitely be on the mend.

Using an average home price nationally of $200,000, and a 10% downpayment per, means that six million, $180k mortgages would qualify for the interest rate subsidy. Assuming each mortgage subsidy costs $20k, the total package comes to . . . $120 billion.

Compare that to the $250 billion that the U.S. Treasury committed just last week to buy equity in the country's nine biggest banks. Incredibly, that handout came with no strings attached -- not even one requiring the banks to actually use the money to lend to anyone!