A few weeks ago I put aside a draft post that I had prepared suggesting that the Federal Government should spend its money - not on bailing out financial institutions but rather on buying single-family homes from distressed U.S. homesellers. There would, of course, be some criteria as to which houses are purchased and at what price - I just had not gotten to that part of the equation when I decided that maybe my idea was a little too crazy.
Then a week later the Treasury Department and Federal Reserve decided they needed $700 billion to buy toxic mortgage securities and derivatives from financial institutions in order to save the U.S. economy. That assertion started me wondering again - maybe my idea was not so crazy... or perhaps crazy was good today.
Yesterday I appeared on Fox Business News and stated my position that although I thought the bailout was important for adding liquidity back into the system, what it was really doing was addressing a symptom of the disease - and not the disease itself, the housing market. When I said that out loud, it made sense to me.
Riding home in the nice car provided by Fox I read an opinion piece in yesterday's Wall Street Journal in which Holman Jenkins suggested:
"This column has advocated injecting the money at the level of the collateral - buying and demolishing the least wanted, market-souring homes in the subprime hot zone of Florida and the Southwest. This solution really would be clean, quick, would minimize the subsidy to bad actors, could be turned off as soon as it had served its purpose, and would involve no sticky issue of whether to bail out foreign banks along with U.S. ones."
Mr. Holman suggests this approach would cost a lot less than $700 billion and would root out the disease - not the symptom.
Again, I began to talk to myself: Is there any idea that is too crazy? So, I started doing some math:
1. There are currently 4.3 million homes on the market.
2. Let's say the government offers to buy any one of those houses that is for sale for under $400,000 (any more expensive house - too bad for the homeowner) at a 10% discount off appraised price and close in 30 days.
3. I am assuming that about ¾ of the housing inventory would fit that category, i.e. that +/- 3,000,000 homes are on the market for $400,000 or less.
4. Since the median price of U.S. homes sold in August was $203,000, I am guessing that the average appraised price of the 3,000,000 houses in my category is about $250,000.
5. Now let's assume worst case that the U.S. buys every single one of the homes on the market for 90% of appraised value (average $225,000). That would cost us $675 billion (freaky coincidence).
6. Let's assume we hold those homes for two years and that after two years the housing market recovers. During those two years there will be rental income but let's assume (again worst case) that the rental income from the 3,000,000 homes we own just covers real estate taxes, insurance, management and repairs.
7. In two years the U.S. sells everything at a price which after closing costs is equal to
what it paid. So, we get all of our investment back.
No harm, no foul.
Perhaps but any more crazy than buying toxic securities that NOBODY can value right now? Any more crazy than helping out financial institutions that are to a large extent responsible for the problems? Any more crazy than creating a huge bureaucracy of asset managers who will have to work to avoid conflicts, let alone actually execute on plan.
Any least with single-family houses we know what we own. And we can figure out how to rent and manage houses. We don't need Wall Street types to analyze, rate, buy and sell mortgage securities (isn't that how we got into trouble in the first place?).
What's more, buying up houses creates a floor on housing price declines. As people get out from under, the infection that is causing the toxicity in the mortgage security world starts to clear up and owners of mortgage securities can figure out what they have and what it is worth. Perhaps there might even be a market for mortgage securities once people understand the parameters (especially on the downside).
Crazy is doing the same thing over and over and expecting a different result. We need to find new ideas and try new things, even some that on first blush may look nutty, before we conclude what is and is not crazy.
Jim Randel is the author of the just-released book, The Skinny on the Housing Crisis: What Every Homeowner and Homebuyer NEEDS TO KNOW!!! (Clover Leaf, 2008).