There Goes the Development: May 2009

Today, for my edification and perhaps somebody else's, I've produced this graph of single-family home sales (ignore the incorrect labels).

Again I've plotted the data as sales per 1,000 population. Unlike the starts data (which is for all units) the trend is up - though the bubble probably made the slope steeper. I don't know what has caused the uptrend, so I'll speculate: this data shows sales, and the increase reflects people buying more spec homes and ordering less custom homes. Sounds plausible. I'll try to figure out what is really going on next month.

Another thing to note is that while the YoY declines have only briefly exceeded 50%, the decline from the peak is currently at 76%. That is a stunning number.

Starts at Home: May 2009

Are we at the bottom for housing starts?

Possibly. This graph shows the starts verses population expressed as annual rates (so, 307M people times 1.73 starts per 1,000 equals 531k starts). The numbers are at record lows and well below trend. But there are a lot of factors, such as household formation rates, amount and location of available inventory, and credit availability that I haven't looked at, so I can't really say for sure. But the bottom has to be close, barring another big leg down in the overall economy. However, even if it is close, that doesn't mean the rebound will be robust. Increases are likely to come at a slower rate than after the last bottom in December 1990.

Open Letter: Bailout Bill

Dear Senators and Representatives,

I am writing today to urge you to oppose the ridiculous financial bailout bill proposed by the Bush Administration and Secretary of the Treasury (and former Goldman Sachs CEO) Hank Paulson. It is easily the most naked power grab in the past quarter century, and if passed as-is, it will go down as the Bush Administration's third biggest screw-up (after Iraq/Afghanistan and Katrina). The plan is undemocratic, unaccountable, and fundamentally unwise. The rush to get it passed is a scare tactic aimed at bullying Congress into passing something that favors Wall Street. We saw something similar before the Iraq war, and we know how that turned out.

The plan as currently proposed almost certainly won't work. Buying the various CDOs, MBSs, and other financial instruments at “market value” would still leave many banks under-capitalized and thus insolvent. But buying the financial instruments at face value would be a huge give-away to Wall Street and other financial gamblers. The only way to avoid a huge giveaway, eliminate the moral hazard, and keep the system functioning is to take over every institution with a whiff insolvency, recapitalize them directly, and manage them until the financial instruments mature and the firms are solvent. It would be ugly, but the American financial system is broken. But so is the idea that unfettered free market capitalism exists in American, or that it works. That has been proven false by very people who most support it – Republicans and Wall Street.

Here are the conditions that I think should be attached to any bill, no matter the details of how the “bailout” is implemented:

1. It should include a way of at least partially paying for the huge bill the taxpayers will inevitably shoulder. I suggest a) repealing the Bush tax cuts, b) resetting the capital gains tax to the pre-1997 levels, and c) implementing a low (0.01% to 0.05%) transaction tax on all stock, bond, option, future, etc. sales (the UK already has a sales tax on stocks and it hasn't harmed the London stock market).
2. It should include a provision to break up anything that is too big to fail.
3. It should include a provision to regulate anything that functions like a bank as a bank.
4. It should be completely transparent and have accountability. All transactions should be posted on the web immediately. Congress should get weekly reports on what has happened, why, and what the next week's plan is.

Talk about limiting CEO compensation may feel good, but is basically irrelevant at this point, as is talk about “claw-backs” - recovering past unwarranted compensation. Helping homeowners should also be separated as it muddles the issues. The focus needs to be on rebuilding the financial system from the top down with a more small-c conservative culture. Thank you for your time, and I look forward to rational action on your part.

Open Letter: Housing Bubble Bailout

Dear Congressmen and Senators,

I am writing today to express my concern over various proposals being floated that would bail out homeowners who have taken out risky or inappropriate loans in the past few years. I am strongly opposed to any kind of bailout. Bailing out people for reasons other than 'acts of God' is bad policy because doing so creates a 'moral hazard'. A moral hazard teaches people that poor decisions do not have negative consequences, which of course is completely wrong.

The modern practice of American homeownership has existed for several decades. Part of that practice has been the broadly-held knowledge that a household should not buy a home that costs more than 3.5 times the household's annual income. Unfortunately, due to the Federal Reserve holding interest rates too low for too long following the 2001 recession, and due to an under-regulated mortgage industry 'innovating' by creating a wide array of very risky new 'products', a great number of households have purchased homes that they would not be able to afford under normal and more rational circumstances. The two unique factors temporarily lowered the down-payment and initial cash flow required to purchase a home, and allowed some households to purchase homes far more expensive than the 3.5 multiplier rule would otherwise dictate. These lower requirements enabled housing prices to be bid up artificially, and created the current housing bubble. As the two special circumstances disappear, housing prices will come down.

I encourage you to use your office to investigate fraudulent and deceptive business practices in the mortgage industry, as well as the wider real estate industry. There are plenty of reports of appraisers inflating home values, real estate agents pressuring appraisers to do so, agents and mortgage brokers encouraging borrowers to lie on their loan applications, and so on. Proper investigation and oversight of the real estate and mortgage industries is needed, especially since the current administration has not done so. I encourage you to create ways for homeowners who have been victims of fraud and deception to seek appropriate compensation.

However, bailing out homeowners would set a bad precedent, as well as keeping housing prices artificially high. The majority of homeowners have made good financial decisions, and bailing out the minority who made bad decisions would be unfair and inappropriate. That means many homeowners who have made bad decisions will suffer, along with holders of risky mortgage bonds. Financial loss must be the price of making bad financial decisions, otherwise there would be no reason to make good financial decisions. Inaction during widespread financial losses is certainly not a vote-winner, but you were elected to provide quality leadership for this country. The appropriate leadership now would be to make sure the unique factors that enabled the housing bubble do not re-occur, and to investigate fraudulent and deceptive practices in the real estate industry. I am confident you will make the correct choice.

Thank you for your time.