Targeting Nominal GDP, Purchasing Homes, and Economic Recovery: A Reply
Bill Watkins & Dan Hamilton
On January 26th, the blogger named Effective Demand commented on our January 25-th entry “Targeting Nominal GDP, Purchasing Homes, and Economic Recovery”. We thank you for your comment. We agree with you that too many people own homes, hard choices need to be made, and short sales or foreclosures must go on. Further, government programs to keep someone in their home who will eventually default anyhow are short-sighted.
You make the statement that the houses that exist are built in the wrong places, too far from job-centers. We agree with this, and purchasing homes in these markets would be a way to foster the re-equilibration process that, even with this plan, will take some time. The owners, we suggested local-area housing authorities, could rent them or use them to satisfy affordable-housing mandates.
You conclude by saying that we should “fix the economy and housing takes care of itself”. This recession is different. The problems started in housing, and were so deep and so lasting, the rest of the economy was pulled pretty far off its growth pedestal. Perhaps in “normal” recessions this conclusion makes sense, but perhaps not in this recession. We expect the economy will experience economic growth below its potential until the housing markets are repaired.
I guess I just don’t see the tremendous benefit of buying houses that are in the wrong place and renting them out. You’ll depress the rental market and that will affect the purchase market as well. That is if the demand is there to begin with, in many of these places the towns are literally dying.
The other thing I don’t understand is what price would you pay for the asset, market? The bank can get market right now. Something above market as gift to the banks?
The only way the idea makes sense is to plow the homes under. You then remove supply (current home) and probably create demand (former homeowner has to live somewhere though many homes are simply sitting empty). If the Fed buys homes at trustee sale (paying no more then market) and plows them under then the former homeowner is freed from debt and the bank gets a bit more because they dont have to worry about transaction fees.
I also don’t believe the problems started in housing. This was a huge credit bubble it lasted for so long it has fundamentally changed the way people perceive debt. People are looking for ways of taking on more and more debt, still to this day. Even though we have people leveraged at the highest level ever measured they are still looking for more credit. They are on a credit downward spiral, they have to borrow from Peter to pay Paul. Housing takes center stage because American’s cultural blind spot to it (we as a people quite simply can’t place a proper value on owning a house) and it was one of the main transmission mechanisms in which the credit bubble manifested itself. But the fact remains it was the excess growth that was based on the credit bubble and housing that has messed up the economy. We have too many people trained in the wrong type of jobs, we have excess capacity that was caused by the credit bubble. We need to recognize credit bubble for what it was and that the solution isn’t trying to reinflate but it is instead trying to create jobs.
A stable housing market is dependent on a stable economy and jobs. Looking to create jobs should be the focus. It isn’t different this time in anything but the size of the problem.