Paulson: Let housing prices fall

Important speech from the Treasury Secretary (pictured) today: "Housing prices need to fall further to permit shell-shocked housing markets to stabilize and policy-makers should not interfere with that process, Treasury Secretary Henry Paulson said on Wednesday."

More from Reuters via LATimes.com: Treasury Secretary Henry Paulson "... said regulators including the Federal Reserve were 'vigilant' and doing everything they could to minimize damage to the economy but played down the value of a more direct government role."

The entire speech is here:, but I've taken the liberty of cutting and pasting the section in which Paulson addresses housing prices:

"The housing downturn and the surrounding uncertainty are significantly impacting our financial institutions and capital markets. However, we should not lose sight of the fact that this downturn was precipitated by unsustainable home price appreciation which was particularly pronounced in a relatively few regions. A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and housing will again contribute to economic growth. Having stability in housing markets will in turn contribute to better conditions in credit markets for mortgage-backed securities.

More, "Data releases every month create headlines about declining housing sales, starts and prices. Yet, declines are exactly what we should expect during a correction. It takes time to work through the excess inventory – and we are. The question many are asking is how deep the correction will be and how long it will last. ...

More from Paulson's speech: "The Case-Shiller index of home prices in 10 major metropolitan areas showed an 11.4 percent decline in home prices over the 12 months ending in January, and the futures market is predicting that the index will decline another 13 percent in 2008. But we do not have a national housing market; housing markets are regional – and there is considerable variation in adjustment, with prices changing the most in areas that had the greatest overbuilding.

Amid this correction, there are many calls to "do something about housing." When people say this, they are urging any number of possible things – minimize foreclosures, make affordable mortgages more available, improve the secondary market and liquidity for mortgages, improve the mortgage origination process, prosecute fraud, reduce the inventory of homes for sale, or help communities hardest hit by foreclosures.

The `to do' list tends to get conflated. We must sort through each of these shared and desired outcomes, carefully choosing policies that minimize the impact of – but do not slow – the housing correction."

Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: AP

Comments

[ART]

Paulson for President!

[Laura]

I am reading a sound and reasonable opinion from an important government official....I feel lightheaded...

[kat]

I would like to say a big "booo ya" to my numerous and particularly vitriolic detractors on this board.

Thank you . . . . thank vury much.

On another note, I 've been searching out home prices in So. Cal. for educational purposes.

Would someone explain to me why it seems you get so much more for your money in San Clemente? It's beautiful an the prices seem downright normal compared to L.A. What gives?

[Condor]

Before you get too excited about Paulson, I smell a political ploy. Talk one way, walk the other. This tough dose or realism is probably just cover for the next bailout proposal. If the Bush adminstration can proudly mail out tax "rebates" even to those who didn't pay taxes, it is unlikely it will sit idly by and miss additional pandering opportunties.

[Cal]

Once you recognize its a bubble isnt the most logical thing to do is rationalize as quickly as possible to minimize the damage?

Paulson thinks so.

[puckhead]

Kat,

San Clemente is beautiful. Unfortunately it’s not close to very many jobs. Most of the jobs in OC are in North OC, not South. Buy a house in San Clemente and most likely you have a hellish commute.

[lefty]

you know, some of these experts have great 'hindsight'! when they start talking, that means it's time for you to buy sunny metro L.A.!! we are just about here folks, so make your move and stop paying that rent!

[kat]

P.S.

There's another silver lining in this "crisis". It will never happen again - not like this. There will be stricter regulations to keep semi literate people out of half million dollar homes. When lending standards tighten, the prices will go down even more. People in decent neighborhoods will never again have to break out in a cold sweat as they see a moving van and 45 people pull up to live next door to them in a two bedroom home.

This a good thing. Let the greedy flippers and greedy financial institutions and the stupid borrowers take the hit.

To the victor goes the spoils.

[IToldu2CashOut]

Prices in San Clemente are lower because it is over an hour to LA and San Diego even with light or no traffic. It is not possible to commute to those areas unless you can spend 6 hours a day in your car. The only practical place you can work is around Irvine. Also it has a small population of about 45k. I agree though San Clemente is amazing, if someday I am rich I would love to have a second home there, but although prices are reasonable they are still probably to high for the location. They had the sky high prices and a big crash that is still in progress.

[MyLessThanPrimeBeef]

This reminds me of the cure for falling hair. What will stop your hair from falling? Well, the floor will is the answer. The floor will stop yourr hair from falling.

OK, so some real smart balding guy comes along, it could be Barney Frank, Charles Schumer, Bernanke or Hilary, and he says, "Hey, then, let's raise the floor to eye level. And my balding head won't look so bad.'

But let me ask you, does that look normal at all, to have the floor on your head? Doesn't that look ridiculous? Wouldn't it be better to do what slow-wits do and that is, do nothing and just let your hair fall? If I am not so lazy and idle, I might just read Bertrand Russell's In Praise of Idleness and tell you how great it is to do nothing.

[kat]

I suppose San Clemente's relative isolation is a double edged sword - less populous, relatively cheaper, but near nowhere. That must be why it's so beautiful and it looks so clean. I would also guess there is a conspicuous absence of the much discussed multi-family dwelling element as well.

[Greedy Banker]

Thanks Paulson. And especially thanks for not mentioning the bailout the Fed just gave to Bear Stearns. Seems right to me. Bankers get to take all the risks they want while consumers get to take all of the conequences. What a great way to keep us bankers richer!!!

[Corntrollio]

Wow, there was a 5:4 ratio of sales to foreclosures in the Valley in January and February:

http://www.dailynews.com/ci_8698128

"During January and February, there were 1,084 foreclosures and 1,335 sales of houses and condos in Valley communities from Glendale to Calabasas, according to the San Fernando Valley Economic Research Center at California State University, Northridge."

I wonder how this breaks out by location -- each "township" the Valley has pretty different characteristics. It would be interesting to compare higher end to lower end.

[Keith]

Lefty, could you please explain how your message ties into the story? There's a disconnect I just can't seem to get through - more info please!

[Keith]

Kat,

Same reason you get more for your money in Valencia.

[JohnnyB]

A nice headline, but…

"...these steps should provide the Federal Reserve with a structure... to make liquidity backstop loans during periods of market instability to non-banks."

Nice deal if you can get it... on the inside… the down-low…

"The President's Working Group on Financial Markets will evaluate these issues and their implications for regulation of bank and non-bank financial institutions."

Quick on his feet… isn't he leaving soon?

"…decision to authorize the Federal Home Loan Banks to increase purchases of agency mortgage backed securities, which could provide over $100 billion in new MBS market liquidity."

Bargain hunting for toxic mortgages... nice.

"A stronger capital base will better enable them (GSE's) to support more home purchases and refinancings through their securitization activities."

Keep up the flawed securitization... it's a proven banking profit machine.

"The subprime mortgage market accounted for a large portion of housing purchase growth before the downturn"

It didn’t account for the major portion of the housing debt bubble.

"Other subprime loans were very poorly underwritten and borrowers simply can not afford the home they bought."

Absolutely!

"Negative equity does not affect borrowers' ability to pay their loans."

Interesting... what if they have to move / sell?

"We are obviously well aware that the housing market correction was not only a precipitating cause but continues to be an underlying factor in our capital markets' stress."

With all due respect… what about Wall Street frawd, SEC rigging, rating agency collusion, Fed tampering, Administration complicity, (other) conflicts of interest?

Wiki; On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal is it allowed commercial & investment banks to consolidate. Several economists and analysts have criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis.

Still want to vote for John (more of the same) McCain or Hillary (more of the same) Clinton?

[donna]

>

Because San Clemente is not Los Angeles. Just like Philadelphia is not Los Angeles. Los Angeles is where everyone works and it's where houses are expensive. San Clemente is far from LA. I don't see the comparison.
Donna

>

[SJ]

Wow, how refreshing. Someone in government who is not looking to bail out irresponsbible people.

Paulson is correct. Greedy, irresponsible people should not be bailed out.

What we are seeing is just a long overdue correction. The free market should decide housing's fair value, not the government.

Contact the following people and let them know you are against a bailout:

Barney Franks - 202-225-5931
Chris Dodd - 202-224-2823
Diane Feinstein - 202-224-3841
Barbara Boxer - 202-224-3553
The Fed - 202-974-7008

The keys to generating stability in the housing market are improved levels of affordability and a correction in inventory imbalance NOT a government bailout to reckless people who put us in this mess.

A free market will allow for the proper correction to take place.

[mbob]

Look up the average property prices in Ontonagan, Michigan. Surprisingly affordable.

The commute? To a job that pays what most readers of this blog would expect, oh, about 2 days.

LL and L.

San Clemente is relatively less expensive because it's isolated.

[sfvrealestate]

"...semi literate people out of half million dollar homes. When lending standards tighten, the prices will go down even more. People in decent neighborhoods will never again have to break out in a cold sweat as they see a moving van and 45 people pull up to live next door to them in a two bedroom home"
Wow, Kat, I usually agree with you on these posts, but isn't this a little elitist? 45 people in a two bedroom home? Where did that happen, exactly?

[jennifer]

For one, the government is suggesting something reasonable! Let is fall so my family can have a nice house with a yard instead of a townhouse!

For the person who asked where the 45 people and the moving van, look anywhere in the San Fernando Valley. My husband's parents now live next to about 25 people who bought the house next door.....and I'm not exaggerating, we've counted them.

[Robbie Fields]

There's also an elephant in your backyard ...

San Clemente is San Onofre adjacent.

[LA-renter]

Thank you for the synopsis, JohnnyB.

Predictable... but still incredible.

Like Condor suggests, watch your wallets folks.

What amazes me more is the gullibility of some posters, who fall for the slick talk of Paulson or McCain.

People are so keen on exacting punishment on their greedy, indulgent neighbors. Yet, they're completely oblivious to the swindle being perpetrated by our tough-talking big boys.

Yeah, the Democrats are going to spend/waste money on band-aids, and the Republicans, no doubt, will welcome the distraction.

[kat]

SFV,

That has become code on this board for what is euphamstically also called "multi family" home owners.

You're right, maybe it is elitiist but it's a sad reality of property ownership. Certain circumstances bring down your property values - elements usually eliminated by stricter borrowing standards.

There, I'm awful.

[Peter I]

Jennifer, there are laws on the books in most cities about how many people can live in a residence. If what you are saying is true, you should report them to the authorities.