It is my understanding that the $769 billion “stimulus bill” is supposed to create 3.5 million or so jobs, according to President Obama. Where are these jobs going to come from?
Most of the discussion lately has been about foreclosures and how to help some families restructure their loans to the tune of about $275 billion. Restructuring the loans doesn’t create very many jobs.
Very little has been said about how to reduce the inventory of homes that have been sitting in the marketplace and how to jump-start the housing industry, which is capable of creating hundreds of thousands of jobs in construction, mortgage lending, title insurance, legal work and so on.
It was reported in the Wall Street Journal on Feb. 19 that housing starts in January “plunged to their lowest level in fifty years” and have set record lows for the past three months. No surprise here! It’s the existing housing inventory that has created the problem.
So what has Congress done? After talking about a $15,000 tax credit for anyone buying a home (new or a re-sale) lawmakers “compromised” with an $8,000 tax credit for first-time homebuyers and forgave the repayment of the previous $7,500 loan program that required repayment over time. What were they thinking? First of all, first-time homebuyers generally qualify for starter homes, if they qualify at all. Will an $8,000 tax credit remove the inventory in place for homes that are priced higher than starter homes? It’s highly doubtful.
Although Virginia isn’t in the same high foreclosure boat as states such as California, Nevada, Arizona and Florida, the market for homes in the Richmond MSA above $300,000 is close to a standstill. Let me give you a real-life example of what’s happening.
I know a couple that would like to downsize from a 2,800-square-foot house to a 1,650-square-foot condo unit in a new development. Their house has been on the market since October, and they have a contract on the condo, subject to the sale of their house. The Realtor constantly tells this couple that they are having more activity on their house than anyone in the neighborhood. The Realtor also says the house is properly priced and is in better condition than almost all of the competitive properties. But there hasn’t been a single offer on the property. Buyers are simply paralyzed, and they have been waiting for the government to do something or to see a change in the economy.
Although no one can guarantee the market would have taken off if the proposed $15,000 tax credit had survived, I believe that there would be more activity in the marketplace, if for no other reason than the psychological lift it would have provided the industry and prospective buyers.
Let’s take the example above. If the $15,000 tax credit were in place, it might be enough of an incentive for buyers to become active again. The seller gets to move, the buyer and the seller get tax credits, and the developer of the condo gets to remove a unit from inventory. If enough units are sold, the developer can move on to the next phase of the development, which creates jobs. These are not “pork”-related jobs. These are market-driven jobs that would be boosted by a government shot in the arm. A part of the $15,000 tax credit could be seen as an investment, because the government would receive payroll tax dollars for every job created, and the state would receive badly needed revenue as well.
If a so-called stimulus is going to work, there needs to be a stimulus component in the package, and that’s why Congress and the president have so far flunked Economics 101.
Brian Glass is a senior vice president at the commercial brokerage Grubb & Ellis | Harrison & Bates. The views expressed here are his and do not represent those of his firm or Richmond BizSense.
I have listened carefully to the debate that has taken place concerning our countries financial crisis. I have come to this from a varied background. I am 54, married, self employed, and responsible for the care of an elderly parent. I have raised and educated my two children. Both of these young men are employed and making their way in this world. I have built my business employing several other families, and have run this successfully for twenty five years. I have invested wisely to this point and have enjoyed a modicum of success. This is now all threatened by the irresponsibility of our government in regard to the oversight of the financial industries. Did no one else think it was a bad idea to lend money to folks with no down payment or means of repayment? Where were the regulators when the advertisements were running at the super bowl and on the television 24-7? Perhaps we all needed another economics lesson.
The decision to stand back and allow it to correct itself was simply more of the same irresponsibility. The financial crisis has its foundation in the fall of residential real estate prices. This is a simple recognition. The continued fall of these prices has less to do at this point with foreclosure than with fear and apprehension concerning where our economy is heading given the lack of responsible governance. This has grown past a simple recession into a melt down of the economic system. Simple loans for businesses to cover payroll and accounts receivables are unavailable at terms that are safe or affordable. Business has recognized that products produced and offered cannot be sold at a profit. They are eliminating workers as a result. Families have ceased the consideration of a new automobile, home, vacation, or most anything beyond gasoline and groceries. I have lived and worked through four of these economic recessions at this point. Each of them catches us anew with surprise. In each of these recessions real estate is the first economic class to be effected. It has always been the first to recover. When we allow housing to recover first it sets in place an economic tidal wave that affects industries from forest products to information technology. It employs highly skilled as well as unskilled labor. It provides a backstop to the existing housing base anchoring the values and tax base. It requires further infrastructure investment in roads, schools, fire departments, utility, and government, that creates waves of ongoing economic activity.
I recently read Stephen Slivinki’s article in Region Focus the quarterly magazine for the Federal Reserve Bank of Richmond. His premise is that that perhaps we have over invested in housing. I have become truly concerned. We are clearly failing to understand the importance of this dynamic economic engine. Our families use their home in a variety of ways. First and most importantly they invest their discretionary income in the community that they reside in. The home provides confidence and stability to the family. The membership in the community fosters participation in churches, schools, museums, symphonies, community groups and local stores and services. They use their home as a financial anchor. The homes equity has always been the first thing to protect. Home equity is used as a tool to finance home improvement, auto purchases, education expenses and a myriad of other important reasons. When times like this come along home equity is frequently used as an important small business funding mechanism. As we age this important asset becomes a means for funding retirement and ultimately the start of a new generations beginning in life. Do we need sound principles underlying our mortgage under righting? Absolutely. They were well considered and carefully organized when I purchased my home. The fault for this crisis lies with the SEC and Wall street. With out unregulated money chasing unrealistic opportunity the under righting requirements that were established years ago would not have been abandoned. The bubble would not have occurred and the foreclosures would not have started to balloon in the first place. When you see families leaving their homes in the numbers we are witnessing today it is because the structures within the economic system of the community have failed them. These structures are there to protect all of us. This is what needs attention.
Sincerely,
Jim Walker
Brian and Jim make sound points but may be focusing a bit too much on the mechanics of the housing industry and not the 400 lb monster sitting in the corner. Housing pricies soared beyond any previous level on the Case-Shiller Home -price index in 2007. This important index is a three month moving average that measures increases in home prices relative to the consumer price index. In the past nine months the index has declined substantially. Richmond is not one of the areas measured.
The index tells us if housing prices are keeping pace with inflation. In this bubble, the index measured inflation failiing to keep pace with housing. One or the other had to change. Traditionally, inflation would increase and housing would retain its gains. But in the zeal to discard the lessons of history the Federal Government, both Political Parties, the investment houses, the banks and the insurance companies pumped enought borrowed money into housing to create an unprecedented increase in housing values. Yet inflation of other general prices failed to keep pace. The primary reason was the money was borrowed. To really get inflation going you have to increase the supply of money.
All across households are being created and dispanded. There are births requiring more space and deaths and retirement requiring less. Every day, every hour there is buying and selling in the residential housing business. That has not stopped. What has stopped is artificial wealth. No longer is the system creating money to be used to buy housing. Without that money 10% or so of the population that was buying houses will no longer be. The party is over. The train has left the station. The music has stopped.
We have more houses than buyers. Brian remembers the days in the early 1990′s when there were more shopping centers than shoppers and office space than tenants. Too much inventory. has a depressing effect on market prices. Building declined, inventory cleared, prices rose. Owners and developers who speculated and lost dropped by the wayside and new entreprenures too their places.
Inventory is liquidated when the price falls far enough for buyers to purchase the property. In Housing this occurs when the price of the home falls below what it cost to build it (excluding the land). Those houses are held and then resold. Many times they are leased until the inventory is absorbed and demand returns. It has been this way since the Great Depression (the real one – not the TV version). This clearing mechanism in not good for builders. It is not good for all levels of Governments. It is not good for home owners who see their values temporariliy erode. Home prices in America are still in an upward trend from the 1930′s.
Delaying the clearing of inventory induces a correction the opposit way. this correction involves the creation of hyper-inflation to rapidly bring cost of living in line with housing prices. Then homeowners who could not pay the mortgage get a wage increase of less valuable paper to pay back the mortgage holders with less valuable paper. This is the time tested method of almost all governments since recorded history. Debase the currency and you have more money to spend. Rising prices and wages lift spirits.
So Brian and Jim should not worry about tax credits and other gimmicks. Just sit back and wait for the inflation tide to lift all boats. When you increase the money supply by printing money, inflation follows. It doesn’t take very long. Samuelson – Economics 101
Both Jim and Tom have good points. I agree with Jim, there really is an oversupply, which needs correction, and in my mind was caused by the dot com collapse which caused people to invest in something that “never” goes down in pricing… housing. The early success of flippers caused a wholesale influx of buyers, with a culmination in 2007 with almost 50% of new home sales going to 2nd homebuyers. This will need to be absorbed.
However, the real value of a homes it’s true replacement value, and in many cases pricing of exixsing homes has gone well below that, and artificially dragging down the value of homes that are not for sale. Homes being under valued also create the situation where if a homeowner is “under water”, they’re stuck. The $15k credit would help that situation both by moving the market more, by letting the homeowner have a better chance to sell and reduce a loss and move to a more affordable home, again, with the $15k credit helping motivate. It’s really a $30k spread.
Now if that same home went to the bank it would automatically lose much more in value, and at the same time is causing the securities which are bundled mortgages to be valued at maybe 30 to 60% of their value, even though perhaps 92% of the loans are performing.
It’s important that the $15k credit is of limited time so it does not create another bubble, just helps the market get back to an even keel. I think the multiplicity of the stimulus to homeowners, banks getting freed of unsustainable loans, wall street getting toxic assets sorted, jobs in construction and real estate having meaning again, added retail from the change of homes, would for roughly 38 billion, save 2-3 times that in added “book” value for mortgages and home values.
And the credit would be fair to even a homeowner that isn’t selling, as the value of his asset would stabilize and start working back up with inflation.