Tel: 800-253-2350 info@matthewferrara.com

As President Obama signed the stimulus bill into law yesterday, the vast majority of Americans, and some REALTORS, registered their vote against it. No, another election wasn’t held – but the 300 point drop in the DOW Jones Industrials Index is a better indicator than an election of citizen sentiment on any given day. Obviously, most Americans aren’t fooled by this bill: It neither inspired confidence nor demonstrated a clear path out of the recession. Political pundits on both sides of the aisle were forced into the interminable pattern of “yes, but…” in their commentary.

Yet the National Association of REALTORS’s Chief Economist Lawrence Yun hailed the move, saying, “… the housing component is clearly the best measure to turn the economy around.”

Apparently the President isn’t the only pseudo-economist around here.

Ordinary calculator-wielding Americans don’t need to read Adam Smith to know he must be laughing in his grave at Obamanomics. Aside from the widely posted lists of pork-barrel spending in the bill, the housing provision is the one that defies even a third-grader’s understanding of the lemonade-stand price mechanism. If you have been selling your lemonade for 50-cents a cup all week, and you see your customer walking coming down the street, suddenly bend over to pick up a dollar bill on the sidewalk, what would you do?

Flip your price poster right over and scrawl “Only $1 a cup!” as fast as you can. Of course.

It seems that even NAR doesn’t understand how supply-and-demand works in the marketplace. Nor do they understand that the price of a commodity is set by the buyer, not the seller. Every agent struggling to sell a listing today does so because they have set a price as indicated by the SELLER. Every time a buyer passes by and doesn’t make an offer, or makes a lower priced offer that is not accepted, the commodity sits unsold in inventory. Only two situations will lead to a sale under these circumstances: The sellers will “listen” to the buyers and reset the price offered for the home; or the sellers will consume their backup-supply of “waiting capital” and end up in financial distress, at which point the home will sell for the buyer-indicated market price, or perhaps even less, as buyers smell a distressed-price bargain.

Now, according to some yet-to-be-explained logic of real estate , many members of the National Association of REALTORS think the rules of supply-and-demand can be fooled, once again, by extending extra unearned credit to the buyer side of the equation. That’s the basic principle behind the $8000 tax credit in the housing stimulus package. And of course, it won’t work because sellers watch the same television news that buyers do. In other words, once sellers know that buyer suddenly have $8000 extra “free” money in their pockets, it’s not hard to guess what they will do:

Raise the price of their home by $8000, of course.

Once again, this isn’t the seller setting the price. It’s the buyer doing it.  If somehow buyers could have received the $8000 tax credit in secret then sellers wouldn’t adjust their prices. But of course, the government’s market distortion is known to everybody. So the only sensible reaction – in market terms – is the one that always happens when you give away free money:

Inflation.

Some people are arguing that we won’t have inflation because there is “excess” housing inventory. So it’s not “more” money chasing “scarce” commodities, and the prices will hold steady. That kind of logic only works if you assume sellers are dumber than the government. But many sellers’ balance sheets are more distressed” than the Fed’s, so they need every dollar they can get, just to sell without a loss. When they hear the government is offering buyers $8,000 extra bucks, they will conclude that increasing the price of their homes will not “harm” the buyer in any way, and will help them fill in their equity-gaps at the same time.

The result: $8000 higher housing prices offered to $8000 richer buyers. And the market remains frozen.

No amount of shifting money from some pockets to others can “create” wealth. This is the fundamental error of all government spending, and the critical flaw in the entire stimulus plan. None of the money being spent was “created” by the government – say, through the profitable sale of a product or service, or even by capturing it from defeating a foreign enemy and stealing their gold, as in the 19th century. All of the money being “spent” is merely being “redistributed” from fuller pockets to emptier ones – and even stolen from future pockets. The prices of goods and services in the marketplace simply follows the money.

Even basic accounting is based upon “double entry” bookkeeping.

So the housing industry isn’t about to get any better, because the $8,000 tax credits isn’t going to fix the fundamental market problems. Excess inventory will become $8,000 more expensive, so buyers will see their “tax credit” as essentially worthless. Buyers will stay pat. They will continue to watch from the sidelines, at the same point where they believe housing prices still too expensive. They have been waiting for housing prices to fall further, not rise by $8,000, before they look are enticed to buy.

There is an answer to this problem. But it doesn’t involve giving away $8,000 to either party. The solution is to not to increase the money supply, but the value of money. It’s done by raising interest rates, not lowering them, and making money more valuable, and somewhat more scarce. Rather than deflating the dollar by giving more out, raise interest rates on both savings and mortgage lending. This will signal to buyers that the cost of borrowing is starting to rise, and induce them to stop waiting for prices to fall.

Make the dollar more powerful, not more plentiful, and price mechanisms will do their own work. The value of homes will stop sliding, since all remaining equity is priced in dollars. Buyers will be psychologically induced to get back into the market, for fear of higher borrowing costs, without spending virtually a dollar.

(From Wall Street Journal Blog. To read entry, click here.)

In fact, spending less dollars, not more, is the real solution to the economic crisis, both in housing and broader markets. Price stability comes with currency stability; dollars that spiral down in value take commodities priced in dollars with it. We see this every day at the gas pumps: oil’s meteoric rise was due to cheap money (inflation of dollars), and crashed when investors feared the dollar was becoming worthless. Stable or increasing value currencies (through money supply or inflation control) maintain commodity prices, like home prices. They help buyers feel more comfortable spending the money they have, because they can make reasonable guesses about the future value of their investments.

Everything the government is doing is the exact opposite of these fundamental laws of economics. The generation in power doesn’t believe in economic laws anyway. Yet you would think that at least a few economists – such as those in the housing industry – would at least know better. It’s one thing to think our politicians are doing some dumb things; it’s another when our intellectual class act even dumber.

See you in the breadlines.

– Matthew