Why the Housing Bill Won't Help the Housing Market

The Housing Bill going through Congress will not solve the nation's housing problem.  Congress would like to help homeowners who are overextended, as well as prospective home buyers.  By extension, they want to help home-builders and developers and the whole food-chain involved in the residential construction sector.  The housing bill will not help.

The real problem:  too many housing units.  Today the Census Bureau released second quarter data on vacancy rates, and the numbers are still ugly.

Can we solve this oversupply of housing by making mortgages easier to get?  The problem is really too big for mortgage reform to fix.  But if it did, we'd aggravate the excess supply of rental housing:

It's important to keep both markets in mind.  Rentals can be converted into condos, which happened at the height of the home ownership boom (2004).  New condos can be made into apartments, which is happening now as recently-completed condos sit vacant.  Single family homes can be rented out or not.  And if the single-family market improved just a bit, homebuilders sitting on lots would try to interest the public in new houses.  The surplus in rental markets makes the surplus of owner-occupied housing that much harder to resolve.

What will solve the underlying housing problem, of too many housing units?  Population growth, which will come with time.  You could also try to increase the number of households relative to the population.  Kick the kids out of the house.  Get divorced.

Mostly, though, this problem will resolve itself slowly as the population grows, but there are no quick fixes.  Certainly the housing bill does not fix the housing problem.

Comments

[Aalan]

Too many housing units? WHERE? Yes, there's too many in the Rust Belt; and lots of unoccupied houses in New Orleans. Throwing all the housing markets into one pot obscures the issue, which is always LOCAL.

[Jim D]

Too many houses in the rustbelt, true. And in New Orleans.

Also Florida, Nevada, Arizona, California (inland), North Virginia, Atlanta, Austin.

Not sure where the first commenter was posting from, but this is assuredly not a localized phenomenon.

[texasgolfer]

might want to occasionally visit housingtracker.net to see trends in inventory in major us markets.

[Did U Think The Ponzi Scheme Would Last?]

I liked your article because it was logical and simple. I have to laugh at some of the comments. Everyone wants to microanalyze this issue to sound like such an expert economist yet for all this jawboning WE ARE STILL IN DIP DOO DOO. Stop trying to overanalyze because the simple problem statement is the correct one: We are experiencing fiat currency and fractional reserve gone wild. With all that cheap and easy money the homebuilders went wild because a lot of people who traditionally would never have been able to buy a house were allowed to do just that. Notice how I did not say they were able to AFFORD their home. They were allowed to buy, which is different.

Now they are not allowed to buy. Credit is much harder to come by. And existing excess inventory indeed needs to work through the system before things can get better. Problem is, the credit is evaporating as are jobs. This housing inventory overhang will last for years and years, not quarters and quarters.

When will Americans wake up about this? Cash is king. Get ready for the great depression redux.

[gaels67]

Not to sound dense, but if vacancies are rising on both rental properties and homeowner rates...where are people going? Are they moving in together? More roomates?

[Maquiavelli]

The bill is not to save housing but to save the banks by passing all that bad debt to tax payers.

[nick4586]

I agree with the simple concept, in particular with the housing market taking a fall and staying down for years to come. I do have a coment about tax payers monies, Fredie and Fanie. For one tax payers should not be concidered for a bailout and, as a solution to this credit and housing slump. As to both Fredie and Fanie they should be split up into 10 different companies in order to create some type of competition and new reform.

[najdorf]

gaels: Are you aware of an industry called construction? They make more houses.

[gaels67]

exactly. We have a massive oversupply out there.

[Jay Jay]

gaels- The number of people living in a house can vary wildly. Take my neighbors.... please! Seriously, take my neighbors, when times where good, the kids moved out and rented apartments, when times are bad like they are now, they move home with mom and dad.

[HarryHope]

The housing bailout is a sham. Homeowners under water can mail in the keys and rent for less. The banks are wringing their hands over folks losing their homes like they will be homeless. In fact moving to a rental will make them more sound financially. In the end the taxpayer bailout dollars will end up in the hands of the bankers who made this mess.

Housing will drop until it's affordable like always. Long way off for that.

[Kunst]

We often focus on the "mortgage problem". The other side of the coin is the "housing problem", major oversupply caused by several years of overbuilding, caused by too many people getting loans they couldn't afford. When renters became owners, the number of rental units didn't go down but the number of new homes sure went up.

Think of a tsunami. The ocean has a normal level. All of a sudden, that level rises 20 feet and wipes out the coastal zone. Is everything OK when the water recedes to its normal level? That's what's happened with the mortgage/housing problem. The damage was done during the bubble, when too many people bought overpriced houses they couldn't afford, or ballooned their mortgages to cash bubble equity out of their house. As we return to normal, many of those people drop out of ownership and it is harder for new owners to take their place. Prices got way too high and have to come down, leaving many homeowners underwater for years to come. Trillions of dollars of paper equity have disappeared, and they are not coming back.

The only good solution to this problem was to prevent it. That might have involved some intelligent regulation, the kind that Paulson is proposing now, much of which is a return to prudent banking practices that were normal until recently. That's like setting up a new tsunami warning system -- good for the next time, not much help now. Republican administrations philosophically dislike regulation. Remember how we were told financial institutions could manage themselves better than the government? Then this kind of carnage ensues and they look bewildered. How could this have happened?

The problem isn't the hangover, it was getting drunk in the first place.

[johnny g]

Bill's got it 100% right, it's all about inventory reduction.

The normal supply of inventory, based on customary developers risk reward pursuits is the proverbial light which is now non-existant.
When we begin to see that light again, we'll be on the way back up.

Other ways to speed the process along would be to increase the American doors to controlled immigration (let's go back to getting the world best and brightest).

Another would be to not abate the current dollar deflation, after sufficient devaluation, pull a Paul Volker and hit the interest brakes real hard for about 6-12 months (squeeze out the inflation psychology) .

I'm sure we will see some strong Federal and select State tax benefits/incentives offered to accelerate that inventory reduction.

[msaghirmd]

I have a blog about the Miami housing crash. The speculators were and still are insane. www.miamicondoforum.co...

[adan]

re the first commentater's "...always LOCAL...."

i'm always suspicious when someone harps so hard on the "local" gong

ie, why have we been force fed a national housing bail out bill?

[catfancier3]

Actually the problem is neither local nor national. It is Global.

[johnthebear]

Foolish lending globally will not go away without great pain.

I see a consensus forming that this problem will last a very long time.

Fortunately President Obama will raise taxes enough to bail out all the poor people in the world.

Good ole USA comes to the rescue "citizens of the world of Obama", you now have a new President! Hail to the King.

[Bruce B648]

We need a larger perspective here. The Internet Bubble broke in 2000 and had 3 legs down into 2002. People used to talk about wave theory regarding stocks. In practical terms this was a succesion of dissapointment spreading from margined portfolios to fully invested portfolios feeling the need to have a cash position to wholesale liquidation by "Long Term" accounts (eg. 401k) when the pain became too great to even open the quarterly statements when they came in the mail.

About this time, wise people like Peter Lynch (remember him) pointed out that the roof over your head was still the best investment that you could make.
Disgusted with the stock market, the public focused on real estate. Former stock market investors started to speculate in housing. Yes, it was more work, but they figured that they were smart enough to pick properties & become landlords, just as they were smart enough to pick stocks & didn't need mutual funds. Rental property prices were bid up beyond that level justified by rents. No problem - we will make it up on appreciation! Real estate always goes up, right?? Interest rates were low due to the recession and 9/11. Vacation homes were bid up as personal finance magazines pointed out that Baby Boomers were nearing retirement. The builders went into overdrive converting farm land, ranches & desert into subdivisions with high levels of amenities (and high association fees). The only problem was that this housing was a greater commute from centers of employment than people had been willing to commit to in past cycles. The builders had a predictable response: Market vigorously - give them soaring ceilings, granite countertops, LIVE ON A GOLF COURSE!! Convince the American consumer that they cannot possibly be happy unless they are living this American dream!! Former stock market investors turned real estate speculators realized that they were working too hard buying existing housing stock. Why not just commit to new construction??
By the time this beautiful new community is 50% built out they can just flip their new home to a buyer who does not want to wait.
That worked so well, lets commit to 3 homes/condos in the next development & make some real money??

Now the perspective. Why does the speculator deserve a bailout??
Why does the greedy builder who convinced every prospective homeowner that they NEEDED granite countertops to be happy deserve a bailout?? (Today there is a story online that granite countertops may emit an unsafe level of radon). They are also typically very dark brown or black. Dark kitchen cabinets were briefly used in the early 70's and became unpopular for decades to come, why are dark countertops the rage?? Could it be because they are imported & expensive???

In my decades as an investment advisor, I have seen many times when the public was late and wrong. It is as if they were looking in the rear view mirror of what they had missed out on & could not take it any longer. So now the public has the big house at the edge of town (or 2 towns away) and not only has to commute but has to pay 50% more for that commute. He can't sell & move closer to work because he was the greater fool: no one has paid more for a home in this subdivision that he did in 2005/6.

This is not just an American problem. England's largest homebuilder is trading at 20% of it's valuation a year ago.

I don't see blogs blaming the builders. I think that they fanned the flames of real estate speculation. They also had the most to gain. The swing factor of disenfranchised stock investors in a low interest rate environment got the ball rolling in 2002-3, however new home marketing (with affiliated financing) lead to the current over-built condition.
The new home builders gained the most & they all sold out at the TOP.

This is much worse than 1991-3. The Savings & Loan industry disappeared at that time. IN TIME, one day, new technologies will provide growth, optimism & hope for those who did not throw away all of their money on a house that they could not afford.
Do not hold your breath waiting for another opportunity to be a real estate speculator in Happy Valley, rather, save your cash so that you can participate in the next Apple, Microsoft of Google that comes out of Silicon Valley.

[Refuse to buy overpriced]

Houses are empty, but meanwhile people in their late 20s/early 30s making $50K - $100K/year are living with their parents because they can't afford to buy at todays prices.

The problem is not oversupply - there are plenty of people to would love to occupy those vacant houses.

The problem is delusional sellers who refuse to lower their prices.

[Refuse to buy overpriced]

There is a severe UNDERSUPPLY of affordable housing.

Want to become very wealthy? Build the next Levitt-town.

Want to destroy America? Bring in hordes of foreigners in an attempt to prop up prices at their current ludicrously high level.

[AlPint]

The author is correct and he forgot to add one more point. yes is right the demand will come from future population growth and an important piece of that is faster immigration growth. right now the legal immigration system is broken and that has to be fixed to make it faster (I am not saying increase immi - but make it faster - now it takes 9 years to get a green card and 16 years for citizenship).