Let’s hope their cure is not worse than the disease
Politicians feel homebuyers pain -- after helping to cause it
We trim, blend, and append four 2008 articles on the state of housing worldwide and proposed ways to solve the current and recurring crisis: (1) “Government Announces Plan to Free up Billions of Dollars at Fannie, Freddie” by the Associated Press on Mar 19; (2) “Late payments on consumer loans at 16-year high” by Jonathan Stempel of Reuters on April 3; (3) “Home sales index hits record low” from Reuters on April 8; and (4) “Housing Roils Spain’s Economy as Zapatero starts Second Term” by Lisa Abend of The Christian Science Monitor on April 11.
by Jeffery J. Smith, April 2008AP: Fannie Mae and Freddie Mac together hold or guarantee around $4.9 trillion in home-loan debt. Decades ago, Congress created the corporations to buy small, less profitable mortgages and thus encourage banks to lend to less well-off families. In recent years, both companies were in multibillion-dollar accounting scandals. Last quarter they posted multibillion-dollar losses and expect further red ink this year. In March politicians loosened the lid on the two companies.
* First Congress increased its cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750. How many poor people buy homes for $400,000, never mind almost three quarters of a million?
* Second, as a reward for filing their financial statements on time as required by law, our elected representatives freed Fannie and Freddie of a combined $1.5 trillion cap on their mortgage-investment holdings.
* Third, politicians reduced by a third the amount of cash that F&F must keep on reserve, from nearly $20 billion down to about $13 billion, freeing up more billions to buy inflated and un-repayable mortgages.
JJS: The financial press says it’s to help homeowners refinance mortgages on the brink of default. But the bailout would help lenders as much if not more. Borrowers could be given cash directly.
Stempel: Credit problems once concentrated in mortgages spread into other forms of debt. More Americans have fallen behind on loans for cars, credit cards, and homes than at any time in this cycle. The percentage of consumer loans at least 30 days past due rose to 2.65% in the fourth quarter, the highest since a 2.75 percent rate in 1992 Q1. Sixteen years fits within the 18-year land-price cycle which drives the larger business cycle.
Financial companies worldwide have written off more than $200 billion related to subprime mortgages and other debt, and analysts expect tens of billions of dollars of additional write-downs for the winter quarter.
Repaying debt is getting harder; in March the economy shed 80,000 jobs, boosting the unemployment rate to over 5%. Minus income, people can’t buy as much, so companies will let go more workers. Thus the economy keeps spiraling downward until a bottom is reached.
Reuters: Pending sales of previously owned homes fell to the lowest level on record in February to 84.6, the lowest reading since the tracking of this data began in 2001.
JJS: These dynamics are happening in many countries.
Abend: Years of unprecedented growth have transformed the once-backward Spanish economy into the eighth-largest in the world.
As in other European Union countries, in the past year Spain has seen unemployment rates increase and food and other prices rise precipitously.
Because widespread real estate speculation led to wildly inflated housing prices and the housing industry accounts for more than 9% of the country's gross domestic product -- more than double that of many other economically advanced nations -- the housing slowdown is hitting the Spanish hard.
In 2007, 32,000 real estate agencies -- 40% of the country's total -- closed their doors. Brickmaking and other construction-supply companies are cutting back on workers. And many developers have simply abandoned half-finished apartment buildings, leaving the buyers who have paid for new housing wondering if they'll ever be able to take possession.
To soften the blow, newly reelected Spanish Prime Minister José Luis Rodríguez Zapatero is issuing €400 tax rebates, creating jobs for unemployed construction workers, and lengthening mortgage terms.
But the tax rebate will only help for one trimester. And extending mortgage terms is going to impede access to new credit, since banks won’t be interested.
It is likely that the worst is still to come; 2009 is the year the downturn spreads to other industries. Spain won’t to touch bottom until 2010.
JJS: What would smooth out the business cycle altogether? Take the profit out of mere absentee ownership of land: tax land values. To make that public collection fair and affordable, also de-tax buildings, businesses, and other goods.
Any time a jurisdiction has taxed land, it has lowered the price of land. California Irrigation Districts did that about a century ago; what worked then can work now. Once the price falls far enough, then home-seekers can start buying again and builders can start building again.
How to protect lenders? What for? They're rich enough to weather any storm, especially one they precipitated, without a bailout.
How to protect present mortgage payers? Make anyone trying to foreclose on them immediately liable for present taxes, expected taxes, and any taxes in arrears.
And use some of the raised revenue to pay residents a dividend, somewhat similar to what Aspen CO does. Families could use the funds to fight the inflating cost of living. Borrowers on the cusp of default could make their mortgage payments or choose to move and spend the dividend on more affordable housing.
Sharing the value of land is fair; it's we, the public, who create it. Land value depends on location, location, location. And the value of location depends on natural amenities like good views or deep harbors and public investment in infrastructure, parks, schools, police patrols, etc.
It's fair for the public to recover the value it creates. And doing so works to get residents out of the housing crisis, this time and forever.
Jeffery J. Smith runs the Forum on Geonomics.
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