I think I’ll apply for the job as Federal Treasurer next month. Apparently, all you need is an abacus and a few simple thoughts and you can at least blow a trillion or so taxpayer dollars. If you’ve actually studied economics, – well, hey, maybe consumers can just fix this mess by making one small change in their approach to purchasing a home…
The problem with all of the “pump money and credit” into the market approaches so far is – as we have seen – they don’t work. First, it spooks the stock market, because inflation devalues commodities and the market sells off. That further erodes company values, who then have to cut costs – which means layoffs. Rising unemployment means nobody has any income to QUALIFY for government loans. So unless the government starts handing out homes like they did bread – in long lines on the sidewalks – almost every move the Fed has been making is TOWARDS a greater recession and ultimately a depression.
Now, what’s the alternative to freeing up credit and cash? Resetting value. What values, you ask? Well, the PRIMARY STORAGE UNIT of value: The United States Dollar. Ideally, we’d restore the gold standard of value. But let’s assume for a moment that we’re not ready to be completely sane; we rely too much on government financing to continue paying farmers not to plow and blocking cheap Brazilian ethanol with 51-cent-per-gallon tarrifs. Gold standards would FORCE us to have fiscal and monetary sanity. But in the meantime, couldn’t we just make the dollar STRONGER?
Yes, and that’s not too hard. It doesn’t take a lot of work. If we have a trillion dollars to give to idiot consumers and drool-monkey CEOs at auto manufacturers, why don’t we just let some braindead bureaucrat use a trillion or two to BUY BACK DOLLARS from the marketplace?
It’s called a currency re-purchase. And it will do the ONE THING that creates value: It will CREATE SCARCITY. If dollars become scarce, their value rises. People will WANT them, so they will pay MORE for them. A stronger dollar means objects priced in dollars would be more valuable too.
That means houses.
It also means the PURCHASING POWER of the average consumer would increase. LOWER CREDIT RATES don’t create purchasing power. They CREATE DEBT. That debt must be paid in the future; and if the dollar keeps weakening, it means you’re going to need EVEN MORE DOLLARS in the future to pay off your debt accrued today. Welcome to the Ninth Circle of Hell, sayeth Virgil. It would just be quicker.
But the story goes on. There’s no way the current political class will increase the power of the dollar. Why? Because it would KILL OFF the auto industry (ie,. the UAW’s votes) because they could not export their cars anywhere. But that’s merely a symptom of the real reason they won’t strengthen the dollar: It would dis-empower their hold over American’s lives. Who would need Papa Government and all His Handouts if they could make a living in the free market?
Put that aside for a moment; maybe your optimism is history-defying but well intentioned. Is there still something that can be done to shore up value in the dollar – and help the housing industry at the same time.
Simple answer: Place your buyers into homes they can afford. Better still, place them in homes that put very low pressure on their marginal income. Do you have buyers who can afford $350,000? Put them in $250,000 and tell them to stay put for a few years. Have them put the cash-flow difference into gold or a Japanese stock and sit tight.
STOP letting buyers get into “thin margin” positions in housing. Start telling buyer to UNDERBUY.
Teach them about Frugality. Like Benjamin Franklin taught generations of Americans before the Federal Reserve was created.
There’s plenty of housing available for underpurchases. Foreclosures. Empty homes. And just regular inventory “beneath” the level that your buyers are currently looking at. Get them to OPT FOR FRUGALITY, not BRAGGING RIGHTS. Remember, our parents did it (Growing up, my house was a carefully orchestrated symphony of last-minute repairs and shoring-ups – but we never were foreclosed and we did it on ONE WOMAN’s INCOME in the 1970s!)
If we focus current purchases into the LOWER priced homes, we will do three critical things to fixing the economy:
- We will give homeowners MORE spare cash each month. Lower mortgage debt (not lower rates on higher balances) will create home ownership SUSTAINABILITY – and help owners withstand even short-term unemployment if it occurs. It’s not forever – it’s a house for a few years!
- Since buyers set the prices of homes, not sellers, it will force a MAJOR correction of pricing down to normal levels. What will happen to those higher priced homes? A) Nothing. The sellers will just take them off the market and stay put for a while, or B) they will go into foreclosure, which will create even MORE lower-priced inventory for more buyers to UNDER-buy. Remember, the GOAL is to create marginal capital/savings for consumers.
- Leftover cash each month in consumer’s pockets will EVENTUALLY start to drive up savings, investments and purchases. This will create some inflation – but of a good kind, becuase it will be PAID FOR inflation – not CREDIT inflation. Even if gas prices go up, it will be paid for in REAL DOLLARS, not on Visa and Mastercard. Now, think down the line a year or two: “PAID FOR INFLATION” is going to cause something else’s price to rise, right?
Housing prices will start to rise again. This time, in REAL DOLLAR TERMS. Not “funny math government credit dollars”
I admit, this is all very hard to get consumers to understand. Except that the Baby Boomers, Seniors and the Ancient Generations all did this in the last century. They SPENT within their means. They bought homes INCREMENTALLY – not the fancy-new-construction-the-first time. This will mean SPANKING the whining Gen X’ers who can’t move up to their next mansion, and the Gen Y’ers who want their home fiber-optic-ready-now. They will have to spend less on less housing. They will havet o be frugal. But they will not be cash strapped; they won’t be in a crisis if they lose their job.
And if they want their fiber, they will be able to afford a box of Cheerios. Not stand in a government bread line.