Why bailouts won't work and prices must fall

I hope those of you who like to make a punching bag out of my employer (no, not Sam Zell, the Los Angeles Times) have noticed that the newspaper continues to publish full-throated, anti-bailout opinion pieces.

Last week it was economist Christopher Thornberg's politically incorrect, but historically obvious argument that the housing bubble was caused by "greed on steroids."

Today it's Peter Schiff, who writes on the opinion page that bailouts won't work, and housing prices must be allowed to fall to a "sustainable bottom" -- levels supported by the market, not by government intervention.

Highlights:

"At current levels, the average American still can't afford the average house. Despite the creativity of its new policies, Washington can't alter that math. The only mechanism to restore balance and get the credit flowing is for prices to fall steeply to a true market level, and for losses (for consumers and corporations) to be recognized and absorbed."

"The government is trying in vain to get funds flowing again and put a floor under prices. But it's too late. U.S. home prices are like a beach house supported by eight pillars: lax lending standards, low down payments, 'teaser' interest rates, widespread real estate speculation, pliant appraisers, willing lenders, easy refinancing and a market for mortgage-backed securities. Knock out even half of these pillars and the house comes crashing down. We've knocked out all of them. Yet everyone hopes that this allegorical house can defy gravity and that bubble-era prices can be sustained in a post-bubble world."

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

Comments

[The bad news is for those with ARMs]

The bad news is for all those which went for the bait and the lowest payment option ARMs which are now adjusting. If only they would have taken a traditional 30 yr fxd they wouldn't be crying. If you have equity and want to get an FHA give me a call 09:00am-09:00pm and lets see what we can do to help you out. Spanish speaking on extension 113.

[Puckhead Response]

The difference between FDIC insurance of bank accounts is that people knew, prior to depositing money with the bank, that their accounts were FDIC-insured. Additionally, the "understanding" between a bank and its customer is very simple: the deposit is liquid (withdrawable any time), will never be depleted except by the customer's own use, and may pay some dividends (i.e. interest).

In contrast, people going into real estate knew both that there was no guarantee and that real estate could go up or down. So it's not analogous to compare the cries for a real estate bailout with what customers from failed banks ask for.

[Roger Moore]

@Puckhead

There's a big difference between deposit insurance and a real estate bailout. Deposit insurance is actual insurance. The banks advertise it, and they've been paying money to FDIC all along in order to insure against the possibility of bank failure. And as part of taking out insurance with FDIC, banks were required to change their business practices in ways that were supposed to reduce the risk of bank failures. IOW, it's a promise that was made and planned for long before anyone had ever heard of subprime lending.

A bailout is a completely different matter. Borrowers didn't buy insurance against the possibility that they couldn't pay their mortgage. There's no Federal Subprime Mortgage Bailout Corporation that banks have been paying for years to guarantee that they'd be bailed out if they made insane loans. And banks certainly weren't required by the government to change their lending standards if they wanted to have a chance to be bailed out. Any subprime bailout would be made up and paid for after the fact, not well in advance.

[Rob]

I am not sure why people think that all of us "lefties" want to bail out home owners and lenders who made bad decisions. I actually think it behooves the progressive agenda to have prices come down in CA and be more in line with peoples income.

[tew]

The government indeed CAN prop up housing prices for some time - not forever, but for quite a time. They can debase the currency and thus devalue all U.S. dollar-denominated assets (and pull in foreign buyers snapping up "cheap" U.S. real estate). They can allow inflation to come up. They can take money from other purposes (war, health care, education, public infrastructure, etc.) and direct it towards housing (in a near infinite number of ways).

However, they will have a harder time of it if the mainstream press publishes hard, meaningful statistics like price-to-income, housing stock value to GDP, household debt-to-equity, mortgage debt as a percent of home values, etc. and, importantly, includes long term graphs (going back to the 50s for example). If potential buyers are presented with many opportunities to consider meaningful facts in a meaningful context, it will be harder to lull them into a purchase at inflated prices.

[Landless]

Homeowners get too much special treatment. The individual home sector receives too many subsidies. Because of this disproportionate aid, rental housing is lagging. Renters have been in crisis forever (at least since I started renting in 1975). What we really need is to be able to move easily from job to job. That means, rentals and standardized schooling. A home locks you into a community. Look at Detroit and know that can be a mistake.

[martin]

JW writes: "Why can't these idiotic politicians understand that prices must fall to meet income levels if you want a healthy housing market that flows as it should?"

Actually, everybody here agrees with JW's position. To a degree, I do too. But I have a what if....

What if the real estate market corrects itself, but millions of jobs also fall out of our economy ... banks fail ... our dollar follows the same path as the German mark did in the 1920s ... and we all go to hell in a handbasket?

What if...?

I don't think any single person has all the answers.

I can only imagine President Obama saying on his Sunday morning, weekly fireside chat that "the only thing we have to fear is fear itself."

[save your ammo]

Brian, don't waste your time replying
to PUCKHEAD.

PUCKHEAD is named PUCKHEAD
for a reason.

[FINLwhiz]

Puckhead just doesn't communicate very well. FDIC was put together after the stock market crash of 1929 and several banks failed. When they failed folks deposits where wiped out - no one had faith in the banking system and that's why your Great Grandma kept her money under the matress. Money under the matress does the banking system (our economy) any good - so this little bit of socialism implanted into capitalism became a must have.

Draw a parallel folks. Right now, we are in a similar spot - no one has faith in our financial markets. If you accept one aspect of socialism in a capitalistic society - how can you state another isn't equally important? Like it or not - the bailout is coming - to restore this market faith. Fiscal policies won't do it, something has to give. No, it isn't the same thing - but yet - in some ways it really is - but only temporary - to achieve the same results - and that's to get the financial wheels turning again.

[FINLwhiz]

The FDIC was also established in the same year as the Homeowner's Loan Act 0f 1933, which spurred the following:

(from Wikepedia.com)

The Home Owners' Loan Corporation (HOLC) or Home Owner's Refinancing Act, was a New Deal agency established in 1933 under President Franklin D. Roosevelt. Its purpose was to refinance homes to prevent foreclosure. It was used to extend loans from shorter loans to 15 year loans. Through its work it granted long term mortgages to over a million people facing the loss of their homes. The HOLC stopped lending in June 1936 by the terms of the HOLC act. HOLC was only applicable to nonfarm homes. HOLC also bailed out mortgage-holding banks. The HOLC was a tremendous success, making about one million low-interest loans between June of 1933 and June of 1936. When the HOLC ended its operations in the 1960s the corporation not only paid all its bills, it even returned a small profit to the federal government.

Source: http://en.wikipedia.org/wiki/Home_Owners'_Loan_
Corporation

[jbunniii]

Falling prices are the solution, not the problem.

[gman]

I am all for bailout!!! I owe 123k on student loans. I think i should get a bailout!

[anonymous]

Peter,
This is the kind of stock reply we get from our sen.s/reps when we plead for no bailout. They respond cheerfully, "We know there's a crisis and we intend to do a bailout!" They don't even read the actual complaint, imploring them not to bailout. I'd say this is taxation without representation, so would Paul Giamatti's John Adams in the HBO miniseries. Please everyone, vote out Boxer, Waxman and Feinstein at next possible opportunity.
Thanks
Anonymous

----- Forwarded Message ----
From: "senator@feinstein.senate.gov"
Sent: Monday, March 31, 2008 10:55:29 AM
Subject: U.S. Senator Dianne Feinstein responding to your message

Dear Anonymous

Thank you for contacting me to express your concerns about the subprime mortgage crisis. I appreciate the time you took to write and welcome the opportunity to respond.

I am very concerned about the current economic downturn and declining housing market. I have introduced and cosponsored legislation to help homeowners with subprime and adjustable rate mortgages avoid foreclosure. On February 6, 2008, I introduced the "S.A.F.E. Mortgage Licensing Act of 2008," which would require all mortgage lenders and loan brokers to meet minimum national standards in an effort to curb abusive lending practices.

Additionally, I am a cosponsor of the "Foreclosure Prevention Act of 2008," introduced by Senate Majority Leader Harry Reid (D-NV), which would provide $200 million in funding for foreclosure prevention counseling and $4 billion in Community Development Block Grants to high foreclosure areas to allow localities to purchase and rehabilitate foreclosed properties for resale. I have also cosponsored Senator Richard J. Durbin's (D-IL) "Helping Families Save their Homes in Bankruptcy Act," which would give qualifying homeowners the opportunity to restructure their mortgage through the bankruptcy process.

I hope the Senate will move swiftly to pass these important bills, and I will keep your comments in mind should further legislation to address this crisis come before the Senate. For more information about subprime mortgage issues, including resources for dealing with mortgage delinquency and foreclosure, please visit the "Subprime Mortgage Crisis" page of the "Priorities" section of my website at http://feinstein.senate.gov.

Again, thank you for writing. If you have any further comments or questions, please do not hesitate to contact my Washington, D.C. office at (202) 224-3841. Best regards.

Sincerely yours,

Dianne Feinstein
United States Senator

Further information about my position on issues of concern to California and the Nation are available at my website http://feinstein.senate.gov/public/. You can also receive electronic e-mail updates by subscribing to my e-mail list at http://feinstein.senate.gov/public/index.cfm?Fuse
Action=ENewsletterSignup.Signup.

[Laker]

puckhead, you have a big mistake in you reasoning on comparing bailout for the irresponsible, flippers, and fraudsters to FDIC insurance of bank accounts.
You see, when you put your cash into a bank account, the bank gets (and pays for) insurance from the federal gov. Both the bank and you know that the money is insured. However, when you buy a house and pay inflated price for it, nobody should, is, or will guarantee that the house would keep its value. If there is such a service, let me know about it. So why would you expect it to be?
The people that lost tons of money in stocks, lost it because it was not insured...As every sucker knows investments are not insured and may lose value. I don't believe you are so dumb as you want to sound like. But if you are, so i would recommend a disclosure for people like you to appear on the house buy/sale agreement under a new HUD code to say"
YOUR HOUSE MAY LOSE VALUE, IT IS NOT INSURED BY THE FEDERAL GOVERNMENT..."

[Teresa]

Rich, I agree with much of what you said. However, the median income for an individual wage-earner in the US is NOT $45,000.00. The median HOUSEHOLD income in the US is only about $48,000.00:

http://pubdb3.census.gov/macro/032007/
hhinc/new04_001.htm

I do agree with what you said about housing prices. One doesn't have to move to Boomfahook, home of $7.00/hour jobs, to find affordable housing. Housing in the Philadelphia area is very affordable--that article about the foreclosure freezes be damned--and while I'm not sure exactly what the average wage here is, it's not some ridiculous figure like $7.00 or $10.00/hour.

You're right in that many Californians think that because their condos cost $400,000.00, housing is like that everywhere else.

[left of lefty]

hi anonymous,

your form letter from senator feinstein is great. i do wonder, though, if perhaps they didn't even read your letter and just assume it's for the bailout. did you send it via email? if so, i can see they may have some type of automatic email reader that simply look for keywords. won't it be ironic if they actually keep some type of statistic internally and put you in the for-bailout box. feinstein then gets an end-of-month, high-level report from the intern who summarizes the numbers and sees a spike in the numbers for the bailout, and pushes for it even harder. :)

[puckhead]

A poster wrote to my earlier post about the FDIC
“In contrast, people going into real estate knew both that there was no guarantee and that real estate could go up or down. So it's not analogous to compare the cries for a real estate bailout with what customers from failed banks ask for.”
Hey I agree that there are no guarantees about real estate always going up and at the end of the day its buyer beware. I also know from reading way too many 10Q’s, 10K’s and 8K’s (sounds like an exciting job huh?) for banks that there are some very well run banks and some banks that couldn’t find a nickel if it was glued to their nose. But we all blindly bank with them. Why? Because we expect the govt to make us whole if the bank screws up so badly and goes insolvent. How’s that for the welfare system at it’s best? Protect the stupid consumers (just like the stupid house buyers) cause they were too lazy to do some due diligence. Many bloggers pooh pooh Bear Stearns when they went under and said too bad for the greedy bankers. Keep an eye when quarterly earnings are released and see what the write downs are for Bof A and WaMu. I bet many bloggers bank with these two fine banks

[MyLessThanPrimeBeef]

Anonymous, try writing in Arabic or Mandarin next time.

[Inland empire sales agent]

I believe housing prices will fall the greatest percentage of homes that where sold between 2003-2007 for around 300k. My theory is base on what is currently happening in my area of Victorville CA. I think this will apply in many of the suburbs that have grown in the last 5 years. The homes I use for my research had at least 1200sq.ft with 3/2 bed and bath built and sold between 2003-2007. The search result for this example has over 200 homes for sale on the Victorville MLS listing. There are 44 homes price at or below 199k for sale. The lowest is price at 139k purchased new in 2006 for $293.5k it has 3/2 and is 1500 sq ft sale price this is almost a 52% drop.. Next there are 101 homes for sale between $200k/299k. One example is a home for sale is at 199k which is REO foreclosure . The price the bank paid was 242k on 12/07 when GMAC go it back. The home is in a nice area it's 2009 sq.ft. 3/3 bed bath built in 2004 and was purchased for $208 in 2004. There is a home for sale that the owners must be in Never Never land the asking price is $399k. The house was built and sold in 2004 for 263k and sold again in 2006 for 310k it's has 5/4 3100 sq. ft in a nice area. The listing on Zillow has a estimate of $304k and the comps seem to reflect that as well.
What I see is the need for a lot of middle income first time buyers to come in to the market. But they can't get qualify for even a FHA loan of $230k+ (area medium) with 3% down plus they don't have the FICO score. They also face a commute of 100+ miles a day with gas price of $3.50. There is limited jobs in these communities that pay well so must buyers with the necessary income work in LA, Riverside and Orange county. If you work in the city and have the income need to move to suburb it is become economical to stay closer to your job. With gas prices increasing and not going back down to historical low of the past it may be the wise decision to live closer to you employment. So now the existing home owners who are usually trading by sales to these first timer are not able. Now we lose the second leg of buyers.who want be in the market to purchase the $500-$800k homes so even more home sit on the market for lack of buyers. Price will have to get below $144k on average (48k median Cal. income) for the number of buyers to come into the market and turn it around. I just don't see where the numbers required of new first time buyers are coming form to accomplish this. Here in So/Cal that pool of buyers that fuel this bubble spurred by cheap money lent to minorities buyers are not there anymore. This group is now out of the market for at least the next 5 years. Because of foreclosure or bankruptcy or just happy to be able to rent at a affordable rate for there income they will not be back. Everyone saying we just need the price to reach a bottom and housing sale will come back. I think that's not the question it is more where are the potential home buyers to buy these homes. Most of the young buyers got sweep up in the last five years and are now upside down or back renting because they purchase a home they never could afford.. So look for a long period of decline in prices and sale more in line with 1991 which the data shows took until 1999 for sale and price to stabilize and increase here in So/Cal.

[Jonathan]

I got the same Feinstein canned reply. It basically says the opposite of what I want. We need to get rid of the ridiculous representatives that are spouting this garbage. Rewrite mortgages when people can't pay? That's absolutely crazy!!

[MyLessThanPrimeBeef]

YOUR HOUSE MAY LOSE VALUE, IT IS NOT INSURED BY THE FEDERAL GOVERNMENT..."

LAKER, that's a good one.

And I may add, from the FDA hopefully:

WARNING: BUYING A HOUSE NOW MAY BE DANGEROUS TO YOUR FINANCIAL HEALTH OR JUST HEALTH PERIOD...IF YOU ALREADY HAVE HIGH BLOOD PRESSURE.

[shockg]

Peter Schiff ia a gas bag who's goal is to sell books.

[Mark Too]

This isn't a bailout for stupid/greedy homeowners. It's a bailout for the banks. Anyone that thinks otherwise is only kidding themselves.

According to realtytrac, over 1.2 million home went into foreclosure in 2006 with over 2 million going into foreclosure in 2007. Many millions more in prior years.

Did anyone care? No! Too bad for the homeowner!

In the current situation, who was stupid? The lender or the borrower? My take is the lender. Borrowers were allowed to finance a home with nothing down. The value of the property goes up and they've made money. The value of the property goes down or the mortgage resets and they can't make the payment they can just walk away. The banks were the ones that assumed all of the risk in these deals - all driven by greed. So who was stupid?

The banks are the ones that are in trouble now. A bailout might help the homeowner stay in their home but that is nothing more than a side affect of trying to make sure that the financial institutions stay solvent.

[Ann]

Nice try Teresa BUT

Median Household Income in Philly (county) is $33,229 or about 33% LESS than the US median household income. There for the median priced house in the county should be $114,300.

Median Household Income in Philly (city) is the same.

With a 3% downpayment (FHA), that means the median household can afford $117,900.

Pulling up the listings for Philadelphia shows that 66% of the homes for sale are lsted for MORE THAN $118,000.

The median list price is $160,000.

Prices need to drop EVEN in Philly until the median price is $118,000.

That means even Philly needs to drop $42,000 on the median list or 26%.

Try again - and use the real data when estimating whether prices are in line with income.

[TJ]

Greenback Dollar – by one Benjamin Shalom Bernanke

Some people say I'm a no 'count. Others say I'm no good.
But I'm just a nat'ral-born banking' man, doin' what I think I should, O, yeah. Doin' what I think I should.

And I don't give a damn about a greenback dollar, crush it as fast as I can.
Save a Bear Stearns or a deadbeat fund, the only things that I understand, poor boy, the only things that I understand.

When I was a little baby, my momma said, "Hey, son. There’s a tiny little club always trying to rig the game
It’s called the fed reserve, my boy. Its called the fed reserve."

And I don't give a damn about a greenback dollar, crush it as fast as I can.
Save a Bear Stearns or a deadbeat fund, the only things that I understand, poor boy, the only things that I understand.

Now that I'm the Chairman, I’m Helicopter Ben. I've learned that all I need to do is hit the printing press,
And pump out more paper, poor boy, now eat your banana dollars - you monkeys

And I don't give a damn about a greenback dollar, crush it as fast as I can.
Save a Bear Stearns or a deadbeat fund, the only things that I understand, poor boy, the only things that I understand.
--------
US of A on life support - Muhahahahaha. Lets borrow more money!!! Lets attack Iran, North Korea, and Cuba on low down/no down.
Hillary 08! Obama 4 Life! Crazy McCain can make it happen! Decisions, Decisions!! Dance you monkeys dance!!!