Solve housing crisis by letting the prices fall

Aug 25, 2010

Ouzilly, France,

The stock market is rolling over. The Dow went down 133 points yesterday. Gold gained $4.

Stocks went down early in the summer. We thought that was the beginning of the big "second shock" we've been waiting for. But we were wrong. The stock market rebounded.

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But now it is back at its July lows...and appears ready to keep going down.

Why? Because small investors are leaving the stock market. And large investors are beginning to realize that there is no real recovery taking place.

"Worries about US recovery deepen," says a headline in the Financial Times.

Not here! Not at the Daily Reckoning headquarters. We're not worried about the recovery. Because there is none.

None of the key components of recovery -- housing, jobs, or consumer spending - suggest that the economy is returning to its pre-recession habits.

This from Bloomberg:

"Sales of existing houses plunged by a record 27 percent in July as the effects of a government tax credit waned, showing a lack of jobs threatens to undermine the U.S. economic recovery."

"Purchases plummeted to a 3.83 million annual pace, the lowest in a decade of record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. Demand for single-family houses dropped to a 15- year low and the number of homes on the market swelled."

"Today's data do not bode well for home prices," said Michelle Meyer, a senior economist at BofA Merrill Lynch Global Research in New York. "There is a decent chance we reach a new bottom for home prices. There's going to be a prolonged, painful drop."

Record Low

The pace of existing home sales is the slowest since comparable records began in 1999. The agents' group revised the June sales figure down to 5.26 million from a previously reported 5.37 million.

Economists projected sales would fall 13 percent. Estimates in the Bloomberg survey of 74 economists ranged from 3.96 million to 5.3 million. Previously owned homes make up about 90 percent of the market.

Purchases of single-family homes also dropped 27 percent, the biggest one-month decrease in data going back to 1968. July's 3.37 million annual rate was the lowest since May 1995."

But fear not, Dear Reader, the feds are on the case. As usual, they are making things worse. The obvious problem in the housing market is that there are too many houses and too much mortgage debt. And the obvious solution is to clear the market by allowing prices to fall and let the debt wash itself out.

Instead, the feds are trying to prevent the market from clearing. Bloomberg continues:

"To help prop up the market, the Obama administration will offer $1 billion in zero-interest loans to help homeowners who've lost income avoid foreclosure as part of $3 billion in additional aid targeting economically distressed areas.

The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers "in hard hit local areas" to make mortgage, tax and insurance payments for as long as two years, according to an Aug. 11 statement. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement.

That's right. What a plan! Do you have too much mortgage debt? Heck, the feds will lend you more money!

*** Too bad Thomas Friedman has stopped writing about the economy. We could use a good laugh this morning. Chilly winds are blowing across this part of France. The children have all gone. The sun is low and cool. It's quiet here, and a bit sad.

But Friedman has moved on to giving bad advice on other subjects.

So, this morning we turn to Bob Burnett, "retired Silicon Valley executive." Mr. Burnett is writing on a site that we believe is part of the Huffington Post. His photo shows a man who seems affable. At least, he's smiling. The edges of his mouth curl up, revealing the incipient insanity of the self-assured. He knows what he knows; too bad that what he knows isn't so.

We smiled too when we read his explanation for how come the US lacks jobs. He blames "conservative economic ideology" that took hold under the Reagan administration.

What? Where has this fellow been? It was under the Reagan administration that the last trace of conservative economic ideology disappeared. Reagan supposedly proved that 'deficits don't matter' and that we can always 'grow our way out of debt.' The Republicans became activists - trying to rearrange the world to suit their imperial ambitions...and pandering to the voters with lower taxes and unfunded giveaway programs. "No voter left behind" was practically their motto. What's conservative about that?

American economic history according to Burnett:

"What followed was a thirty-year period where America's working families were abandoned in favor of the rich. Inequality rose as middle class income and wealth declined. As corporate power increased, unions were systematically undermined. As CEO salaries soared, fewer families earned living wages."

Poor Burnett misses the point of the last 30 years of US economic history. He thinks middle class families declined because they were 'abandoned,' as if they were pets in need of constant care and attention.

(What really happened, in less than 20 words, was that US society became debt-soaked and zombified...thanks to the join efforts of Fate, History, Economic Cycles, the Fed, Economists and Both Political Parties.)

The man has no idea how an economy functions. This you can tell by reading his suggestions to the Obama administration. Everybody without a clue has recommendations. Burnett is no exception.

"America has economic cancer and radical surgery is required. First, there has to be a massive redistribution of income by increasing taxes on both the wealthy and financial institutions (particularly those that were at the heart of 2008's economic meltdown).

Second, there has to be a second stimulus package that not only supports America's teachers and public safety workers but also strengthens the US infrastructure, in general. It's not logical to propose that American businesses provide better jobs without also ensuring that our schools produce workers who can meet employers' needs.

Third, the Federal government has to be involved in economic policy. The last thirty years has demonstrated that it's insane to assume the free market will do this. What we've learned is that the market follows the path of least resistance and dictates economic policy solely based on greed. Creating wealth for a handful of CEOs isn't consistent with the national interest. What are needed now are economic policies that produce decent jobs for average Americans.

The Federal government has to intervene and create the jobs that the greedy, shortsighted private sector hasn't provided."

What a dimwit. Who does he think was making economic policy during the bubble years? What does he think the schools were doing? What does he think the regulators were up to?

Rob the rich to give to the poor? Hey, that should work!

He should run for Congress. Maybe he is running for Congress. It would prove another of our Daily Reckoning Dicta: anyone who wants to be in Congress is not someone you'd want in Congress.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Solve housing crisis by letting the prices fall"


Aug 26, 2010

- To help prop up the market, the Obama administration
-will offer $1 billion in zero-interest loans to help
-homeowners who've lost income avoid foreclosure...

Don't you think more money is being routed to the BANK's who are the ultimate beneficiaries.

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