Hey Obama, it’s about homes, stupidby Mark B. Evans on Sep. 09, 2011, under Politics
During the 1992 presidential election, James Carville coined the now-cliched phrase “It’s the economy, stupid” to sum up what the election was all about.
This go round, the phrase is back, though it’s been modified to “It’s about jobs, stupid.” Which is why President Obama addressed a joint session of Congress yesterday to propose a new jobs stimulus plan, a plan promptly rejected by Republican Congressional leaders and all of the Republican candidates for president.
But high unemployment and a sputtering economy are not what it’s all about.
It’s about homes, stupid.
The burst housing bubble is what got us into this mess and it will be the recovery of the housing market that gets us out. America has a consumer-driven economy and the engine powering that car is the housing market. And for the past four years, the engine has been out of gas.
We have more wealth in our homes than in any other sector of the economy. At the height of the hyper-inflated housing bubble in 2007 American homes were worth an estimated $66 trillion. Two years later, they were worth $49 trillion (It’s back up to about $56 trillion now).
That $17 trillion kick to the groin is what doubled over the American economy. And as any man can tell you, if you take a shot to the nards, it takes a while to recover.
The question for the President and the Congress is: Can they do anything to help speed the recovery?
Liberal economists say yes, conservative economists say no. But all of the economists agree that no amount of jobs stimuli will have much effect on the economy until imbalances in the housing market are resolved.
There are four main problems keeping the housing market from recovering:
• Millions of foreclosed homes and millions more in the process of foreclosure. In order to get these assets off their books, banks have been increasingly willing to accept short sales – selling homes for less than what is owed. Short sales are a drag on home values.
• Millions of excess housing inventory. There is an enormous quantity of vacant homes, especially in the states hit hardest by the burst housing bubble – Arizona, Nevada and Florida. Other parts of the country may recover faster than these states because the excess inventory has to be absorbed before homebuilders start building again. Excess supply is a drag on home values.
• Millions of homeowners “underwater” on their home loans. Many Americans refinanced their loans in the bubble years and the loss of home value has them owing more than what they can sell the house for. This is preventing homeowners from taking advantage of historically low mortgage rates and traps owners in their homes. If they live in Arizona but could get a better job in Texas, they can’t move because they can’t sell their home. A workforce that’s immobile is a drag on home values because it holds down demand.
• Millions of homes stuck between 80 percent and 100 of Loan to Value ratio. Most lenders won’t refinance a home unless it has at least 20 percent equity (an LTV of 80 or below) and they won’t loan money for a home purchase contingent on an existing home sale unless there is enough equity in the sale home to equal a 20 percent down payment on the new home. The loss of equity, even if a home loan is “above water” is preventing millions of people from selling their homes or buying news ones. That, too, is a drag on demand.
Conservatives want the market to play out and let these problems resolve themselves. But the problem with that is it may take anywhere from two to five years. Which means the economy won’t recover for two-to-five years, no matter how many tax cuts or road building bills Congress passes.
That’s why liberals want something done about the housing market. But they’re divided about what to do because of the law of unintended consequences.
Any injection of federal cash into mortgages to prevent foreclosures alters the lending market and any injection of federal money into the housing market creates artificial demand to drive up prices that will have to be suppressed later by the extraction of that cash through the sale of the excess inventory. It was the federal government’s “easy money” home lending policies that helped blow up the bubble in the first place, so any attempt to blow it up again could end up making things worse.
So it’s damned if they do and damned if they don’t.
The fallback solution has been to create an artificial supply of jobs through federal spending. The thinking is that by reducing the unemployment rate it will halt the foreclosure rate and buy time for the slow increase in the economy and the population to absorb the excess housing inventory and get home values moving up again.
But that will only work if the federal spending creates millions of jobs to offset the 7 million or so lost in the recession.
Paltry payroll tax breaks and few hundred billion for some road projects ain’t going to get it done.
Which brings Obama back to, “It’s about homes, stupid.”
Find a solution to the housing market in the next year, and Obama gets to be president again.
Don’t and he won’t.