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Urgent Stock Market Message

Want to Fix the U.S. Housing Market? Listen to the Gipper

Housing-Market / US Housing Feb 28, 2010 - 04:02 AM GMT

By: Mike_Whitney


Best Financial Markets Analysis ArticleThere is a remedy for the housing crisis. And it doesn't involve an agonizing decade of uncertainty while supply adjusts to demand. All Obama needs to do is to stop artificially propping up the market and let the chips fall where they may. That means the Fed should stop buying mortgage-backed securities to keep long-term interest rates low. That means the congress should not renew the $8,000 first-time homebuyers subsidy. That means the FHA should modify its lending standards so that mortgage applicants have to meet normal criteria for securing a mortgage.

When government stops meddling in the market, housing prices will return to long-term trend and sales will resume.

But doesn't that mean that millions of people will face foreclosure when the current price of their homes dips below the value of their mortgages?

Yes, it does. But there is a flip side to that (awful) prospect, which is this: the areas of the country with the most foreclosures, are also the markets where where sales have picked up the most. That's because--contrary to belief--people are not fools and they know that prices have to come down. When prices fall, buyers appear. The Fed knows this, the Treasury knows this, realtors know this, and Obama knows this.

So, why does the administration continue to meddle?

It's because a surge of foreclosures will put more red ink on banks balance sheets. None of the extraordinary measures the government has taken so far--HAMP, mortgage modifications, loan abatements, subsidies etc--have been designed to help the victims of fraudulent loans and bubblenomics. It's all been for the banks. That should be obvious by now. It's a simple equation: The banks get everything and the people get bupkis.

Consider this: On Tuesday the Census Bureau announced that new home sales in January fell to a "record low" of 309 thousand. This is a sharp decrease from the revised rate of 348 thousand in December. In other words, the nearly $2 trillion the Fed has pumped into housing---via quantitative easing (QE), first-time homebuyer subsidies, $300 billion in Treasury purchases, and $175 billion in Fannie and Freddie debt--has not reversed the downward direction of the market. Prices are still falling, foreclosures are still rising, and supply still far exceeds demand. It's time for the government to back-off and let the market clear.

There are ways to soften the blow for the people who will suffer from foreclosure or the loss of equity. Dean Baker, who was the first economist in the country to spot the bubble in 2002, suggests that foreclosures be mitigated by judges so that people are allowed to stay in their homes as renters at a reduced rate if they agree to do the maintenance. That does not make up for the fact that they were ripped off in a fraudulent mortgage swindle, but there are no pain-free solutions. Propping up the market just extends the misery over a longer period of time. It does not fix the problem.

So, why is it important that the government withdraw its support for the housing market now?

Perhaps, this article which appeared on Bloomberg News on Thursday will explain:
Bloomberg News: "The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.

The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan." (Bloomberg)

Obama "prohibits foreclosures"?

What's next? Will the president stand at the water's edge and try to stop the tide from coming in?

Our befuddled leaders have gone from one extreme to the other; from believing wholeheartedly in the wondrous beauty of the self-regulating market to presidential edicts which ban the business cycle. This is lunacy.

Obama should take a moment and reflect on the words of his hero Ronald Reagan who famously quipped at the 1976 Republican Convention:

"The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help."

For once, the waxy-hair Gipper was right. Obama needs to "stop helping" and let the market correct.

By Mike Whitney


Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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