Sadly, each passing day brings with it more depressing economic news. Today’s latest is that housing sales dropped 27% in July, the weakest showing in 15 years. That the housing market remains a complete disaster, common knowledge to most of us, appears to still be a secret to those in Washington. This latest news reinforces that it is time to put aside the Washington “PR fixes” and get down to real solutions that address what is both a devastating crisis for many American families and a major barrier to any economic recovery.
To properly address the housing crisis we have to first stabilize the market. We can only stabilize the housing market by first stopping the downward spiral that it is currently caught in. What downward spiral? Today, each foreclosure, auction, and new house for sale puts increasing downward pressure on prices. As home prices drop, more mortgages become “underwater”, which leads to increasing cases of homeowners walking away and more bank foreclosures. This in-turn drives home prices down even further, and the cycle continues and continues.
To date none of the DC solutions have had a prayer of addressing this core problem; they were just band-aids. Not surprisingly, these DC solutions have only succeeded in allowing our politicians to say that they’ve tried to address our housing crisis versus actually doing so.
* The first attempt at a federally run loan-modification program appears to have failed: 50% of participants have dropped out since the program started.
* The recent homebuyer tax credit only succeeded in making folks who were going to buy a home anyway buy it earlier, so they could get $7,500 from Uncle Sam. Immediately after the credit expired, a huge decrease in home sales resulted.
* Ironically, the brutal economic climate, which has allowed interest rates to stay at historic lows, is the only federal intervention that has worked in the housing market’s favor.
We must go beyond these superficial gestures to fix a problem of this size. How about some fresh thinking on the subject? That’s why I’m proposing:
Banks becoming equity partners with homeowners. Let’s explain that with an example:
Jim has a $100K mortgage from the bank for his $120K house. If the house is currently appraising for $75K, the bank would readjust Jim’s mortgage to $75K and take, say, a 20% ownership stake in the house. The result would be that Jim’s monthly payment would be substantially reduced and he becomes much less likely to “walk away” from his house. The bank has a loan which has immediately become more solid and, say, in 10 years when Jim sells his house, the bank, as a 20% equity partner, can share in the upside.
While the fine print still need to be worked out, this type of private-sector administered program actually cuts to the core of the issue and establishes the foundation for a sustainable housing market. There are other measures as well — going to a 50 year mortgage (Japan and other nations already offer them), etc., that also warrant discussion and would also help.
Washington’s failure to deal with the housing crisis represents a truism in politics and life: there are no short-term solutions to long-term problems. Sadly, short-term thinking and fixes are all Washington appears to be capable of. Housing, jobs, our national debt – these are not intractable problems, just difficult ones. Yet until we elect officials who demonstrate the capability for fresh thinking and are focused on solutions not ideology, we’ll keep getting more of the same: band-aids.
This is the first in the series “A Business Plan for America” that will outline critical public policy proposals that are free of partisan politics, ideology, and dead ideas.