The New York Times editorial board strikes another blow for market ignorance today in this editorial. Its premise is that in order to save the housing market, we have to destroy it. Sadly, this is an all too common attitude among our Democrat friends these days.
The editorial argues as follows (editorial comments in parentheses):
1. The housing market tanked in 2008 and hasn’t recovered. (So far, so good).
2. Government stimulus programs such as the home buyers’ tax credit caused a temporary spike in home sales. (And every bit as reliably, sales plummeted with the stimulus’ end as demand was artificially pushed forward).
3. Foreclosures are putting downward pressure on home prices. (Increasing supply with constant demand generally has that result).
4. Banks are slowing down foreclosures, hoping to time the market. (‘Puter’s a moron, but trying to avoid selling into the teeth of a bear market seems rational to him).
5. These problems will not solve themselves. (Yes, they will. Prices will fall to a point where people will buy them, and demand will then pick up).
6. Government intervention is the only solution. (No, it’s not. See response to 5, supra).
7. The current government solution isn’t working because bank participation is not mandatory. (Failure of the program has nothing to do with the fact that it ignore bedrock precepts of economics, such as supply and demand).
8. We must change the laws that apply to, essentially, 30 year bonds (mortgages) in order to require banks to offer modifications before foreclosing. (If you rewrite 30 year contracts by fiat in the middle to early stages of their terms, you have created huge potential losses in banks that will further depress their ability to capitalize adequately).
9. Democrats from Rhode Island and Ohio are leading the charge, which is great. (Rhode Island and Ohio are economic basket cases caused by years of Democrat fiscal mismanagement. In fact, both states just elected Republican governors to repair the years of ruinous Democrat rule).
That’s the NYT’s positions. Have the government game the market to achieve the ends you want, and ignore any foreseeable negative consequences of your actions.
If the NYT’s preferred policy is implemented, the following things will happen in quick succession:
1. Banks will stop lending except to all but the most creditworthy at anything resembling today’s terms and conditions.
2. Home equity lines of credit will almost completely dry up.
3. Bank stocks will plunge, as their loan portfolios have been unilaterally recast on significantly less favorable terms.
4. The market for any derivative or equity based on real estate backed debt will freeze, as valuation of the assets will be difficult if not impossible until the rules are written.
5. The government will have effectively nationalized the residential real estate lending market, not that it hasn’t done so already.
The elephant in the room that liberals steadfastly ignore is that the housing market under the best of conditions is destined to deflate or at best hold level over the next twenty or so years. Why? Because demographics are destiny.
Baby boomers outnumber Generation X by slightly more than 3:2 (76 million versus 51 million). Assuming similar home ownership rates over time for the generations, at any given point there will be 1/3 more existing homes than existing buyers. And yet we think that new home building is a great industry that just has to rebound, because it always has. Just as housing prices always went up, right until they didn’t.
Of course, there are good reasons for building new homes, such as functional obsolescence of the old housing stock, development of new areas in growing communities and redevelopment of older communities. But it seems unlikely that these legitimate reasons will ever be sufficient to see a return to the heyday of spec building that occurred during the housing boom years. This, coupled with demographics, lead ‘Puter to believe two things are likely:
1. America is currently oversupplied with housing.
2. Demand is not going catch up with supply for some time.
These two factors show the folly of any government attempt to game the market in homeowners’ favor. If there is no demand for existing supply, prices will continue to fall, regardless of what government does, short of buying existing stock and plowing it under (ed. — this would actually be preferable, as it would address the oversupply issue, and likely cheaper in the long run).
The New York Times is calling on King Canute –er, President Obama — to stop the tide. It can’t be done. And to make matters worse, anything the government does will make matters worse.
There’s your daily dose of Little ‘Puter Sunshine.