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Friday, February 10, 2012

Housing Crash Necessary For Recovery

The only way housing will recover is for all government intervention in the housing market to stop, allowing foreclosures to occur and prices to fall as quickly and as far as necessary to achieve an equilibrium between supply and demand.

In this October 2011 analysis I predicted that housing could fall between 50% and 80% based on these risk factors. All of these factors remain true today.   

All government efforts to "fix" housing have failed miserably. Well, not entirely. The government has succeeded on two counts.  First, it succeeded in wasting taxpayer money through its plan to pick winners and losers. Here, the winners were sellers getting sale prices at still-inflated prices, and the banks holding and servicing the mortgages; they got the money transferred from taxpayers funding the homeowner "assistance." Second, the government succeeded in favoring existing and past sellers, who got higher prices than they otherwise would have gotten had prices not been artificially supported. However, their windfall came at the expense of current buyers in the market who still risk paying inflated prices for homes which are very likely to continue to fall substantially in price.

Note what I wrote at the end of the foregoing paragraph: "inflated prices...very likely to continue to fall substantially."

The Obama Administration's homeowner rescue plan announced Thursday was quickly panned by analysts and commentators who understand the housing market. Their criticisms were largely that the payouts to foreclosed owners and victims of robosigning (all of whom have also, remarkably, been delinquent on their mortgages) do little to help any individual homeowner, do little to support prices, transfer large amounts of money from the banks (who will make future borrowers and current depositors pay) to recipients who will individually benefit little if at all, and do little or nothing to prevent the risk of future default if prices continue to fall.

The government expects home prices to still fall substantially.  If it didn't, it would not be worried about supporting prices in the face of the three-year-long foreclosure backlog in states, like New York and New Jersey, in which foreclosure is a judicial system process.  They  know there is a huge backlog of homes ready to hit the market over the next few years, and these distressed sales will someday  be pushed through by desperate  homeowners or banks.  This has to -- absolutely must -- pull prices down on the simple laws of supply and demand.  And even if the government tries price supports by boosting demand, that will just push demand forward, at the expense of demand tomorrow, leading to a delayed price drop.

In essence, what the government's tragically misguided policies for price support  has done is prolong the period during which prospective buyers expect -- and fear -- significant future price declines.  No buyer in his or her right mind will buy any nonconsumable asset (like a car or computer with a short economic life) knowing it will most likely be worth much less in the near future.  Because the government is delaying -- but not preventing -- the huge price correction I predicted here -- the financial sector cannot recover, the overall economy will not recover, and people who were unemployed in 2008 are still unemployed today and likely will remain unemployed or underemployed for years to come.

Had the government -- and the banks -- bitten the bullet in 2008, we would have had a sharp recession. But the recovery would already have occurred.

Those people unemployed today for the last three years would likely be employed today and enjoying the fruits of that recovery -- which the government has succeeded in delaying just as much.

Ask those people if they're better off today than they were four years ago.

Eric Dixon is a New York corporate lawyer and member of the Board of Directors of the Financial Policy Council, Inc.   The views here are his alone.

1 comment:

  1. Govt. will have some sort of role. But this should be very positive.