Thinking Big 2: Fixing the Housing Crisis
James Dugan
Some rights reserved by AR McLin The idea of thinking big in Washington is a dirty phrase. In fact, you can recover your political career in a sex scandal quicker than you could in presenting or supporting a government role in fixing the recession. The market is not fixing itself and the American Re-Investment act is just staving off the real numbers of unemployment. The American consumer has stopped spending for many reasons but mostly because of the housing crisis in the nation. Their homes are worth less today than they were five years ago.
So to get the American economy growing again is to get the American housing market moving. Until people feel comfortable absorbing debt and extending their credit limits, American companies will not create jobs. Even if we buy everything here in America and support our unions and the American worker, companies can not expand because the largest investment for the majority of Americans, their homes, is losing value.
I hate the housing crisis. I believe we created this bubble and we must just let the people who edged their bets on credit lines and refinancing take the loss. But it has gone on too long. The people are not only losing their homes, but are cutting back on spending. The economy sputters at no growth while people continue to lose value on their homes. I believe in fiscal discipline and staying away from credit cards, but if the government doesn’t act to save the middle class like they did the banks, then the idea of a home as a symbol of American prosperity and stability will be lost.
That leaves us with a difficult decision that will take a government type bailout and the faith of banks in the nation to lend and take losses in the short run. We can’t rely on China or Brazil for our growth, increase in jobs, or maintaining our democratic lifestyle. We can no longer allow another generation to do worst than their fathers. That will be the third in a row. We must correct the housing market by re-establishing new, realistic values and providing new low interest loans based on them.
So much talk in Washington relies on allowing the market to grow and accepting its spurious personality. But the market has spoken and to continue to pay on loans that are hundred of thousands of dollars above the actual cost of the house, while the loan continues to be backed by the FDIC, and the bank collects interest on a unfair price, is immoral and crushing to the middle and low classes. The very idea that the unfair loans are shrinking the markets, providing less money for business expansion because of tighter credit credentials, thus eliminating the very jobs the middle and lower classes need to survive, screams of reform.
So I propose a reevaluation of home values and based on a realistic assessment, a new loan will be created based on the new value. The bank will take the loss on the difference but the new loan will handily recoup that loss over the span of the loan. The consumers end up spending three times the price of the house with interest anyway. There will be a five-year window and all loans must be fixed at the lowest credit rate or 4%. This will insure the banks will get their money back on the loss, which was already saved with tax payer money, and prevent any predatory lenders looking for quick buck from corrupting the housing industry again.
If we can do this, then housing cost will come down and consumer confidence will return. The federal government will allow the banks to pay back the tax payers for their existence. The new loans will lower the chances for foreclosures and give banks new confidence in lending to customers and businesses. We will have more money to invest and spend and the economy will grow.
It will take faith in reassessing land values at fair market prices. The banks and the people must have a long-term vision of America. But if you want to invest in anything, I think your country, your home, and your future are reasons to think big.
Reader Comments (3)
I am no expert in Real Estate finances by any stretch. But I feel Dugan, that this market may forcably correct itself harshly without any government interference. The boom of the late 90's really drove up the prices of homes beyond what most thought was realistic and it still has not come down yet. People used to tell me "Rates are so low! You need to buy a home!" Yeah, rates were much lower than what my parents were when they bought homes back in the 1980's when it was a rate of 14-18%...but then again the median home prices was under $100,000 as well. Now it is well over $300,000 if you want a decent home up where I live. I remember how irate I got watching shows about people who quit their regular job to become full time house-flippers. Buy low, put some cosmetic improvements into a house and then sell it for 20-40% more than what you bought it for without laying down a dime and comp[letely f' up the market by driving homes above and beyond what they should go for. I just wanted a place to live to call my own. I did not view the housing market like Trump views commercial properties in NYC. It gave a me a bit of perverse glee to see these people lose their shirts in the last few years. With the refinance boom, there were a lot of people that refinanced for easy cash based on the present value of their home who are now upside down b/c their home bvalue plummeted in the last 5 years and are looking to unload. But to whom?
Young adults getting out of college most likely have tens of thousands of dollars in college debt and are working entry level jobs for marginal pay to start off. How are they going to save the 20% before they are 30 to purchase these $400-$500,000 homes that are gluttoning the current market? My feeling is that the the current homeowners are going to take a real hit in the next 8 years when they look to retire and unload their large homes and have to take the best offer available. That is when you will see this market readjust to a more realistic level.
That is what I fear -- I mean that the next generation will not be able to even get a loan for half the price, let alone buy these bloated mansions. There are people making payments on homes, and some for as many as three to four years, that are now selling at 2/3 or half the price. It is too much a loss and foreclosures depreciate markets and stop credit being a viable part of a market economy.
Those who despise credit must get over it. It is fine for college -- but don't go around trying to settle down roots. We have to make sensible home buying a viable option with realistic market prices and low interest. The banks can not always be the big winners.
I accept that in eight years the market will be more realistic but there will be a section of housing that will be untouchable. That is also 8 years of fewer construction jobs and 8 years of people not settling down where a 30 year mortgage would make sense. There would be very little refinancing to help improve a house and fewer contractor and skilled jobs. If we make the push now, we can correct the problem, because the market is being bullied by banks unwilling to realize they pushed prices up, gave inflated credit, blew the price bubble up, and now won't give credit unless it is perfect with two steady jobs. Good luck finding that, now, and probably more in 8 years with attacks against unions and rising health care costs.
I hope the flipper never comes back. That was a perfect example of what carpetbaggers were in the South after the Civil War. But if we are not careful, we will soon the slum lord return. I am not saying let's start it over again, but we can never let the housing market go unregulated ever again, so let's fix it now, and get people believing that their home is the best investment in America again.
Thanks for the comment.
I think we need to think bigger than what you mentioned. If you're a real Democrat, we should be taking these ideas and expanding them to national level. The Philadelphia Inquirer wrote a four-five piece story on the high speed trains of Europe and how many European nations- Spain, France, Portugal, Germany- are banking on this infrastructure and technology to galvanize its economy.
While not as optimistic, I think there is real potential in this tech. We need to start thinking larger when it comes to technology. Yes, it would help to validate these efforts in single states by creating a legitimate high-speed train from Philly to Pitt or NY or Baltimore/D.C. or all three. I'm talking 40 minute trips, not an hour and half to two hours. The trains in Europe have this capacity.
I think a region such as ours should be used as a pilot for such an investment. Unfortunately, we only see quick fixes in this country and are unwilling to invest in something that may take 10+ years to return on the investment. I like the idea, but I think we need to be thinking eve bigger!
Good Lunch!