Top priority: stabilize housing …

The obvious has become clear to me: there will be no meaningful economic recovery until the housing market is stabilized.

Why?

It’s not so much that some folks are being foreclosed on – some deservedly since they bought houses they couldn’t afford with little or no downpayment; some undeservedly because they got caught in the downdraft and lost their jobs .

It’s more because:

  1. Since homes are most families’ biggest assets, the decline in home values impacts consumption.  It’s called the “wealth effect”.
  2. An inability to sell homes – at a profit, or at all – reduces folks’ mobility, making it impossible or impractical to move from a high unemployment market (think Detroit) to one that may have brighter job prospects (think North Dakota).
  3. Since homes are often used as collateral to stake new small businesses, distressed home values cut entrepreneurs borrowing power. And, it is accepted wisdom that small businesses fuel job growth.

I’ve argued that the Feds approach – modify loans to “keep people in their homes” – is philosophically flawed and strategically misdirected. 

If somebody made no downpayment and few monthly payments, then it’s not “their home”.  It’s the bank’s home.

More important, it doesn’t fix the problem.

My answer: unleash private capital to suck up bargain priced residential real estate and rent it out.

Specifically, eliminate future capital gains taxes on any residential property bought in the next 2 years, allow investors (i.e. landlords) who rent the properties to depreciate the properties on an aggressively accelerated basis (i.e. say, 5 years), and allow any excess tax losses from renting to be applied to ordinary income.

My bet: there would be a massive inflow of private capital to buy residential properties, housing prices would be bid up, folks would have access to affordable rentals, and the economy would be stimulated … REALLY stimulated.

The downsides?

Sure, the higher prices would be somewhat artificial … unless the model becomes a new paradigm – replacing the American Dream of home ownership.

And sure, the tax benefits accrue to fat cats.

So what, let’s get the economy rolling …

2 Responses to “Top priority: stabilize housing …”

  1. Tags Says:

    I talked to a contractor the other day and he said his biggest client, a nursing home, stopped paying him on time because they could not fill their beds and thus keep their cash flow positive. “Why?” I asked. Apparently, their potential clients, the elderly, could not sell their homes and raise the money to move into a nursing home. That is just sad all around.

  2. TK Says:

    The government prefers a slower descent for home prices because the government and the banks still own a huge pile of mortgage-backed assets whose toxicity will increase with any sharp drop in home prices.

    Obama is just buying time to allow the banks to “earn” a substantial cushion for when more home supply is forced to hit the market and prices inevitably fall. Every month between then and now will reduce the future need for direct government support. Either way, losses down the road are more palatable than losses today. Economically and politically.

    Dropping rates to 2% sounds inexpensive, but what do you think those loans will be worth when rates move higher? Why would anybody refinance their 2% loan? The government is already holding rates at historic lows. Homes are being sold, so why cut rates further?

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