No Exit Plan for Housing Quagmire

Here's David Streitfeld in Los Tiempos de Nueva York, speculating that a new consensus on real estate non-intervention may "give the Obama administration permission to take the risk of doing nothing."

And here am me, three years ago, asking the previous administration's treasury secretary why the option of doing nothing was never considered.

Back when the market was still at the top of the slide, Streitfeld did excellent work demonstrating how downward stickiness in house prices was creating chaos. Here, for example, he shows how a Florida lender with a back office in India refused to let local agents lower asking prices on 753 foreclosed California homes.

The problem in 2007 and the problem today are the same problem: Nobody is willing to price a house low enough to sell. "I wouldn't quite phrase it as 'let the housing market crash' - instead I'd argue to stop trying to support house prices," says Calculated Risk's Bill McBride, who also notes that this is not a matter of neutral economic growth but a choice between two interest groups. By continuing to support home borrowers, even at depleted post-HAMP levels of service, you're punishing potential buyers -- who don't need more tax breaks or fancier debt instruments but lower asking prices.

It's also not clear what "doing nothing" would actually mean. Winding down Fannie Mae and Freddie Mac, and selling their portfolios to an unenthusiastic private lending market? Eliminating the Federal Housing Authority with its disgraceful lending standards? Ending the mortgage interest deduction on your 1040? To end the hyperinflation of American real estate, you'd need to cut through a vast tangle of public policy and accept a price drop that could take us back to the middle of the Clinton Administration or earlier.

The market interventions of the last three years -- including but not limited to TARP, HAMP, and the Fannie/Freddie bailout/conservatorship -- may be uniquely unfair and ruinous. But a long pro-inflationary history led up to them -- a grim tale in which Americans took on ever larger loads of debt for the privilege of buying ever smaller percentages of house. It will take more than doing nothing to dismantle all of that.

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  • prolefeed||

    For the Obama administration, "doing nothing" equals "a temporary pause in further socializing the housing industry."

  • Neu Mejican||

    It's also not clear what "doing nothing" would actually mean.

    It would typically mean not changing any polcies in anyway whatsoever and letting the current situation play itself out.

    Either the status quo is the best option, or government should do "something" by modifying policies and programs.

  • Some Guy||

    While "doing nothing" is certainly preferable to anything they are likely to actually do, it still doesn't make the root problem go away.

    It's like telling someone to stop throwing gasoline on the fire. While a good first step, it needs to be followed up by actually putting out the fire.

    The problem is that people don't understand what the fire is. It's not falling house prices, it's all the government intervention preventing them from falling further and staying there.

  • Hugh Akston||

    Hopefully the Prez knows enough to stop digging when he finds himself in a hole. But there is absolutely no chance that he will have the brains/guts to start filling it back in.

  • TallDave||

    Fannie and Freddie need to die. The U.S. government should not be tinkering with the mortgage markets via GSEs.

  • Libertarian||

    Back when Harry Browne was running for president, he was interviewed on the local radio station. He was asked what he could possibly accomplish if elected, assuming that the Senate and House would still be Dems and Reps. I called in and said I knew what he could do: "veto, veto, veto....."

    Obama could be the best President over the last 100 years if he did absolutely nothing but veto every bill that came before him. That will never happen, but I can dream, can't I?

  • ||

    He could be an even better president if he signed bills repealing existing laws or extending sunsetting tax cuts, and vetoing everything else.

  • ||

    Obama could be the best President over the last 100 years if he did absolutely nothing but veto every bill that came before him.

    Well with the republican taking the house this fall Obama is about to become the best president in living history.

    It will be fun in 6 years when the left start crediting him the great economic gains he got simply by being gridlocked.

    Don't believe me? look at how they credit Clinton for being so good with the economy when in reality he was lame ducked by the republican lead congress.

  • Some Guy||

    Then in 2020 when the GOP has a unified government, they'll add a massive expansion of entitlement spending...again.

  • Mr Whipple||

    Clinton had God. Well, a man, with a God complex. I do not speak his name, but his initials are AG.

  • obijuan||

    So, let the Bush tax cuts expire?

  • Max||

    Taxes need to be REALLY high on those fucking right-winger rich people who suck Ron Pual's dick!

  • Fluffy||

    You may have missed it, because it was announced on Friday in a holiday weekend news dump, but the administration announced a new program where underwater mortgages are going to be refi'd into new FHA loans without reference to LTV.

    I thought they would do this with Fannie and Freddie's loans - but they appear to have decided that this still leaves the major servicing banks with too much risk, so to subsidize those banks EVEN MORE, they're going to stick FHA with those loans instead. This means that the lenders will be able to dump their losses off onto taxpayers even more effectively than they could when we were just shoveling money at Fannie and Freddie every quarter.

    I really can't believe that I thought up a great way for the administration to steal from taxpayers to help the banks, and they managed to TOP IT. My imagination for stealing just is too limited for the Obama Treasury Department.

  • Obama||

    Debt belongs to the people! And these guys concur!

  • BakedPenguin||

    The windows in the Amityville Horror house look like eyes, evoking a malevolent version of Tati's joke in Mon Oncle. Kind of the way the current situation evokes a malevolent version of housing as envisaged in Levittown.

  • ||

    Bio had and interview with Ronald Defeo tonight. Lately, bizarrely, there have been a whole bunch of Amityville related coincidences cropping up not the least of which is the picture with this article. Couldn't be happy, hopeful coincidences, but coincidences about a horrible murder.

  • Fluffy||

    BTW,

    Rand Paul up by 15 points in Kentucky.

    I've complained about some of his statements since he started "going conventional" after the Maddow incident, but man - I still want to see how big an asshole he becomes once he's actually got the seat.

  • ||

    I still want to see how big an asshole he becomes once he's actually got the seat.

    Come on, give the guy a chance. While Acton is never wrong, Rand will almost certainly be in more agreement with your politics than any other Senator, won't he? I realize that isn't saying much, but who knows, maybe he is a stealth candidate.

  • alan||

    He has a talent for letting libertarians down that is for certain. His opponent on the other hand . . . wow . .

  • SIV||

    Your expectations are too high. First he has to be elected in a statewide race in KY. If Rand turns out to be, only a conservative constitutionalist in the vein of Senator Jim DeMint (R-SC) it is still a big win for minarchists.

  • The Angry Optimist||

    only a conservative constitutionalist in the vein of Senator Jim DeMint (R-SC) it is still a big win for minarchists

    Yes, we definitely need another nativist looking to deport 11 million people.

  • ||

    What?!

    Burn the apostate!!!!!

  • cr||

    http://community.nytimes.com/c.....ugman.html

    Enough, Nobel laureate Krugman. Enough.

    Look at the bright side. You will get even more tax breaks, which you should use to save yourself and your family. Go live in a country that is civilized. We prefer guns, hate, war, and tax cuts for the wealthy: the divine rights of white Conservatives.

    Let's celebrate with a beer. And tune in to watch our Conservative majority Supreme Court and the Conservative dominated Congress rewrite the Constitution in their image.

    The stupids have triumphed. No regrets. After all, we let them have our media and then our minds. Given enough repetition, their lies and half-truths sound comforting, like the crackling of fire on a cold winter's day. And that fire will burn brightly for a long time as we feed it with the contents of our public libraries (those liberal dumps of anti-Christian Socialist, Communist, liberation theology turned out to have a good use after all.)

    I, personally, will dye my hair blond and look into lightening my skin color. And will definitely shred my college diploma. Our new leaders won't like edumacated folks. No big words from me. Just "yes sir," "no sir," and "Jesus saves."

    We should all try to fit in. It's the American way.
  • hmm||

    How can the majority be the victim in politics.

    I almost cried a tear for this fellow/gal.

  • dollar brand||

    ever hear of South Africa?

  • hmm||

    The majority referred to the political majority. Kinda thought that was obvious.

  • Lowdog||

    The comments are even worse. People think that the government can tax and spend the economy into prosperity. How can anyone possibly believe this? Maybe if there was some proof that high taxes and public works projects were a net gain to the country it would justify the taking of someone's hard work, but since there isn't, how can anyone argue this with a straight face?

  • SIV||

    That's excellent trolling cr. 605 recommends!

  • hmm||

    I've noticed that in politics there is never a do nothing step in any analysis. In economic or financial comparative statics the first step is the do nothing step, so by default you have a measure from which to start, instead of flailing under the assumption something must be done.

  • ||

    If a politician isn't doing something, he can't boast to the voters about what he's done and is doing now. As stupid as it is, from a politician's perspective, it is always in their (though not our) best interests to be "doing something".

  • ||

    It's what Sir Humphrey called "politician's logic" in Yes, Prime Minister:
    Something must be done.
    This is something.
    Therefore it must be done.

  • American Delight||

    I am for a timeline for a federal withdrawal from the housing market. We need a phased, responsible draw down of all troops, er, FHA, Freddie/Fannie employees.

  • Hugh Akston||

    You're just soft on the foreign debtors, who hate us for our flatscreens.

    Real Americans never surrender in the War on Solvency.

  • ||

    While we live in a constitutional republic, it operates more like a democracy. More than 50% of households own a home. Therefore the mob says more housing stimulus. And that is what we will ultimately get.

  • ||

    While we live in a constitutional republic, it operates more like a democracy.

    Yep, and the democracy at Athens voted the death penalty for Socrates for "corrupting the youth".

  • ||

    I've got a great plan for winning the War On Terror by invading Syracu... uh, I mean, Iraq.

  • Rrabbit||

    People paid 300K, 350K on a 100K house, betting that they could sell the 100K house for 400K to a bigger fool.

    That bubble had to burst.

  • Steven Smith||

    Let's not forget one of the most egregious examples of governmental intervention in the free market: allowing home lenders an exception from the modification provisions of Chapter 13 bankruptcy. Repealing this provision would allow for a very quick leveling of home prices.

  • ||

    Ouch! A very good point. Farther than the nearest star from happening, but an excellent example of government intervention in the housing market.

  • hmm||

    That is a pretty good point.

  • ||

    STEVE(N) ANGRY! STEVE PUT 20% DOWN ON CAVE AND BOUGHT CAVE HE COULD AFFORD, WHILE YETI NEXT VALLEY OVER GOT HUGE FISSURE WITH NO MONEY DOWN! NOW STEVE TAXES PAY FOR YETI FISSURE! ARRGGGHHH!

  • hmm||

    C-

    No yeti rape.

  • ||

    I figured that was redundant.

  • Butts Wagner||

    And you know that there are hipsters out there willing to buy the sleek, modern fissure from the yeti.

  • ||

    You know what's worse? The bubble is pricing my family and I out of the market entirely. Oh, we could get an ARM with no money down and be irresponsible, but I'd rather rent than pay a price I can't afford and take on more debt than I can manage.

  • Rrabbit||

    Yep. Indeed, sane people who are willing to buy (only) at realistic prices are pushed out of the market.

    Normally, such a problem would fix itself within a couple of years. But the US real estate bubble has been self-inflating for 20 years in some states.

  • ||

    It's also not clear what "doing nothing" would actually mean.

    It is clear to me.

    It means i can buy a house for the price it is actually worth rather then how much land use regulations have artificially inflated the price

  • ||

    To end the hyperinflation of American real estate, you'd need to cut through a vast tangle of public policy and accept a price drop that could take us back to the middle of the Clinton Administration or earlier.

    The rise in construction materials and labor costs for building homes has stay below inflation for a long time. The price of homes should drop to that level.

  • Mr Whipple||

    Bullshit. Construction materials have gone through the roof, so to speak.

  • ||

    Any day now, Bennay and Timmay will get Rumpelstiltskin to spin those dud mortgages into gold.

    Of course, you might have to say goodbye to your first born sons.

  • ||

    Actually, the "housing crisis" reminds me of that old children's story about the guy who wanted to get rid of a mouse: he brought in a cat to do away with the mouse; to get the cat out of there, he brought in a dog; and on and on through the menagerie.

    Now, we've got to get the elephant out, because the place is rapidly filling up with shit.

  • ||

    know an old lady who swallowed a fly
    I don't know why she swallowed the fly
    Perhaps she'll die

    I know an old lady who swallowed a spider
    That wriggled and jiggled and tickled inside her
    She swallowed the spider to catch the fly
    But I don't know why she swallowed the fly
    Perhaps she'll die

    I know an old lady who swallowed a bird
    How absurd to swallow a bird
    She swallowed the bird to catch the spider
    That wriggled and jiggled and tickled inside her
    She swallowed the spider to catch the fly
    But I don't know why she swallowed the fly
    Perhaps she'll die

    I know an old lady who swallowed a cat
    Imagine that. She swallowed a cat.
    She swallowed the cat to catch the bird
    She swallowed the bird to catch the spider
    That wriggled and jiggled and tickled inside her
    She swallowed the spider to catch the fly
    But I don't know why she swallowed that fly
    Perhaps she'll die

    It goes on from there and it was an old lady not an old man.

    http://www.peterpaulandmary.com/music/17-07.htm

  • PantsFan||

    no you fool.
    it was a cat that wouldn't leave

  • thenino85||

    Reading that linked interview with Paulson brought back bad memories. The man was a charlatan of the highest order. He refused to answer any questions. He just barreled ahead with what sounded like prepared statements, and every time someone called him on internal contradictions, he basically fluffed it off as the chattering of ideologues or that the interviewer didn't really "get" what was going on. How he can talk about how houses are overvalued, but they can't be devalued ever, is just revolting. Did he ever realize that there are two sides to a market, buyers as well as sellers? Where did he get his degree from, a diploma mill? Or that the loan approval process wasn't nearly rigorous enough in the past, so we need to speed through loan modifications as fast as possible now (now being December 2007). Something multiple interviewers called him on but he just waved them off, presumably because they don't work for the government and therefore aren't smart like him. Man, in retrospect, he makes Turbotax Geithner look good by comparison.

  • King Henry Paulson||

    The problem in 2007 and the problem today are the same problem: Nobody is willing to price a house low enough to sell.

    That would be a "market failure".

  • Amakudari||

    I think it's more like a game of chicken. The bailouts just coming, so sellers hold onto their houses in hopes of something better.

    So far, they've been rewarded, even if we've only barely succeeded in reflating home prices.

  • Hugh Akston||

    How long do we think it's going to be before the Federal Government starts to buy unoccupied homes in order to drive the supply down and prices up?

  • hurly buehrle||

    I think Vegas has the over/under at about 6 days.

  • hurly buehrle||

    I think Vegas has the over/under at about 6 days.

  • Brett L||

    I thought they already tried that in Detroit... Not that Detroit's results are in any way applicable to the rest of the world. I think the houses may have had more value as salvage than dwellings.

  • ||

    How long do we think it's going to be before the Federal Government starts to buy unoccupied homes in order to drive the supply down and prices up?

    Maybe they'll provide refundable tax credits to ADM to buy houses, demolish them, and plant corn for ethanol on the sites.

    Everybody's a winnah!!!1

  • Bill||

    They could pay people to demolish them which would lower unemployment and provide a stimulus to the economy.

    This in turn would create a demand for new houses which would turn the whole housing market around and in turn provide jobs for all the people in home construction and realty, etc.

    Problem solved.

  • ||

    Cut everybody else's welfare, but not mine.

  • brec||

    "And here am me ..." (Start of 2nd para.)

    Can anyone enlighten me as to the appeal of baby talk in a piece such as this?

  • Glen Quagmire||

    You must be THIS beautiful to ride the Quagmire! All right!

  • Max||

    "It will take more than doing nothing...."

    How about writing nothing? Couldn't hurt. Give the old brain a rest, Tim.

  • Max's Mom||

    Max, stop pestering these people. Come up from the basement and lick Mommy's cunny. It always makes you feel better.

  • Your President||

    Remember, kids... none of this is the fault of My Party. Our hands are clean.

  • rhea||

    Let’s face it; the American government does not have the political will to be honest with the American people about our financial condition. The politicians will most likely take the easy way out by printing us into hyper-inflation rather than admit their folly and take the responsible action of implementing Greek-style austerity. Either way, it's not going to be pretty. Expect major social upheaval and unrest throughout the country, if not outright anarchy. At the very least, I expect we'll start seeing some European traditions such as general strikes that will be very disruptive to daily life.

    We help Americans move to Asia for jobs and prosperity. Learn more at http://www.pathtoasia.com

  • Alice Bowie||

    I agree with you.

    However, we DON'T need to have Civil unrest or anarchy.

    If we do nothing, and let people be foreclosed on and let them find a home that they can afford. HOWEVER, if they cannot find a Job or an Apartment because of BAD CREDIT, you can COUNT on civil unrest. Foreclosures should be kept off the credit report or a regulation has to be put in place to protect these people...Unless we are willing to live with Civi unrest.

    The other thing one can do is LOWER priciple value owed on Mortgages. This will allow the current buyer to purchase a home at fair-market value. This will screw the investor. However, the investor is already screwed.

  • ||

    Funny that the Amityville house picture is used.

    http://thecelebritycafe.com/fe.....05-26-2010

  • دردشة||

    thanks

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