Matthew Ferrara, Philosopher
 

The Case for Doing Nothing to Help the Housing Market

At what point will politicians, Fed, Treasury and even the real estate industry admit that throwing money at the housing industry isn’t going to improve it? Despite tax credits, subsidized housing agencies and mortgage tax deductions, the deleveraging of the American housing sector will not be deterred. So it’s time for everyone to take a deep breath and try a bold new strategy:

Do nothing.

Forget about the contradictory charts, reports, media and analysts. If any other sector of the economy were reported on with such daily deviation, the public would conclude that someone was drunk. Imagine news reports saying automobile sales were soaring Monday, falling Tueday, flat Thursday and soaring again Sunday – all in the same week. That’s exactly what you get on the real estate pages of most newspapers and websites these days.

The analytical confusion breeds policy confusion over what to “do” about housing: Should we try a third tax credit policy, though the evidence from the first two attempts merely kicked the correction-can down the road. Another TARP won’t work, since the big banks are healthy again, having paid their loans with interest. Giving them more money to offer in 4% loans won’t create buyers to actually borrow it. Besides, banks are perfectly happy borrowing from the Federal Reserve at 0% and lending to the Treasury (buying bonds). With such a neat no-risk way to make a profit, what bank would even think about getting back into housing?

This leaves the political hacks and industry PACS to come up with the next feel-good measures. The latest proposal includes lending money – at no inteerst – to underwater homeowners who are also unemployed, so they can pay a mortgage they cannot afford.

Brilliant.

Now, such challenges might lead one to believe there is nothing to be done to help various housing troublespots in the country. (Note that not all housing markets are in trouble or all home owners underwater). In fact, after billions of dollars, and dozens of programs, will nothing work?

Exactly!

Nothing is exactly what we need. More accurately, doing nothing else to distort or delay the market correction, no matter how painful or disruptive. Doing nothing has worked before: we’ve been through asset bubbles, dot-com manias, equity explosions, and credit-fueled consumption by irresponsible before. Pardon the pun, but the house of cards has collapsed many times over the centuries. And it came back into shape without any help from then-nonexistent Federal reserves, mortgage tax deductions, housing subsidies or tax credits.

And usually within a single year.

When the market was left to correct itself throughout the 19th century, different recessions for different reasons all recovered within about a year. That’s because the people closest to the right information – and therefore the right things to “do” were consumers. Not politicians. And consumers know that doing nothing is the best policy for speeding a recovery out of a recession.

Consumers know how to do nothing – like spending less in order to increase household savings, as protection against further downturns. Such savings also get directed into productive activities by other consumers, called job-creators. But mostly, doing nothing means putting off large and discretionary purchases – like a home.

That’s why so many are renting just a little longer today, or staying home with mom and dad, or just waiting. Doing nothing is exactly what the market needs to get the proper information flowing about supply and demand.

Doing nothing takes time, which is terminal for politicians and sometimes difficult for the real estate industry itself. But consumers have a lot to reconsider as a result of the past ten years. It takes time for them to figure out what the future landscape, upon which their homes will sit, will look like.  They must try to anticipate unemployment rates, tax rates, insurance costs, energy costs, food prices, college tuition, etc., none of which will be like they were in the middle of the last decade. Which is exactly why they cannot buy and sell homes like it was then, either.

Doing nothing let’s them evaluate all factors, and possibly conclude that housing prices need to fall before they can afford to come back into the market. It’s not just about mortgages and tax deductions any more.

None of this can happen if policymakers keep trying to do “something.” Until we admit that housing purchases are discretionary, we won’t understand that sometimes there’s nothing to actually “do” when the absorption rate falls some years. Remember, there’s no necessary requirement to purchase a home, compared to other products such as food or energy. And since there’s sufficient stock to accommodate the housing needs of nearly everyone, there could be a lull in housing volume for quite some time. Some consumers might decide to buy more iPads than a new pad. Maybe a rise in renting, roommates, multi-family housing or buying a more modest home for the time being, but so what? Our parents and grandparents did it for the better part of the last century.

But it is  is ludicrous to believe that a deleveraging consumer trying to predict the economic landscape of the near future wants its government to push the prices of housing prices up. And that’s what any government program is almost certainly going to do.

The only reason to “do something” is emotional. We’re a  society that doesn’t like the fact that some times are tough and some people have to feel pain. Our laudable tendency for social compassion has become complete avoidance of any problems, along with political and financial absolution for any mistakes, even the ones we bring on ourselves. Unfortunately, social compassion isn’t an economic policy. Good emotions often lead to bad market interventions and unintended consequences that mostly make things even worse.

Even those who thought they were “on top of it all” during the boom have learned that the fruits of government interference eventually attract fruit flies. The last thing we should be doing now is letting the short-sighted cooks in government back into the kitchens of our housing market.

  • Sperosells

    Nothing works as well as nothing!

  • Lmaher7154

    Matt — I’ve been saying this 2008. Let the markets (all of them) take care of themselves! We are supposed to be a free market society where businesses succeed or fail based on how they are run. Let it be! It will work itself out and probably more quickly if they’ll just leave it alone!

  • Stevefowler

    Your analysis is just about perfect. May I suggest you forward this essay to every member of Congress!

  • Hkaruba

    Thank you! The instant gratification has to come to an end at some point on everyones part…both government and consumers. There is a strong need to say “NO” to that spoiled little voice inside that says “I want it just because I deserve it” no matter the outcome. Reel it in for awhile. It only hurts for a bit.

  • Paul

    Doing nothing worked well for Seinfeld and his pals, but in today’s real estate market it just isn’t going to be a hit. Your analogy of the 19th century markets might make intellectual sense but probably isn’t viable in todays 7/24 information age. The huge US financial institutions, which exacerabated the crash of 2008 happened because of the growth of unregulated markets (that is, doing nothing). I am not against government being involved in both fiscal and monetary policy, I am just afraid of very, very bad governance, which we experienced during most the period of 2000-2008. Our markets today need clear, straightforward laws and streamlined lending criteria for creditworthy applicants…I would agree that we could use a break from the steady stream of shallow, vapid reporting about “real estate” in general. But, we in general, love small snippets of quotable half truths, which substantiate our pre-conceived beliefs. Until or unless something else knocks this story to the back pages, we are doomed to hear it over and over. I call it the OJ Simpson effect. I couldn’t even turn on the tv during the period following the Tonya Harding assault on Nancy Kerrigan; then we had OJ and the car chase. That story never seemed to end, much like the real estate story of today…I just hope what knocks real estate off the front page is not something even worse…

  • Alec

    Nice job Matt… I agree, let’s try “nothing” and let the creative juices in the marketplace generate and flow… !!! Again, nice job, well said…

    Matt for President! .. ( :

  • Hedwards

    Matthew… Having been through the housing crisis in Texas in the 80’s following the oil bust, I know that doing nothing is REALLY doing something. If we do not allow the market to totally correct, we will never get out of this!

  • Thanks to everyone who has posted their comments; I appreciate the feedback and I encourage everyone to share these ideas with their fellow REALTORS, clients and even local Association leaders, to spread the word that the what we really don’t need is more “help” from outside the market!

  • Troyfletcher

    I agree with everything said. When we look to the Government to fix something we become dependent on them the next time we have a problem. The problem is the Government trying to fix it in the first place. Dependence on the government will be out downfall.

  • Matt, I agree with your comments – with one little twist. If the government could ever devise plans and options that are NOT political, but actually solved problems, then I would be for them. However, as history has taught us, especially recent history, this is not the case. Every plan or program endorsed by the government is a weak, watered-down effort that is primarily focused on special interest groups. Let the market (or any market) recover on its own based on the ingenuity of the actual people on the ground and in the trenches.

  • There’s no such thing as a non-political government solution, right? What we need is a “separation of economy and state” if we ever want to return to global leadership.