Last week, we had disastrous reports on the housing market that were precipitated by the $8,000 first time home buyers credit. US existing home sales fell 27.2% and US new home sales fell 12.4% as buyers had moved forward their purchases. RealtyTrac reported that home foreclosures rose 4% in July to 325,229. Housing prices appear to have stabilized as the S&P CaseShiller index rose for June, but that was still under the influence of the tax credit. July/August could be ugly. We are not sure to what level housing sales will eventually gravitate towards, but the adjustment process is stomach churning.
The adjustment process to find that level is ongoing and the housing affordability index is reaching new highs. This is a very helpful development and Robert Shiller believes we may only have another 10% of downside risk in housing prices.
However, there is concern that the process will drag on for some time and that the shadow inventory of housing will swell the number of homes that eventually come on to the market. This would depress prices further and keep the downward spiral active.
This is why new action may be needed.
But not new government handouts.
What we need are incentive based changes to encourage banks to speed up their writedowns of loans and encourage homeowners to not walk away from upside down mortgages.
Here’s a step-by-step program for housing and I discussed it last night on Kudlow Report.
- Banks refinance underwater loans at current LTVs and homeowner does not take (1099d) loss in home value.
- Homeowner gets to refinance at lower interest rates.
- Banks take the loss on the drop in value and take the tax write-off for the loss.
- Banks then take a 50% stake in any resale profits on the home from the lower value of home and get to take this profit tax free.
- Homeowner gets 50% upside from sale of home from new value.
This way, the homeowner gets to stay in the home and has an incentive to keep maintaining it.
The bank takes a hit, but gets upside potential on the home.
Finally, this helps clear the market to a price that will get new buyers motivated to purchase and reduces foreclosures.
It provides incentives for both parties to act. Most importantly, it speeds up the housing correction by encouraging prices to fall to levels that reflect their current value and thereby encourages buyers to step in and act.
Yes, there are tweaks to this to further incent (40 year amortization for underwater loans) to restrictions on selling the home immediately (transferability allowed for labor mobility?). But these 5 steps should be a building block for Congress to help resolve the housing crisis faster and to spur new job growth.
Andrew B. BuschDirector,