Our friends in Washington continue to reward witless members of the financial sector. Meanwhile, those of us who don’t fly Bonus Class think about importing guillotines from France.
Thankfully, we may not need to place the order.
All we have to do is to get Washington to listen to the best idea I’ve heard to end the decline of housing prices and, thereby, restore our confidence in the most important asset most Americans ever own. The idea comes from economist A. Gary Shilling and real estate developer Richard S. Lefrak.
Their suggestion: Don’t think about artificially low mortgage interest rates and other stop-gaps. Instead, eliminate the oversupply of houses. Too many were built during our speculative bubble. And, by the way, don’t spend a dime of taxpayer money doing it.
How can this be done? Simple: Open our borders to immigrants who can buy a home in the USA. Let a million immigrants a year do this for two years and the entire oversupply of homes and condos will be absorbed. Supply will no longer dwarf demand. Prices will stabilize. The most important asset owned by the vast majority of Americans will, once again, be a source of pride and security.
While there has been much attention to the incredible decline of equity markets around the world, the reality is that the vast majority of Americans have far more at risk in the housing market than in any financial asset. Indeed, many Americans have more at risk in the used car market than in the stock market.
According to the 2007 Survey of Consumer Finances done by the Federal Reserve, households at every level of income had more at risk in the value of their home than in financial assets. Those in the top 10 percent, for instance, owned homes with a median value of $500,000, compared to median financial assets (of any kind) of $404,500.
Households in the middle of the income distribution owned a primary home worth a median of $150,000--- but had median financial assets of only $18,600. Middle-income Americans, in other words, have about 8 times as much to lose in the home resale market as in all of the financial markets.
As you can see from the table below, 80 percent of all households in America have at least 3 times as much at risk in the housing market as in our financial markets.
The Risk of Home Value Versus The Risk in Financial Assets
This table compares median home values to the median value of all financial assets across income groups based on the 2007 Survey of Consumer Finances
|Percentile of Income||Median Primary Home Value||Median Value of All Financial Assets||Ratio of Home Value to All Financial Assets|
|Bottom Quintile||$100,000||$ 1,700||58.82x|
|Second Quintile||$120,000||$ 7,000||17.14|
|Middle Quintile||$150,000||$ 18,600||8.06|
|Fourth Quintile||$215,000||$ 58,300||3.69|
|Second 10 Percent||$300,000||$129,900||2.31|
|Top 10 Percent||$500,000||$404,500||1.24|
Economist Shilling estimates that we built 6.7 million excess houses during the 1996-2005 boom. Of that number 3.9 million was to make up for underbuilding during the 1987-1991 S&L collapse. That leaves an excess of 2.8 million homes. That’s about two years of building. He estimates that lower building in 2007 and 2008 reduced the surplus to about 2.4 million houses for which there is no need.
Reducing interest rates or resetting mortgage payments won’t reduce that surplus. The only way it will disappear is if new customers appear and buy those homes. The fastest way to do this is to offer citizenship to immigrants as a reward for buying a home in America.
Here’s the formula: Buy a home. Save America. Become a citizen. Admirably direct when compared to the expensive and complex programs Congress has already funded.
Shilling writes: “If the current excess of 2.4 million houses were purchased at today’s median home price of about $184,000, the inflow from foreigners would be $88 billion, assuming they put 20 percent down and borrowed the rest in this country. If they paid cash, the inflow would be $442 billion. Besides stimulating the domestic economy, this would vastly help the U.S. foreign accounts and support the dollar. The mere announcement of this program would probably go a long way toward stabilizing house prices.”
And stabilizing house prices is very important. It may be the whole ball game. Without productive action, economist Shilling estimates that home prices will fall another 20 percent by the end of 2010. That would leave nearly 25 million homeowners “upside-down”--- owing more on their homes than they are worth.
This is something worth writing about to your representative or senator.
On the web:
Earlier Scott Burns Columns on the Foreclosure/Financial Crisis:
“In the Heart of the Bubble” (6/23/2002)
“Letter from Northern California” 10/20/02
“Can You Say Boom?” (3/21/04)
“Working Stiff Houses, Fat Cat Prices” (5/01/05)
“A Tale of Two Transactions” (12/02/06)
"The Nitwit Sector" (8/10/07)
"Déjà Vu, Texas" (10/5/07)
"The Coming National Yard Sale" (12/21/07)
"Hazard at the Extremes" (2/22/08)
"The Last Bubble" (3/23/08)
“How History Is Likely To See Our Financial Crisis” (10/15/08)