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By conventional wisdom, there are myriad arguments as to how to fix the real estate market, and by extension, the U.S. economy. Essentially, they boil down to two options:
- Throw massive amounts of fiscal and monetary stimuli at the economy in classic Keynesian fashion
- Do nothing
Although many economists insist letting the free market correct itself without the skewing influence of artificial factors is the most reliable method to re-establish equilibrium, political considerations will not allow the government to seriously consider the latter. As free-market advocate Milton Friedman once said, "Hell hath no fury like a bureaucrat scorned". Wise or unwise, effective or otherwise, politicians fear the consequences of their own unemployment if they appear to sit on their hands during a crisis.
Governmental intervention
The government has tinkered with the real estate market in passive-aggressive fashion. Mortgage rates have been kept artificially low for almost a decade. 30-year fixed rates have been below 7% since mid-2002 and have trended downward for almost twenty years. Three recessions, two major asset bubble explosions and the worst economy since the Great Depression have prompted massive government intervention, particularly within the last 3 1/2 years. By this report, up to three trillion dollars were printed between 2008 and 2010 alone. As the monetary base graph at the bottom of this page shows, money in circulation spiked to levels previous unheard of, due to numerous, massive stimulus programs: over five times the levels seen during the Great Depression. And yet, despite machinations of historic proportions, U.S. GDP grew at a tepid 2.8% annual rate during the fourth quarter of 2011, and remains at a pivot point for a potential downward trend.
The primary variable in the equation remains the health of the real estate market. Housing prices continued to fall in 2011, down 4.7% nationally. Although a slower pace of decline than in recent years, millions of foreclosures remain in the system, further depressing prices. Few experts anticipate a turnaround in 2012.
Effective stimulation of the real estate market
In point of fact, it is likely far too late to effect a serious reversal of strategy. With previous efforts largely unsuccessful and budget deficits rampant throughout the world's economic "ecosystem", the notion — much less the appetite — to do anything significant at this point would create the appearance of a collective and terminal case of non compos mentis.
And yet, one solution which never appeared to be given consideration would have stemmed the tide of foreclosures, thwarted numerous bank failures, helped to restore consumer confidence and reversed many negative trend lines in one massive fell swoop: the United States could have obtained its real estate license and become both buyer and seller of residential real estate.
Your objection is duly noted. The government is not in the business of owning residential real estate. On the other hand, the same could be said for its stake in banks, automobile manufacturers and insurance companies. Furthermore, ownership in those entities is via an intangible asset: preferred stock. In bankruptcy, if sufficient assets do not exist in liquidation to pay off creditors, preferred stock has no value. Real estate, despite the historic declines, will never become worthless, and has the long-term potential of appreciation.
Public/private partnership
Perhaps the government purchases foreclosed real estate from financial institutions at its appraised value, or employs the same loss-share strategy utilized in FDIC-assisted acquisitions by splitting the loss 80/20 with the foreclosing entity. The methodology would have to be reasoned and balanced in its approach. Either way, the lender would take far less of a write-down, the government would buy and hold real estate until the overall health of the markets improves, and as a result, perhaps millions fewer fire-sale listings would occur. With that many fewer properties driving down comparable prices, the net effect would be a stabilization of values.
Benefits
The benefits of such a strategy would be significant:
- Instead of one-time efforts to light the economic fuse via tax breaks, rebates and artificial interest rates, it would directly attack the problem itself
- The government could rent out the properties, defraying holding costs or even generating a profit due to the strong rental market
- Thousands of property management jobs would be created
- Inventory would be substantially reduced, accelerating the return to supply and demand equilibrium
- Values of homes nationwide would stabilize, with appreciation right around the corner
- Inventory could be released to the market place strategically, particularly during strong buyers' markets to maximize returns on investment as well as smoothing out boom/bust cycles
- The stability of the financial system, along with consumer confidence, would be restored
Summary
As stated earlier, it is too late. The government has already thrown historic levels of money at the symptoms in lieu of the root cause, with very little success. However, as philosopher/humanist George Santayana once famously said, "Those who do not learn from history are doomed to repeat it". The next time the real estate bubble begins to form, Uncle Sam should to eschew his welfare mentality and get into the property management business. He may not be very bright, but he'll make a decent neighbor.
Sources:
- Reuters.com (accessed on 2/11/12)
- Realtytrac.com (accessed on 2/11/12)
- Zillow.com (accessed on 2/11/12)
- ShadowStats.com (accessed on 2/11/12)
- Bea.gov (accessed on 2/11/12)
- WorldPropertyChannel.com (accessed on 2/11/12)
- ThinkExist.com (accessed on 2/11/12)
Walter McLaughlin - I am a 47-year old commercial banker living in the Seattle area. I am an avid sports fan, but also greatly enjoy writing satirical, ...
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