“What to do about ‘Under Water’ mortgages”.
There is a lot of noise out in the economy about all of the mortgages that are “under water” and about the need for the government to do something about that. People seem to think that, if the balance due on the mortgage were somehow magically reduced, the economy would be just fine. Well, that is not quite how it works.
First of all, a home is not a commodity that is bought and sold on speculation that prices are going to rise or fall. Real estate in general, and homes specifically, are considered illiquid assets. They are like works of art or jewelry. Are there art speculators and jewelry speculators? Yes, but people buy art and jewelry to enjoy and use. The consideration about resale lies in the hope that the quality of the investment will help it retain its value (and possibly grow) over time. That is why the value of objects of art and homes do not fluctuate the way wheat, corn and soy beans do.
It is my judgment that the home building industry is the largest domestic industry in our economy. The traditional throttle for the housing industry has been mortgage rates, because higher rates disqualify buyers, reduce demand and slow housing production, while lower rates qualify more buyers, expand housing demand and accelerate housing production.
Because of the reach of the housing industry into building trades and products, appliances, furniture, building materials, banking, mortgage banking and land development, to name just a few parts of the industry, deceleration of housing production translates into fewer jobs in the national economy, and acceleration of housing production translates into the creation of more jobs.
Since 2006, housing production has been slowing and the economy has been losing jobs. Further, the Wall Street crash of 2007 and 2008 virtually eliminated all sources of capital to fund the mortgage industry. That lost capital is the reason for the severe shortage in the mortgage market today. So, what’s all this have to do with the 25 million people who are under water on their home mortgages? Well, the answer is fairly simple. We are in the worst recession (?) since the Great Depression. We have some choices to make. Most economists seem to agree that some form of government intervention in the economy is appropriate temporarily help get the economy turned around.
So, we tried that. We authorized 780 billion to build “infrastructure” and to bail out the cities, counties and states, and we pumped billions into the labor unions. At the end of the day, we have nothing to show for this misguided waste. We can continue by spending more money on solar panels and propellers (that will ultimately be made in China), and we can turn to all of those people who are “under water” and simply reduce the amount they owe on their mortgage, so they won’t be “under water” any more. We can then eliminate the wasteful mortgage interest deduction so government can have more money to spend.
Problem solved. No one is “under water”, we have $9.00 gas at the pump, no one is buying those environmentally unfriendly houses that are sprawling into the suburbs, we can drive into the country in our electric cars, that have Chinese batteries, to watch the Chinese windmills go round, and everyone lives in a foreclosed high rise condo, downtown and pays rent to the federal government. Oh, and by the way, remember those home owners that were not “under water” any more? Well, since we are no longer building homes, because there is no mortgage money, and homes are worth less because there is no mortgage interest deduction, and there are fewer jobs, the value of those homes, and 25 million more, went down, so, again, everyone is under water… you get my drift.
Or, we can do something about the 25 million mortgages that are “under water”. Just as it is true that you don’t know who is swimming naked until the tide goes out, it is also true that, when the tide comes back in, it lifts all boats that can float. So, let’s make sure our boat can float, and then let’s prepare for the tide to come back in.
The best way to solve the “under water” problem is to make the homes that are worth less than the mortgage, worth more than the mortgage. Now that is a novel idea. How do we do that? We turn our attention from supply to demand. In the pre-bubble days, the housing market was supply driven. Everyone was focused on generating supply, because demand was “over the top”. Today the market is demand driven. The economy that can generate demand is the economy that has a healthy housing market and is a healthy economy. If we can cause demand to rise, it will, like the tide, cause the values of all homes to improve, until the home owners are no longer “under water”.
Like it or not, the banks are out of the mortgage lending and construction lending business, because the government regulators will not allow them to lend. The government fears that, because most banks are nearly insolvent, further real estate losses will wipe out their capital and kill the banking system altogether. They did the same thing in the early 90’s after the crash in Texas. This government intervention in the mortgage and construction lending industry is a clear example of how shear stupidity can prolong the suffering of millions of Americans. Remember that this is the same set of government regulators that thought the market was great and risk free in 2006. Talk about “buy high-sell low”.
If there is to be no private capital available to the mortgage industry, then the first step is for the government to step into the capital void and make an appropriate amount of capital available to the mortgage industry, so that the supply of mortgage money is no longer a choke point for the housing industry, both new and resale. This can all be done with debt capital, not government spending that is never to be recovered, and this capital supply can be gradually withdrawn as private capital gradually moves back into the mortgage industry. With a reasonable supply of mortgage capital, home buying will increase and the values of all homes will begin to rise, and the negative attributes of falling home prices will gradually fade away.
I know, I know, “What about all those foreclosures?” I stand by my position, and this applies to foreclosures as well. Why? Because with the improvement in demand, we build more homes, so we create more jobs, so those who are unemployed can get a job, so, their home won’t be foreclosed, and the person who gets a job in another city can sell his/her house, so it won’t be foreclosed, and the person who decides that the home is no longer a good investment and plans to walk the note will reconsider, so the home won’t be foreclosed…do I detect the tide coming in?