By John Saunders
Money is starting to flow from the government’s financial rescue plan, but even the economically challenged Los Angeles Times has realized that it is not enough to get the economy back on track.
We have avoided falling off the cliff for now. But we are still teetering on the edge.
As with everything else that has been done by the government,it’s too little too late. The first and most basic step to getting the economy and financial system functioning properly is that housing prices have to stabilize.
Fortunately most of the components necessary to achieve this are in place, if only the government takes the right actions.
Housing prices have fallen in much of the country where they are no longer out of sync with what buyers can afford to pay.
Prices on the coasts and other high demand areas still are above affordable levels, but they are much closer to being affordable than before. And there is a reasonable case that properties in high demand areas should re-tain a permanent premium to the overall market.
Fair value, however, is not sufficient to lead to a stable market. The momentum of falling prices is so intense that prices are likely to overshoot on the downside unless there is a fairly dramatic intervention to stop the fall. Housing could easily fall another 30% to 50% unless action is taken.
Adequate financing is also a necessary condition for housing stability.
Currently almost all housing financing is done through Fannie Mae and Freddie Mac. The government recently placed these entities in conservatorship and has taken control of their operations. The government could dictate changes to their policies and operations.
While funding costs of Fannie Mae and Freddie Mac have gone down since the government takeover, they still are paying close to 1% above federal interest rates. If the Treasury Department borrowed in its own name, funding costs could immediately be dramatically cut.
That should be done. Treasury is effectively guaranteeing this debt anyway.
The government can currently borrow money for 10 years at around 4%,and shorter term money for much less. There is a shortage of government securities in the market. There is no reason why the government cannot make mortgages available at 4.5% and make a decent profit while at it.
This combined with a rational easing of credit standards (not going back to the crazy standards of 2006 and ’07 but not being unduly tight as in the current market) would dramatically improve the situation.
The government should immediately announce that Fannie Mae and Freddie Mac will buy new properly underwritten mortgages at a 4.5% interest rate. This program should be available across the full spectrum of the housing market as its purpose is to stabilize the market, not just to help those deemed deserving.
This would change the outlook for the housing market overnight. Housing sales would increase, and a refinance boom would be triggered. The extra money that refinanced borrowers would save could boost consumer spending. The early payoff of refinanced mortgages would help liquefy banks.
This 4.5% mortgage rate might be enough on its own to stabilize the economy and prevent a depression. At the least it would go a long way toward mitigating the downward death spiral our economy is now in.
The government could announce such a program immediately and implement it in short order. It should do so.
What is completely clear is that if we continue to react to emergencies with a too little too late policy, these emergencies will be disastrous. We must get ahead of the curve or we will be facing a calamity that will make the economic fallout from Sept. 11 insignificant by comparison.
Saunders is a real estate investor and owner of London Coin Galleries Inc. in
Newport Beach.
