Government Intervention in the Housing Market a Fact of Life

Submitted by Rich Toscano on October 4, 2009 - 9:32pm

For a long time I have been discussing, with various degrees of rantiness, government intervention in the housing market. When I first touched on the subject in early 2007, before any bailouts had begun, some of the potential interventions I envisioned seemed kind of far-fetched. By late 2007, as I noted in a Manimal-referencing followup, many of these same interventions were already underway.

And now? The lengths to which the government has gone to prop up the housing market have surpassed even my own cynical expectations. By a long shot.

continue reading at voiceofsandiego.org

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Submitted by greekfire on October 4, 2009 - 10:39pm.

What we are witnessing is a 3-second pin of the People (and free-market Capitalism) by the Government - and socialistic central economic planning.

Submitted by twm on October 5, 2009 - 7:16am.

Rich said "These readers are absolutely right in the sense that the housing market owes much of its quasi-recovery to artificial and, in the long-term, unsustainable factors. Where I part ways with them lies in their belief that this distinction matters all that much in terms of forecasting near-term outcomes."

If you are a prospective buyer now, doesn't the long term matter more than the near-term? Continued government intervention in the near-term may keep prices "stable" in the near-term, but what really matters is where prices and interest rates will be many years from now when you go to sell. The government intervention is actually making that differential worse on both ends (higher than normal prices now, lower than normal real prices later).

Submitted by Rich Toscano on October 5, 2009 - 7:40am.

twm wrote:
Rich said "These readers are absolutely right in the sense that the housing market owes much of its quasi-recovery to artificial and, in the long-term, unsustainable factors. Where I part ways with them lies in their belief that this distinction matters all that much in terms of forecasting near-term outcomes."

If you are a prospective buyer now, doesn't the long term matter more than the near-term? Continued government intervention in the near-term may keep prices "stable" in the near-term, but what really matters is where prices and interest rates will be many years from now when you go to sell. The government intervention is actually making that differential worse on both ends (higher than normal prices now, lower than normal real prices later).

TWM, you say lower than normal REAL prices later, but most would-be buyers are more concerned with nominal prices. I agree completely that lower real prices are on the way. But if they can prop up prices for a couple years with all this nonsense, a lot will have changed by that time in terms of dollar purchasing power, the economy, etc etc etc, and who is to say what will happen to NOMINAL pries at that point.

Rich

Submitted by peterb on October 5, 2009 - 8:25am.

"The point here is that the government has pretty much declared war on the housing bust." RT

Didnt the govt declare war on drugs a while back?

Submitted by twm on October 5, 2009 - 8:29am.

Rich Toscano wrote:

TWM, you say lower than normal REAL prices later, but most would-be buyers are more concerned with nominal prices. I agree completely that lower real prices are on the way. But if they can prop up prices for a couple years with all this nonsense, a lot will have changed by that time in terms of dollar purchasing power, the economy, etc etc etc, and who is to say what will happen to NOMINAL pries at that point.

I'm more concerned with real prices. I know that makes me a very abnormal would-be buyer, but I think that is only because most people just don't think about inflation and are fooled by money illusion. Inflation is especially important to consider over the long term since prices aren't directly comparable otherwise. I fully accept that nominal housing prices could flat line or even rise if we have a bought of inflation, but that inflation would also affect all the other factors in the equation, like the opportunity cost of the down payment, income, and risk levels, and as such I would expect "breaking even" in nominal terms to actually be a bad outcome when inflation is rampant.

Submitted by Rich Toscano on October 5, 2009 - 8:37am.

I actually see exactly it your way TWM... but yes, that makes you (and me) pretty abnormal compared to most would-be buyers. :-)

rich

Submitted by davelj on October 5, 2009 - 9:26am.

twm wrote:
Rich Toscano wrote:

TWM, you say lower than normal REAL prices later, but most would-be buyers are more concerned with nominal prices. I agree completely that lower real prices are on the way. But if they can prop up prices for a couple years with all this nonsense, a lot will have changed by that time in terms of dollar purchasing power, the economy, etc etc etc, and who is to say what will happen to NOMINAL pries at that point.

I'm more concerned with real prices. I know that makes me a very abnormal would-be buyer, but I think that is only because most people just don't think about inflation and are fooled by money illusion. Inflation is especially important to consider over the long term since prices aren't directly comparable otherwise. I fully accept that nominal housing prices could flat line or even rise if we have a bought of inflation, but that inflation would also affect all the other factors in the equation, like the opportunity cost of the down payment, income, and risk levels, and as such I would expect "breaking even" in nominal terms to actually be a bad outcome when inflation is rampant.

This is exactly why, in my opinion, IF you're going to buy right now (or shortly), you need to make sure that you are (1) buying something that's cheaper to own than to rent on a cash flow basis (these properties are out there), (2) employing a (historically low) FIXED-rate mortgage, and (3) planning on holding onto the property for a LONG time (like 15+ years), even if that means renting it out. You're not likely to become the next Sam Zell, but it's very difficult to get hurt financially - regardless of what inflation does in the future - if all three of these factors are in play.

Submitted by Blogstar on October 5, 2009 - 10:02am.

greekfire wrote:
What we are witnessing is a 3-second pin of the People (and free-market Capitalism) by the Government - and socialistic central economic planning.

Makes me wonder when they are going to socialize the remaining households and businesses that are in the black.

Submitted by SD Realtor on October 5, 2009 - 4:05pm.

Rich this is one of the best articles you have written. TWM the main point for you and others like you is that yes you should be concerned with real prices. However because things are not real anymore and valuations are now the result of so much intervention, it may be best to just sit and wait. How long? Not sure. Look there is absolutely no doubt that prices will react once the intervention ceases or when the bond market approaches reality. We all used to sit and compare this market to the 90s market and now we have all found out that we were wrong due to the amount of intervention. So that is okay. The best thing that a wouldbe buyer can do now is recognize it and choose to play the game or wait. Clearly many people can and will wait and that is a good thing. How long? Don't know.

Look everything you said is absolutely true. Some people hold those issues near and dear to the heart and for them, buying now really is not a good thing. All you will do is get aggravated and not enjoy your home. So hang out and check back in later. Other people place a priority on the lifestyle and owning a home and all that stuff. Personally I rent but I wish I would have closed on a home I wanted to buy in 2008 but backed out. Many piggs scoff at the notion of not buying at the bottom. Yet how many announcements of purchases have we seen on this site over the past year. Lots and lots.

There is not a right or wrong answer in general but there is a right or wrong answer for each person.

I like the post by Rich. This is not a bull market and the fundamentals are horrible. However to deny the affects of the prop up is a form of denial that is unrealistic. I don't think anyone denies it is a house of cards. We will see how things go but the govt is not as stupid as we thought.

Submitted by jpinpb on October 5, 2009 - 4:23pm.

It's easy for the house to win, particularly when it's playing w/everyone else's money.

Submitted by sdcellar on October 5, 2009 - 4:29pm.

Timely (?) post, Rich. I think a lot of us, including myself, have been sluggish in coming to grips with this, but all the guvment mumbo jumbo is definitely doing the trick.

If you can't tell, the question mark regarding timeliness isn't really on you. After all, you only brought this up like two years ago. But, I'm sure you noticed the slow uptake on reality, so really, it couldn't have been more timely. Bears will be bears, I guess!

(and sorry, as I seem to recall you're not big on puns...)

Submitted by BuyerWillEPB on October 5, 2009 - 4:30pm.

Rich, you forgot to mention the Public/Private 'Land Bank' scheme right there in San Diego. That was the Primary reason I moved out of San Diego. As soon as I heard about this illegal govt. scam to buy up foreclosures back in 2007, I immediately began planning my evacuation. Best move I ever made.

Submitted by sobmaz on October 5, 2009 - 4:39pm.

They weren't kidding when they coined the phrase "Don't fight the Fed".

By the way, is there ANYONE we can sue for teaching all of us Suckers in Public School and Economics 101 that the FED cannot control long term rates?

They taught us that if we borrow too much rates will rise (B.S.) and the Fed can only control short term rates (more B.S.).

Kings over the centuries have spent fortunes trying to turn iron into Gold and our FED has finally succeeded with the "stoke of a pen".

I once thought that other nations would put a limit to the abuses we could do to the worlds reserve currency, the dollar, but I was wrong about that too. The Chinese complain now and then but they will still work harder than anyone else for a buck.

The only thing that will put the brakes on the insanity of the Fed is if Gold and Silver break their chains (the chains the Fed fashioned) and slap the Central Banks back from the edge of insanity.

I believe that if the dollar is so invaluable that it can be created by the trillions at a whim, Gold and Silver will soon be in the spot light. They only acted as money for centuries because they were limited in supply. Money must be of limited supply.

If the dollar can be produced infinitely, does the dollar qualify as money?

Submitted by CA renter on October 5, 2009 - 10:11pm.

Rich,

You are absolutely, positively, 100% correct, however much that might frustrate the bears (myself, included).

We will see how they hold out long-term, but for now, the PTB is definitely succeeding in propping up the housing (and stock, and bond...) market.

Submitted by SDnonSerfer on October 5, 2009 - 10:14pm.

It's obvious that those in power will attempt to stay there, so yes, count on persistent government action to avoid fixing the real problems and to try to resurrect the bogus "economy" we all knew for at least a decade. These bandaids seem to be an unavoidable consequence of 2 year congressional terms. And so much for the "wisdom" afforded the Senate by relatively longer 6 year terms (it is apparent that the whole lot of them are owned by the financial sector).

I think the important question is: How long can this all continue before being overcome by unintended consequences?
I've seen compelling arguments that we're going the way of Japan's lost decade(s). I've seen other arguments that we'll end up like Argentina. I do not pretend to have a clue exactly what is going to happen, but it just looks more Japanese to me. Even with the apparent magic of the Fed, I still do not believe in perpetual motion. Real work must be done - and not only in China. I'm gonna wait and watch (and save) a bit longer to see this mess play out. The one thing which I can see clearly is a BADLY broken US consumer, and I don't see that changing anytime soon.

Submitted by SD Realtor on October 5, 2009 - 10:27pm.

In one way I do agree with the most pessimistic posters that this will all end badly. How long it will take for that badly is up for debate. I used to think it will be sooner but I think it may be a longer slow road down the tubes. At one point we all look back 10 years from now and go wow things suck now. Of course I could be wrong because all it really will take is a disruption of the bond market and poof, prices will tank.

Submitted by hammer on October 9, 2009 - 11:59am.

I have been a housing bear since 04' and do expect a continued drop over the next 12 months.
That being said, I do think this winter will be a good time to buy in barrier to entry locations at current market prices if it is not a starter home. If a buyer anticipates the home to be a long term location, it is very compelling to lock in a low rate and put it to bed.

If a buyer anticipates a move to a larger home or a different location in the next 5 years, I would hold off and monitor

The job market will start to bounce back in 2012, and we know how the mindset changes amongst buyers when they feel secure in their jobs.

I would think 15 years from now, buyers would feel pretty comfortable with the 5% mortgage they put to bed in the long term location they have been seeking

Thoughts

Submitted by urbanrealtor on October 10, 2009 - 12:03pm.

It is difficult to enjoy your good articles and comment on them with all of the obsequiousness that is so characteristic of comments on your better posts.
So here is how I will describe it.
It is is better than most articles by libertarian-oriented writers.
And I read a lot of them.
And I am a liberal.

It has almost become a cliche that at any given social gathering, there is some guy talking about Ron Paul, gun rights, and the gold standard.

Usually, he has lots of expertise in tech and no background in history or social science.

If more of those jackasses started analyzing like Rich, I would not be so averse to their arguments.

While I still don't agree with your view on economics, I see your reasoning as...well...reasonable.

Of course I should be careful. Last time this happened, I got threatened for saying I liked Bush41 at a meeting of the Che Cafe (Yes I used to be a member there. Shocking.)

Submitted by Arraya on October 10, 2009 - 1:14pm.

Given the increasing magnitude of deflationary forces. The Fed can not stop but actually has to increase intervention, just to maintain the current price levels.

So far, the most noticeable effect, to the biggest, theoretical, untested, monetarism experiment in the history of economics has been the mobilization of the world to go against the dollar, as well as, the trillions of new public debt with no noticeable positive effects on the real economy. It's actually still shrinking along with wages.

Which leads to the million dollar question. If somebody defaults and nobody counts it, was there really a loss?

Submitted by justinmac on October 11, 2009 - 6:39pm.

I hope Gov't support continues..

I find sometimes you have to get outside of local media to get the real skinny:

http://www.reuters.com/article/domesticN...

Submitted by Ruffster on October 18, 2009 - 11:26am.

One of the really interesting effects of the government intervention that escapes the average person is the activities and attitude of the mortgage lenders holding a large percentage of these bad mortgages. In Riverside county alone there are over 3000 foreclosure auctions scheduled every banking day at the moment. Due to the uncertainty of what the feds are going to do next, 97% of these auctions get postponed by the banks. Of the ones that do actually go to auction 10% are discounted hugely (as much as 85%) so that investors will buy them at auction. The rest revert to lender, but even a majority of those then simply sit without being marketed.

The banks really are expecting a massive intervention by the feds to buy their toxic debt. And is it really any wonder? If you go back and read the bailout plan that Paulson acted on last October, it actually spelled out that he was to buy all REO and notes currently in foreclosure.

He didn't do it then (which begs the question where he gets his authority), but who's to say he won't tomorrow?

What would happen to those homes afterward would be the question of this century (and this market).

Submitted by twm on October 18, 2009 - 11:31am.

SD Realtor wrote:
TWM the main point for you and others like you is that yes you should be concerned with real prices. However because things are not real anymore and valuations are now the result of so much intervention, it may be best to just sit and wait.

I was actually using the economic definition of "real," which is "inflation adjusted." I wasn't using it to refer to the prices being skewed by government intervention, as it sounds like you may have thought. I just wanted to clarify that since it makes an important difference in terms of what I was saying.

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