Most economists agree that the bursting of the housing bubble is the root cause of our nation’s financial and economic problems. What they don’t agree on is how to fix the problem. I believe I have a simple solution that will quickly reverse our nation’s financial and economic free fall.
Most economists agree that the bursting of the housing bubble is the root cause of our nation’s financial and economic problems. What they don’t agree on is how to fix the problem. I believe I have a simple solution that will quickly reverse our nation’s financial and economic free fall.
Before I explain my idea, let me be clear about the magnitude of the problem facing our nation ... it is epic in scale. Since the bursting of the housing bubble in the summer of 2006, the U.S. stock market has lost approximately $10 trillion, based on the Wilshire 5000 Index, and U.S. homeowners have lost approximately $6 trillion in home equity, based on the Case-Shiller estimate of a 30% drop in home prices thus far . I believe the stock market will take care of itself if the current depression in the housing market can be corrected.
The chart below shows the carnage in new home prices in the U.S. since the peak in the spring of 2007.
1/2000 3/2007 1/2009
(In 2009$) (In 2009$) (In 2009$)
Median $207,365 $276,661 +33.4% $201,000 (27.3%)
Mean $254,039 $347,037 +36.6% $234,600 (32.4%)
* Data from the U.S Census Bureau –Median and Average Sales Price of New Homes.
Adjusted for inflation, both median and mean new home prices are already below where they were in January of 2000 (the same patter holds for existing homes prices). This would be bad enough even if Americans had been prudent with their personal finances ... unfortunately, many were not. The chart below shows total U.S. household real estate values, mortgages and home equity during roughly the same time period.
In Trillions of Dollars (In 2008$) (% change is after inflation)
12/99 12/06 3rd Qtr '08
%Chg. %Chg.
HH R.E Values $13,489 $23,368 +73.2% $19,101 (18.3%)
HH Mortgages $5,730 $10,532 +83.8% $10,571 +0.4%
HH Equity $7,759 $12,836 +65.4% $8,530 (33.5%)
* Data from the Federal Reserve Flow of Funds Accounts.
The Federal Reserve data in the 3rd quarter of 2008 indicate U.S. households have already lost 1/3rd of total home equity in less than two years on an 18.3% drop in prices! As indicated above, Case-Shiller data show a 30% drop in prices thus far, which correlates to an equity loss of $ 6 trillion. Many economists are forecasting an additional drop of 25% in 2009. I do not believe homeowners or our financial institutions can withstand such a loss.
To stop the slide in home prices, the federal government needs to do two things. First, stop foreclosures. Second, increase demand in the economy. I believe I have a way to accomplish both quickly and efficiently, without causing moral hazard.
There are approximately 75 million owner occupied houses and condominiums in the U.S. with mortgages. Of these, approximately 55 million have a mortgage, with an average mortgage of around $190,000. If we assume the average 30 year mortgage in 6%, then the average household has an annual mortgage payment of about $12,000, or $1,000 per month. The total annual mortgage payment on 55 million households in the U.S. with an average mortgage balance of $190,000 would be approximately $660 billion, or $55 billion per month.
When looked at in this light, the housing problem does not seem so overwhelming. After all, Congress has already agreed to a $750 billion bail out of the nation’s banks and financial institutions, and President Obama is asking for an "escrow" account of $750 billion more for the banks and financials in the 2010 budget "just in case".
So what is my plan to fix the housing depression? Simple, covert all existing mortgages to 30 year mortgages with 4% rates for the 1st five years, 5% rate for the second five years, and 5.25% rate for the remainder of the mortgage. This would apply to all owner occupied houses and condominiums with an existing mortgage. Second homes, rental properties and investment properties are excluded. The terms would also apply to all new and existing homes sold in 2009 and 2010.
This will reduce the average monthly payment on a $190,000 mortgage from $1,000 a month ($12,000 per year) to $675 per month ($8,100 per year). This will save the average homeowner $325 per month ($3,900 per year). The net savings to U.S. homeowners with a mortgage will be $17.9 billion per month, or $214.5 billion per year. It will also cost U.S. taxpayers approximately $1.08 trillion over the next five years.
This program would dramatically reduce the number of foreclosures and begin the orderly sell off of the oversupply of new and existing homes. It would also provide a much needed stimulus to 55 million households equal to approximately 1.5% of GDP.
This program make look like it costs lot of money, but considering the fact that the U.S. has already spent $1 trillion on the wars in Iraq and Afghanistan since 2001, and considering the fact that $18 trillion in U.S. wealth has evaporated in the past two years, the concept looks pretty cheap to me.
What do you think?
rok for dean