Home prices in record plunge
Anyone who steps in front of the freight train that is falling home prices and purchases stock in a homebuilder right now is nuts. I continue to be short any that I can find in CAPS.
Home prices in record plunge
National Association of Realtors reports that home prices dropped a record 12.4% in 2008 - the biggest fall in 30 years.
The economy will not bottom until home prices do, or at least until the pace of the declines slows significantly. The more prices fall, the less the toxic assets on banks books are worth, the more money banks need, the less they will lend, the more consumer confidence falls as they see the value of their most expensive asset implode, the more consumer spending slows as a result of this low consumer confidence, the more companies that are selling less stuff lay people off...on, and on, and on.
If it really wants to waste money trying to prop up a broken economy, the least the government could do is do it right. It's not a perfect solution or necessarily the "right" thing to do, but the only way that I can see for the government to pull us out of this mess now is to lower mortgage rates to 4% - putting a temporary floor under housing and more money into consumers' pockets.
I am not necessarily advocating these things, both of these would likely either be either temporary fixes which delay the inevitable or have terrible side effects, but in my opinion now that the stimulus package can't be changed this is one of the few options left that might work.
Some have said that the government doesn't set mortgage rates. They're right, but you can't honestly tell me that if Uncle Sam really wanted to they couldn't get mortgage rates down to 4%. The Fed could buy Treasuries like they were going out of style. Everyone would move out of the way of that freight train pretty darn fast. The government could even get Fannie and Freddie (which were essentially nationalized) in on the act.
I am not necessarily in favor of massive intervention like this, but instead am suggesting an alternative that wouldn't cost any more money than that was already spent on TARP, TALF, stimulus, etc... yet would likely be much more effective.
I am not looking for additional homes to be built. There are too many already. What lowering mortgage rates significantly would accomplish is the stabilization of asset prices and lowering of mortgage payments. This would in turn prop up or at least put a floor under all of the toxic assets on bank balance sheets that are tied to housing. Thus keeping the banks from constantly needing more money.
At the same time some of the money that consumers were keeping from their significantly lower mortgage rate, in many cases several hundred dollars per month every single month for years rather than a stupid $10 per week for a year or two, would flow back into the economy in the form of increased consumer spending. This would at least slow the job losses that we have been seeing.
If one put the brakes on the rapidly deteriorating economy, they could then work on long-term solutions to our problems like encouraging domestic manufacturing, a switch to domestic fuel sources, better education for our children, better mass transit, a smarter power grid. These things are very necessary, but they take time. Fix our short term problems ASAP with lower mortgage rates and then move on to fixing what's really wrong with America.
Moves like this to make mortgage payments are not unprecedented. Years ago the vast majority of mortgages were only for 15 years. In an effort to pump up asset prices, the government pushed the market towards 30-year mortgages.
I'd love to hear others' thoughts on this subject.