RSSMoney Morning Contributing Editor Shah Gilani told us last week that if something isn't done now to fix the U.S. housing market it'll "drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of."
"The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth," said Gilani. "And we can almost immediately execute a simple plan to fix mortgage financing and stabilize U.S. housing prices."
Gilani outlined steps the U.S. government needs to take to resuscitate the U.S. housing market, including unwinding Fannie Mae (OTC: FNMA) and Freddie Mac, making bailed-out banks contribute to a private national pool of mortgage capital, and creating a new ratings agency to assess the creditworthiness of mortgage pools - with a tax on the pools' interest.
He also called for more up-front money from borrowers, and for a tax-incentive program to stimulate buyer demand and stabilize the housing market.
"The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth," said Gilani. "And we can almost immediately execute a simple plan to fix mortgage financing and stabilize U.S. housing prices."
Gilani outlined steps the U.S. government needs to take to resuscitate the U.S. housing market, including unwinding Fannie Mae (OTC: FNMA) and Freddie Mac, making bailed-out banks contribute to a private national pool of mortgage capital, and creating a new ratings agency to assess the creditworthiness of mortgage pools - with a tax on the pools' interest.
He also called for more up-front money from borrowers, and for a tax-incentive program to stimulate buyer demand and stabilize the housing market.
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"Without these actions, the financial ugliness we're experiencing right now could literally last for decades," said Gilani.
Readers responded with a wide range of praise and criticism of Gilani's plan to fix the U.S. housing market. He addressed the following comments to further explain why his plan could salvage the housing market and the U.S. economic recovery.
Mr. Gilani, reading through your plan, it gave me a headache. If it's too complex for the average American, it's too complex. After all didn't complexity get us into the housing mess in the first place? How will complexity get us out? We've been tinkering with the housing market ever since the collapse and nothing has worked.
Shah Gilani: There are a few "moving parts" to my plan, but I don't believe it's too complex. It essentially supports a financing component and a price-stabilization mechanism based on tax credits.
As for your insight that too much manipulation and stimulation caused the problem in the first place, I agree. It's just that sometimes it takes a bit of counter-manipulation to swing the pendulum more to its center.
After decades of trying to increase home ownership and artificially lower mortgage interest rates, it's time to let the free market mark homes down to their actual value. Prices will fall. The homebuilding industry will suffer, possibly for decades. That's the end result of decades of government manipulation. Perhaps we need to rethink the idea of what a home should be and what portion of the economy should be dedicated to homebuilding. Where has stimulation gotten us?
Gilani: I am all for the free market. However, markets are never free. They can't be in a complex econometric model like the one we've set up and live in. In theory, I'd like to see "freer" markets, just not so free that they become a "free-for-all." And with good reason: The truth is that by freeing up banks through deregulation, we fostered the greed factor, which ran unchecked and helped drive us over the cliff. Can we really afford to see a wholesale collapse of housing?
Mr. Gilani, you propose important and necessary steps. But unless the root cause, inflated mark-to-market values for illiquid assets - mortgages, MBSs, Home Equity Line of Credit (HELOC) loans - is addressed, the problem will simply crop up anew. The solution is to make illiquid assets liquid - create a market and require banks, pension funds, and GSEs to use it. Requiring them to sell even 1% of their illiquid assets each year in a supervised market - with capital requirement adjusted up or down based on ratio of balance sheet value to actual sale proceeds - will very quickly solve the current corrupt balance sheet problem and restore confidence in our economy.
Gilani: I do get where you're coming from, Charles. You think we should trust the free market to determine the "mark-to-free-market" (my phrase, not yours... but, hope you like it) value of homes and mortgage-backed securities (MBS) by making banks sell some portion of their inventory into the real world to engender true price discovery. But your plan does have a not-so-free component to your free market. You inherently saw the need for banks to be forced to sell (that's not a free market) and have a "supervised" (by government) valuation methodology and process. Even in the hope that free markets are the answer, less-than-free-market oversight is almost always contemplated. It is either free, or it isn't.
The bottom line: As many readers said, it's about jobs. You are right, of course. But that said, and agreed with: Maybe by fixing the U.S. housing market we can actually save and create some jobs. Is that so crazy?
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Website. Please include your name and hometown with your email.
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Readers responded with a wide range of praise and criticism of Gilani's plan to fix the U.S. housing market. He addressed the following comments to further explain why his plan could salvage the housing market and the U.S. economic recovery.
Mr. Gilani, reading through your plan, it gave me a headache. If it's too complex for the average American, it's too complex. After all didn't complexity get us into the housing mess in the first place? How will complexity get us out? We've been tinkering with the housing market ever since the collapse and nothing has worked.
-- Phil S.
Shah Gilani: There are a few "moving parts" to my plan, but I don't believe it's too complex. It essentially supports a financing component and a price-stabilization mechanism based on tax credits.
As for your insight that too much manipulation and stimulation caused the problem in the first place, I agree. It's just that sometimes it takes a bit of counter-manipulation to swing the pendulum more to its center.
After decades of trying to increase home ownership and artificially lower mortgage interest rates, it's time to let the free market mark homes down to their actual value. Prices will fall. The homebuilding industry will suffer, possibly for decades. That's the end result of decades of government manipulation. Perhaps we need to rethink the idea of what a home should be and what portion of the economy should be dedicated to homebuilding. Where has stimulation gotten us?
-- Patrick
Gilani: I am all for the free market. However, markets are never free. They can't be in a complex econometric model like the one we've set up and live in. In theory, I'd like to see "freer" markets, just not so free that they become a "free-for-all." And with good reason: The truth is that by freeing up banks through deregulation, we fostered the greed factor, which ran unchecked and helped drive us over the cliff. Can we really afford to see a wholesale collapse of housing?
Mr. Gilani, you propose important and necessary steps. But unless the root cause, inflated mark-to-market values for illiquid assets - mortgages, MBSs, Home Equity Line of Credit (HELOC) loans - is addressed, the problem will simply crop up anew. The solution is to make illiquid assets liquid - create a market and require banks, pension funds, and GSEs to use it. Requiring them to sell even 1% of their illiquid assets each year in a supervised market - with capital requirement adjusted up or down based on ratio of balance sheet value to actual sale proceeds - will very quickly solve the current corrupt balance sheet problem and restore confidence in our economy.
-- Charles S.
Gilani: I do get where you're coming from, Charles. You think we should trust the free market to determine the "mark-to-free-market" (my phrase, not yours... but, hope you like it) value of homes and mortgage-backed securities (MBS) by making banks sell some portion of their inventory into the real world to engender true price discovery. But your plan does have a not-so-free component to your free market. You inherently saw the need for banks to be forced to sell (that's not a free market) and have a "supervised" (by government) valuation methodology and process. Even in the hope that free markets are the answer, less-than-free-market oversight is almost always contemplated. It is either free, or it isn't.
The bottom line: As many readers said, it's about jobs. You are right, of course. But that said, and agreed with: Maybe by fixing the U.S. housing market we can actually save and create some jobs. Is that so crazy?
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Website. Please include your name and hometown with your email.
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Tags: fix the US housing market
The plan leaves out the most important element – the consumer. You cannot legislate that they purchase. As long as the job market is soft and the prospect of a layoff looms large people will hold back on a purchase.
A $10,000 tax credit to rope a buyer into a $300,000 purchase is not going to do it for the majority of consumers. What needs doing is for the government to stop pretending it can create productive jobs and let private enterprise get to it.
I redid my mortgage in 2006 at the height of the market. I had no idea we were in a bubble. Owned the house for 20 years and it never did anything in price while my family in New York was reaping the rewards of a healthy market. I call my house the money pit. I totally redid it and went with all the upgrades. My plans were to sell it and move to an area I would of preferred. It was appraised for 255,000.00. I refianced for an interest only loan for 10 years. My payment is at 1041.25 per month. Another 100.00 per month in taxes ad another 157.00 in insurance for a total of 1298.25. In 5 years it will jump an additional 400.00 and something. It will come up to 1700.00 and God only knows what the taxes and insurance will be by then. Houses all around me are being let go and return brings my value down moreso. As of now they say my house is worth about 75,000. I'm stuck. I have not missed any payments. The interest rate is great now and even if I refianced again with a better interest rate it would save money but nobody will because I'm so upside down. In those ten years I would of paid 124,950.00 in interest. The banks should make some money but not to the extent they are. They should lower my principle payment subtracting the interest already paid and provide a good interest rate where they will make there money and then some which in return will help out the economy. At the same time allow people to assume your loan like they did in the 80's. It is crazy I have neighbors living in the home for free and I'm honoring my word but if they don't do something honest people like myself just say the hell with it as well. I have to fight this off every month as I write out my check. The banks have scammed the average American and have placed shackles around our feet. They knew what they were doing and now they need to fix it. Even if they kept my payment as it is now they will have still prohited from me but also have one less problem in the future. I know that won't come to reality though. I've called around now and nobody even wants to talk to you.
I get so sick of hearing everyone talk about how prices need to fall to this amount, or that amount, as though they have some magic formula. The fact is that the cost to build a home has actually increased over the past three years. Builders have cut their margins, that's a fact. And because of that, it is possible to buy a new home today for less than you could have three years ago…even though the cost to build has gone up.
But, the party is now over. Builders and suppliers have drawn the line, and most of them have reduced overhead to the point that they can survive, even at today's anemic production rates. New home are now at a 6.5 month supply, and that based on extremely low sales numbers. Has anyone thought what would happen if new home demand picked up…even a small bit? There would be major supply problems, and prices could escalate dramatically. Yes, people could still buy an existing home for less money, but just like autos, some people will only buy a new home.
We need to start thinking how best to have a HEALTHY housing market! The housing market
In hindsight, John made a bad consumer decision, over spending for his neighborhood, and an interest only loan. He has the amenities he wants (wanted) in the house, but now he is $150,000 underwater with his mortgage. Instead of blaming the banks for making a profit, or the contractors or vendors who renovated his home, the honorable alternative is to find a way out. He can join the thousands who just walk away from the home, which will ruin his credit, or he can get a sideline business going, a second job, or rent out spare rooms, or something creative to pay off the mortgage before it adjusts up higher. Blaming others isn't constructive, and asking the government to help fails to embrace this situation as an opportunity to help himself. Some other self-help ideas; besides finding other sources of income, John would be shocked how much he can save by reducing expenses. Have a garage sale, (people are shocked how
much their junk is worth), quit smoking, buying soda or booze, drop cable (with a new business or job you won't have the time to waste on it), evaluate your life insurance (term really saves a lot), any retirement savings could be applied to reducing your mortgage debt, get a cheaper car, sell scrap metal, barter for items instead of buying them, shop your auto and homeowner's premiums, request a reduced real estate tax assesment, and opt for cheaper vacations. I share this because I was in a similar situation. I started a new part time business, and it helps me with tax deductions, but I'm making more than my regular job. I've painfully paid down a lot of debt. Most importantly, I developed skills and character traits that otherwise may not have been possible. Don't be so proud that you fail to ask God for help. His resources far exceed anything any Gov't or bank can offer you!
lets get real the housing market is a damnable racket and a lot of the players want to get back to the way it was before the crash so they can make easy drug dealer like profits and take us to another crash they do not care they want what they want and have an enornmose lobby. it is extensive .remember articles in major newspapers like debt is good manage your debt and on and on by supossedly expert unbiased writers?