Posted by Jonathan J. Miller -Tuesday, October 25, 2011, 6:30 AM
Former economic adviser to President Obama Dr. Larry Summers pens an opinion piece in the Washington Post: “How to stabilize the housing market“.
I can’t decide why this was submitted to Wapo since it offers no solutions to stabilize the housing market. Should be renamed “here are some of the problems with the housing market.”
When I first read Summer’s piece I was reminded of Steve Martin’s line on SNL (way back in 1978) where he offers some sage advice on “how to have a million dollars and never pay taxes”:
“First, get a million dollars, then…”
The observations he makes are not new and not insightful beyond basic conventional wisdom. I continue to be amazed at how disconnected the very smart DC econoliteri are from what ails housing.
“First, banks need to lend, then…”
- First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and too rigorous.
- Second, as President Obama stressed in rolling out his jobs plan, there is no reason that those who are current on their GSE-guaranteed mortgages should not be able to take advantage of lower rates.
- Third, stabilizing the housing market will require doing something about the large and growing inventory of foreclosed properties.
- Fourth, there is the issue of preventing foreclosures, the initial focus of housing policy efforts. The right way forward is far from clear.
Here are my observations to these 4 points:
- First – Banks have to be incentivized to lend and ease underwriting standards. The problem with Washington establishment is they have been begging and pleading for banks to lend since the crunch began. THIS WILL NOT WORK. Banks don’t want to, primarily because of the low rate policy held by the Fed. No real spread and tough to equalize the risk between borrowing from the Fed for free and a higher risk proposition with Joe and Mary Homebuyer.
- Second – Yep. Low rates don’t do anyone any good if you can’t get a mortgage. That’s what is happening now. It’s all credit access, baby.
- Third – Five years of elevated REO activity coming. Its not going away and housing won’t recover until it clears the market. Our government resources can’t stop this. They aren’t large enough.
- Fourth – Uh, yes its a complex problem.
NOTICE TO THE WASHINGTON ECONOMIC POLICY ELITE Create economic incentives to lenders and problems slowly go away. Housing won’t recover without credit repair. Incentivize lenders to lend. Asking doesn’t work. Focus on the banks and they will in turn help the consumer. Don’t bypass the banks and go directly to the consumer since that’s not a sustainable fix.
Late into the Depression, 10% down lending returned to the market with government incentives and helped housing recover more quickly. You don’t starve a recession and feed a boom. Washington’s still got it exactly backwards.