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Leaving Bad Enough Alone

Except for housing, much of the American economy is slowly but steadily recovering from the recession that began more than three years ago. The housing sector might be recovering by this time too, if we had not tried so hard to help it.

The centerpiece of those efforts was the first-time homebuyer credit, enacted under the George W. Bush administration in 2008 and expanded in the first months of the Obama administration in 2009. It was ultimately increased to $8,000 and extended to include many people who already owned homes, but who signed contracts to buy a new principal residence through April 2010. All of this was an attempt to drum up activity in the home market.

It succeeded in making the market more active, but not in making it any healthier. After $22 billion in fruitless federal spending, the housing market is about where it was in the depths of the downturn. The Standard & Poor’s/Case-Shiller index of property values in 20 cities fell 3.1 percent from January 2010, Bloomberg reports — the biggest year over year decrease since December of 2009. Rising foreclosures and falling consumer confidence mean prices probably won’t rise any time soon.

Housing starts are, unsurprisingly, down as well. It’s not hard to see why developers would hesitate to build new projects in this climate. New home sales are at their lowest point since recordkeeping began almost 50 years ago. Though a recovery will come eventually, the signs all point to a long, chilly wait.

Not everyone is surprised. As I have discussed before in this space, the homebuyer credit was, for the most part, a bonus to those who would have purchased homes anyway rather than an incentive to those who would not have otherwise bought. The government, by paying people to do what they would have otherwise done, artificially sustained demand by dragging future purchases to the present. Buyers moved existing plans forward to take advantage of the credit before it ended last summer; we’re now in the gap where that demand would have been.

Prices have fallen back to where they were, or even farther in some places. The S&P/Case-Schiller index indicated that, in 11 cities, prices are at their lowest levels since the initial housing bust.

If the government had left the housing market alone, a few things would be different. First, we would have saved $22 billion in federal debt. Second, prices would have probably fallen further sooner, which would have enabled many buyers to pay something close to the same net amount, since the lower prices would have offset the lack of the federal subsidy. Third, we would by now be much closer to the end of the housing slump, or at least past the worst of it, and thus be closer to a sustainable turnaround.

The Obama administration continues to make the situation worse, even after the credit’s expiration, by doing what it can to keep the brakes on the foreclosure rate. Leery of sanctions and regulators’ scrutiny, banks are hesitant to foreclose. Fewer properties are making it to market as a result. The Financial Fraud Enforcement Task Force, which Obama established, is pressing hard to find any hint of wrongdoing in the foreclosure procedure, leaving banks understandably slow to act.

While keeping people in their homes is superficially appealing, the Obama administration continues to miss the deeper point. There are still families and individuals in houses that they can’t afford. Until the process of default and foreclosure is allowed to run its course, recovery will be limited, because those homes won’t go to people who are willing and able to pay for them. Artificially postponing the worst of the housing crash has only succeeded in delaying the inevitable pain and the recovery that will eventually follow.

We should have left bad enough alone.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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