I think one can safely say that the US housing delivery system is broken, with US homeownership down by about 5% from its peak and still falling, with nearly zero private sector activity in new mortgages outside of Federally subsidized FHA/Fannie/Freddie programs (the private sector is providing only about 10 cents on every dollar lent under guarantees from the Federal mortgage programs), and with the securitization system so messed up that, quite often, nobody can prove they own anything. Effectively, the system as it stands now appears to some to be a giant, multi-trillion dollar house of cards, where unreasonably high valuations are artificially propped up by Federal subsidies, to the expense of affordability and systemic solvency.
Housing demand IS recovering, with new mortgage applications surging, but banks are only lending public dollars, not their own money. Clearly, the urban development activity on which our profession depends is linked heavily to housing activity and an operational housing product delivery system. With that system dysfunctional to the point of non-existence outside of the Federal guarantee system, clearly something has to be done - and more importantly, there is an opportunity to do something, with population still growing and latent demand pent up as it is in the system.
We planners need to think about what this all means and what should come next. I thought I'd try to start a discussion to solicit perspectives on this issue.
1. Should the Canadian system be considered? No mortgage deduction, sales tax on transactions, 20-30% down, 100% private-sector lending. One can argue that our vast bureaucracy of housing mortgage subsidies just props up values, decreases affordability, and increases transaction and production costs. An argument can be made that we take advantage of the fact that the system is broken now to allow the market to free-fall and find a new/affordable private equilibrium, with the subsidy framework effectively removed or drastically curtailed. Federal subsidies can still kick in through increased tax credits, but the guarantee system itself would be phased out over time. The downside would be that the transition would APPEAR to homeowners to be extremely painful (this is a tough love scenario), as housing prices would continue to fall, and some type of transitional foreclosure protection for all those negative-equity people would need to be rolled out in the interim, during the transition. This is the obvious "free market" solution but it's politically painful. It may also be the only solution that'll really work at this point, if only you can survive the mobs of angry homeowners seeing their (undeserved and ill-gotten) life savings evaporate as real estate prices come back to the real world. Also, the Feds may have to write down much of FHA, Fannie and Freddie's portfolio and then pass those writedowns onto consumers as partial mortgage write-offs (in real terms, this cost is just accounting if those mortgages are in payment default anyway), as housing valuations come home to earth. Personally, I like this solution best but the torches and pitchforks present an almost unsurmountable challenge.
2. Bill Gross' suggestion (kind of echoed by Krugman): nationalize the entire Federal mortgage subsidy system, effectively moving toward the Swedish model. When you go to the bank now and inquire about mortgages, what they offer you is really not a Chase or HSBC mortgage at all, but rather a 90%+ Federally subsidized product (assuming you qualify at all under the new rules), which in turn artificially props up housing values and, quite possibly, diminishes housing affordability. Gross and Krugman appear to be suggesting that we take advantage of this dire situation to simply remove the middle-man. You borrow money directly from the government, and the public system would charge premia to consumers at rates which would assure its own fiscal solvency. The problem with this approach is while it makes sense in a Utopian sense (and a financial one as well), there is no real evidence that government knows how to act as a mortgage lender to consumers.. or would do it any better than the private sector banks. Private banks would, of course, lobby against this with all their billions. That and I suspect Teabaggers would stage a coup or at least riot in the streets. Of course, then we would have an excuse to shoot them.
3. Does securitization need to be reexamined? Can it be eliminated? What would replace it? Clearly, in a fully nationalized guarantee or direct mortgage system, securitizaton wouldn't be needed or would shrink to only that portion of the mortgage market which would be based on private-sector activity (a portion which does not seem to exist at all, in fact, today), but securitization, if it works correctly, encourages liquidity and lowers the cost of borrowing to the end consumer in theory.
4. Do we need to restrict the availability of debt to one home per purchaser, like the Chinese are now proposing to do? This would remove speculative activity (which will return once the market recovers), increasing affordability, and would decrease the strain on both the banks and the subsidized guarantee system. But again, liquidity could decrease. Also, much of the prospection would be taken out of the pricing mechanism, making price-discovery more difficulty in some areas.
5. Is home ownership overrated? Should we focus our efforts on creating a new system that provides financing to landlords instead of to homeowners? Should the Feds use all the money they're dumping into the dysfunctional guarantee system into direct housing construction and management? Or in giving funds to states and localities to resurrect their big mid-century housing authorities? Should government be our landlords? Can large portions of the subsidized consumer mortgage guarantee system be replaced by expanded developer tax credits for affordable housing?
6. Something in between.
Finally, assuming that we don't do something like #1, should public sector engagement/subsidy encourage people to live a certain way? Higher densities, TODs, sustainability/energy efficiency standards, etc, etc., by steering guarantees and other subsidies toward ideal forms (to be clear, this has been the case in the past, at least from the 1950s to the 1990s,with a clear regulatory preference for low density strip mall suburbia.. and quasi-redlining for everybody else).
Any thoughts?
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Originally posted by stroskey
If "they" accepted a solidly consistent 1%-4% growth rate, decent and fair returns on investment and were weened off the get rich quick at everyone else's expense schemes, 3%-5% down would work just fine
