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Fratto: Chicken Soup For The Housing Soul

There's no cure for the common cold except to get in bed, rest, and take the time needed for the body fight the virus.

Sure, chicken soup is great. Take your vitamin C...maybe an antihistamine to get you through the night. But at the end of the day, it's rest, and time, to battle through it. In the meantime, grab the Kleenex and suffer through it.

That's where we are in the Great Housing Correction: treating symptoms on the margins to get us through the night while the nation's economic body battles the virus. And it will defeat the virus, but only with rest and time.

The "cure" for the housing virus is so far outside the bounds of our political and economic sensibilities that we can take it off the table. A real cure would require spending nearly an order of magnitude more than what was announced yesterday, and it would involve bailing out the very worst actors in this drama.

A friend of mine owns a large plumbing supply firm in South Florida. A few weeks ago he went to check on some of his products in a condo development that had 50 occupied units out of 750, and many of those current occupants are having trouble making their mortgage payments. There is no sensible federal plan to save that non-performing asset, nor should there be. But from an economic standpoint, there is no correction in housing until these kinds of assets begin to perform. And it will take some time before that happens.

What ails housing is an over supply of new or recently-constructed homes. Full stop. Home prices will not stabilize until we work down this overhang. Tony Crescenzi rightly pointed out in his blog yesterday, that we're making some progress there as new home construction has fallen dramatically over the past 18 months. Slower residential construction combined with an increasing adult workforce will over time help to align demand and supply. And maybe those young families who crave a new home of their own — and who really have been "playing by the rules" — will finally be able to discover housing prices they can afford.

In the mean time, it's a regimen of chicken soup symptom treatments — keep mortgage rates relatively low; try to limit foreclosures among the very limited number of politically palatable "deserving" homeowners; and hope that the stimulus will bring forward aggregate growth to speed things along (I'm doubtful on that.)

The $75 billion announced by President Obama sounds big and bold, but I'll be shocked if we ever see half that amount go out the door. (Remember the $300 billion program touted by Rep. Frank and Sen. Dodd last year?). If we limit assistance to the politically palatable, we just don't get to the numbers needed to have a big impact. Take out "speculators", non-conforming loans, those more than 5% underwater, vacation homes, the complicating factor of second mortgages, and who are you left with? Not many.

    • Blair: Obama Housing Plan Will Have Impact in March
    • Watch - Lockhart: New Mortgage Efforts Are More Aggressive

One final point: remember also the trickiest problem in all of the foreclosure mitigation efforts: they're voluntary. The most vexing reality is that homeowners in trouble with their mortgage payments tend to hide from the banks and servicers who (begrudgingly) want to help them. They are frustratingly difficult to bring in. They ignore the mail. They don't answer their phones. And they revert to a head-in-the-sand strategy. It's hard to help people who are afraid of being helped.

Over the next 18 months we will have cleared the decks of the sub-prime mess as the vast majority of those mortgage-holders will have been hit with the shock of their adjusted rates. They will either scrape to make their payments, foreclose, or find some way to refinance. We will see sustained affordability and some increase in the availability of mortgage finance. We can also expect aggregate demand to recover over that time period. And the natural market dynamic of reduced residential construction will help to better align supply.

Until then, try the soup.

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Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.