President Obama’s housing policies have been as successful as the circumstances would allow. Back in June I quipped, Obama’s housing policy succeeded wildly by failing spectacularly. Personally, I would have preferred he let the banks go bankrupt, nationalize them, fire management, recapitalize the banking system, and sell them off the bank’s stock when the economy recovered. Unfortunately, the flash-point of the crisis occurred while Bush was still in office, and these institutions were deemed too big to fail. Obama continued Bush’s flawed policies and looked for solutions that did not bankrupt the banks. This left few good options.
Once bank bankruptcy was taken off the table, the natural corrective mechanisms in the system could not be allowed to function. Mark-to-market accounting was suspended so banks could embark on a policy of amend-extend-pretend and hold shadow inventory until the housing market recovered. The needed purging of excessive household debt could not go forward. This paralyzed the economy, and we are still feeling the economic impact today.
Once the decision was made to coddle the too-big-to-fail institutions, the only policy option to reduce household debt was to give trillions of dollars to loanowners through principal reduction. For as distasteful as too-bid-to-fail has been, this option would have been even worse. Stealing from renters and prudent homeowners to give to irresponsible Ponzis might have lead to riots in the streets. I would have participated in them.
The strongest case against the Obama administration’s economic policy goes something like this:
Early on, the Obama administration misunderstood the unusual nature of the crisis. … The precise nature of the administration’s misunderstanding was that the key problem was household debt, and until that problem was solved the economy couldn’t recover.
This misunderstanding was not for lack of people loudly proclaiming it. Further, even if he did understand it, reducing this debt would have either bankrupted the banking system or cost taxpayers trillions of dollars to bailout borrowers who didn’t deserve the help.
… the administration believed that the best and fairest way to fix the housing system was to fix the economy. If people had jobs and tax cuts and unemployment insurance, they would be able to pay their mortgages and they would be able to buy new homes and that would take care of the housing problem.
And realistically, putting people back to work in jobs that pay enough to support mortgage payments is the only long-term strategy that will support house prices and boost the economy. Unfortunately, the loss of demand from rampant mortgage equity withdrawal was never going to be made up by any amount of government stimulus in only a few years.
That did not take care of the problem– it did not come close to taking care of the problem.
So one view is that the administration basically got the crisis backward. You couldn’t fix the housing crisis by fixing the economy. You had to fix the economy by fixing the housing crisis. And the administration’s housing policy wasn’t anywhere near sufficient to do that. This mistake was doubly disastrous because monetary policy, which would normally be a huge driver of recovery, typically works through the housing market, encouraging consumers to buy new homes while interest rates are low. …
That’s nonsense. Trying to “fix” housing has been part of the problem. Short of wiping out the banks, there was no “fix” for housing. Monetary policy has been as effective as it could have been. Low interest rates have prompted responsible homeowners to refinance which frees up their income for more spending. Unfortunately, a few hundred dollars a month to responsible households doesn’t boost the economy as much as giving hundreds of thousands of dollars to Ponzis.
Dean Baker points this out in a rebuttal to this column, Still Getting the Housing Bubble Wrong:
Bubble-inflated house prices created close to $8 trillion dollars of housing equity. The housing wealth effect implies that people would spend between 5 to 7 cents on the dollar of this additional wealth, creating between $400 billion and $560 billion in additional annual consumption. The property taxes on inflated house prices also helped support perhaps $80 billion or so in state and local government spending. For good measure there was a bubble in non-residential real estate that followed in the wake of the housing bubble, which created a boom in this sector as well.
When the bubble burst, there was nothing to replace the lost demand. Residential construction fell by more than 4 percentage points of GDP ($600 billion annually in today’s economy). It fell below normal levels because the boom of the bubble years had led to record vacancy rates. Consumption plunged because the housing bubble equity disappeared. When the wealth was gone, the consumption that it generated also vanished. And, we saw cutbacks in government spending at the state and local level in response to the lost tax revenue.
All of this seems clear and simple. We lost $1.2 trillion to $1.4 trillion in annual private sector demand. Some of this has been replaced by the federal government’s budget deficits, but not enough to fill the gap. So what would have various plans to rescue housing done?
Suppose we had instantly written off all underwater mortgages, would that have kept construction going? That’s hard to see, since the enormous oversupply of homes would still be there.
Would that have sustained house prices? It’s hard to see how or why, the problem is that the bubble had raised prices far above any level that could be justified by the fundamentals of the housing market.
Back to the The best case against the Obama administration article:
In this morning’s New York Times, Binyamin Appelbaum tells the story of the administration’s disappointing housing policy response. It’s worth reading alongside Zach Goldfarb’s September look at the same subject. Together, the articles make an ironclad case that the Obama administration’s housing policies failed to fix the housing crisis, in part because they never really tried to fix the housing crisis.
The two stories make a convincing case that reducing the debts of loanowners is critical to an economic recovery. And it is true that Obama did not give free money to Ponzis in order to accomplish this end. The only real alternative was to foreclose on overextended borrowers and put them out of their debt misery. That didn’t happen because too many on the Left were against it, and the banks couldn’t afford it.
As Appelbaum puts it, while Obama “poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy,” he “tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.”
Realistically, this was the only option Obama ever had. If he had given away trillions to loanowners, the Tea Party would have revolted, and I would have joined them along with every renter and responsible homeowner who had to pay the bill.
That’s because, in part, key members of the administration came to the conclusion that they didn’t have good options on housing policy. The politics were terrible, the mortgage servicers were incompetent and the gamechanger options were costly. As Treasury Secretary Tim Geithner told Goldfarb, “We do not believe that there were feasible alternatives available to us within our authority that were better.” …
The right question on housing, then, is not whether the administration’s policies proved insufficient. They did. It’s what would have been better. And that’s not a question that either Appelbaum or Goldfarb conclusively answer. It’s not even a question that the most credible critics of the Obama administration’s housing policies conclusively answer. …
That’s because there is no answer! Moral hazard is the central issue in housing bust. There are only two choices; either (1) you bail everyone out with a massive debt forgiveness program at taxpayer expense, or (2) you foreclose on everyone and reduce their debt while kicking them to the curb. Every other policy option boils down to extend and pretend while the economy heals itself.
The difficulty comes when you try to actually design a debt-forgiveness program. As Sufi writes, a successful debt-forgiveness program needs to target the households “whose consumption behavior would be materially changed.” Unfortunately, that’s hard to do.
WTF is he talking about? We need to target debt forgiveness to the Ponzis because they will spend more? These macroeconomists who want to see more of the “wealth effect” really need to think about what that really means. They are talking about supporting Ponzi borrowing. This cannot be the stable base of a national economy.
“What is more likely to happen is that all underwater homeowners would line up for relief. This would lead to government expenditures far larger than most taxpayers would accept.”
Sufi didn’t have an answer. Rather, he concluded his column with a prayer. “If policy makers would acknowledge the drag on the economy from excessive household debt, a fix may present itself,” he wrote. “I’m certainly open to suggestions.”
Here’s a suggestion for you: Foreclose on the delinquent mortgage squatters! What’s wrong with that solution? It’s very, very simple, yet nobody wants to acknowledge it. That harsh reality is even more politically charged than giving away trillions to Ponzis.
And beyond the policy design questions, there’s the political question. Taxpayers don’t mind a broad-based tax cut, or a program to rebuild bridges and roads, or even increased help for the unemployed. But hundreds of billions of dollars that go to the homeowners who got into mortgages they couldn’t afford and stopped paying rather than to more responsible homeowners who scrimped and saved to keep up with their payments? That’s a tough political sell. …
Doug Holtz-Eakin was the chief economic adviser to John McCain during the 2008 campaign and he proposed a widespread debt-forgiveness plan. The only problem? “No one liked that plan,” he said. “In fact, they hated it. The politics on housing are hideous.” Recall that the Rick Santelli-rant that kicked off the tea party was aimed at the modest, limited housing policies that the Obama administration actually did propose.
All this raises a question: If the Obama administration’s housing policies have been so ineffective and poorly executed, why don’t more Republicans make this critique?
The answer is that the politics of housing are so bad that Republicans have largely chosen to steer clear of the issue. Mitt Romney, for instance, doesn’t have a specific housing plan, much less a plan for debt forgiveness. He began the campaign by counseling, “don’t try to stop the foreclosure process. Let it run its course and hit the bottom.”
I applauded Romney when he made that speech. He told the simple truth and endorsed the right policy to solve the problem of excessive household debt and bring stability to the housing market. Then he wimped out.
Then he reversed himself, saying instead, “the idea that somehow this is going to cure itself by itself is probably not real.”
No, it’s very real. Unfortunately, it isn’t very politically popular. I used to respect Republicans because they used to have the courage to stand up and take the heat for unpopular but appropriate policy actions. Now both parties just pander to their constituencies without regard to the greater good. Sad really.
But he hasn’t endorsed any specific policy measures on the subject, which makes it hard for him to criticize Obama. After all, it’s tough to say the other guy made a mistake by not pursuing debt relief when you also don’t want to pursue debt relief.
The 2012 election is shockingly silent on the issues pertaining to housing. Obama did the best he could given the circumstances, and when Romney proposed the only reasonable alternative, he was forced to back off because it was politically unpopular. I expect both candidates to avoid this issue for the rest of the campaign — despite the fact that the fallout from the housing bubble is probably the greatest economic challenge the country faces today.
Twenty-three years of ownership with nothing to show for it
I think some of the most tragic cases of extreme financial stupidity concern those who lived in the same property for 20+ years and rather than paying off their mortgage, they borrowed themselves into foreclosure. The former owner of today’s featured property was one of these cases. He bought the property back in 1989 for $342,500, and by 2006 he racked up $669,600 in debt on the property. It isn’t clear when he defaulted, but the foreclosure proceeded quickly once they started the process.
What will he do now? He is getting old to start all over again.
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Proprietary OC Housing News home purchase analysis
$582,500 …….. Asking Price
$342,500 ………. Purchase Price
4/11/1989 ………. Purchase Date
$240,000 ………. Gross Gain (Loss)
($27,400) ………… Commissions and Costs at 8%
$212,600 ………. Net Gain (Loss)
70.1% ………. Gross Percent Change
62.1% ………. Net Percent Change
2.2% ………… Annual Appreciation
Cost of Home Ownership
$582,500 …….. Asking Price
$116,500 ………… 20% Down Conventional
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$466,000 …….. Mortgage
$122,556 ………. Income Requirement
$2,106 ………… Monthly Mortgage Payment
$505 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$146 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$410 ………… Homeowners Association Fees
$3,166 ………. Monthly Cash Outlays
($330) ………. Tax Savings
($727) ………. Equity Hidden in Payment
$133 ………….. Lost Income to Down Payment
$93 ………….. Maintenance and Replacement Reserves
$2,335 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,325 ………… Furnishing and Move In at 1% + $1,500
$7,325 ………… Closing Costs at 1% + $1,500
$4,660 ………… Interest Points
$116,500 ………… Down Payment
$135,810 ………. Total Cash Costs
$35,700 ………. Emergency Cash Reserves
$171,510 ………. Total Savings Needed
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