The Home Market is Broken
Posted by Michael A. Kamperman on August 24, 2010
Existing Home Sales plunged 27% in July to the lowest level since 1995. True, demand was borrowed from the future by the tax credits. But in 1995 mortgages rates were on the way up, not down. Not down to the lowest level in my adult lifetime and most likely your adult lifetime too. And let’s not forget home prices are back to early 2000 levels. Lower prices and lower interest rates cannot stimulate macro demand for housing. The reason is simple. We built enough single family homes for 70% of the population, yet only about 64% of the population is traditionally positioned for home ownership. Young people in their 20′s looking to build a career with a resume are better off mobile than tied down. People whose finances are poor don’t need the added costs of home ownership. Now, combine overbuilding market inventory with high unemployment, tight mortgage credit despite the heroic efforts of the FHA, and the deflationary psychology that prices could continue l0wer rather than higher and you have a broken market for homes.
The Obama Economic Team has failed to come up with a strategy to revive the housing market. The market has become addicted to tax credits. The mortgage modification efforts have been a woeful failure with almost half of the participants re-defaulting, and most inquirers failing to qualify. If your current on your mortgage you get no help. It is time for out-of-the-box-solutions. To change the direction of housing the Obama Administration needs a plan that addresses supply, credit, and psychology.
To rebalance supply we need to demolsish houses. We should end the cash for caulkers program and offer people who live in run down houses a chance to upgrade to a beautiful foreclosure on favorable terms. Then we should demolish the homes they left behind. If a bank is sitting on a run down foreclosure, then it should demolish it. The solution is not to talk people who shouldn’t own a home into one, that will only push more problems down the road. The solution is to lower the vacany rate and rebalance supply and demand. Credit is easy. Simply offer to refinance every current mortgage for 4% without an appraisal, a new title policy, or income verification. If their current they are getting the cash from somewhere to pay and we would be lowring their payments. Salvage the salvagable rather than trying to salvage those who simply cannot afford the house. Everyone marvels at the Chinese economy, yet over half of the apartments in Beijing and Shanghai are vacant and owned by investors who believe in real estate. In China they are building all sorts of things they don’t currently need. Psychology will return in America when we see more people bidding for homes than homes available for sale, and when their are no more foreclosures or short sales in the neighborhood dragging pricing down.
