Shiller: Austerity Negative for Housing

On Tuesday, we reported that the unadjusted broader Case/Shiller index fell 4.5% on a year-over-year basis. Month –to-month numbers were positive in most markets, however, due to the usual buoyancy of the Spring and Summer selling season. (Property values were flat on a seasonally-adjusted basis).

Economist Robert Shiller spoke with Carol Massar and Matt Miller on Bloomberg Television’s "Street Smart" on Tuesday. Shiller sees the likely austerity that the US will see as a result of the debt ceiling debate as negative for housing demand and expects this to impact prices.

Video below

Note, Shiller flags the degree to which Fannie Mae, Freddie Mac and the FHA are propping up the housing and mortgage markets. This is significant when you ask How much did Fannie and Freddie cause the financial crisis? as Tyler Cowen did recently.

I told you in 2008 when Fannie and Freddie were nationalised, I felt that they would be used for the nationalization of America’s mortgage problem – a back door bailout for the banks. See last May’s post Banks Making Shed Loads But Fannie And Freddie May Be "Losing Money as a Matter of Policy”. And indeed, as I reiterated in January of last year, the government is still manipulating mortgages.

So, you can’t look at Fannie and Freddie’s losses as any evidence that they caused the crisis. More it is a recognition that they were major contributors to the crisis (or as Cowen says “the mortgage agencies made the crisis much, much worse”). What’s more, they are being used to conduct a stealth bailout at taxpayer expense. These agencies should never have been private companies and should now be shut down. Set up a different agency if you want the government to perform any guarantee function.

P.S. – when I say shut down, I mean wound down over time. Yes, this would be negative for the economy. But, if you want to aid the economy, promote jobs or do a job guarantee. Don’t prop up asset prices artificially.

  1. David Lazarus says

    I think that you are wrong. Fannie Mae and Freddie Mac should be closed to all business immediately. All it does by keeping them running is extend and pretend with the housing market. That guarantees problems for decades, and more backdoor bailouts for banks for that entire time. Once property is down at a sustainable floor it will allow new buyers. First time buyers should be helped immensely by this.

    Start winding them down and force banks to take back their loans at par. Let the banks pay for this wind down. If it destroys the big banks that is a plus. It will eliminate their trillions of tax losses which means that the government will not be subsidising them till those losses are cleared.

    1. Edward Harrison says

      I added that because a friend on twitter called me out, saying that an immediate shutdown would be very negative for the economy and cause untold disruption to the mortgage market. I agree. A timetable for winding their business down would eliminate dead weight losses from a debt deflation – which your call for an abrupt end to Fannie and Freddie would mean.

      And you know as well as anybody else the banks can’t ‘pay’ for the wind down as they are already carrying hundreds of billions in dud assets on their books.

      1. David Lazarus says

        Yes but they have also been re-capitalised by the taxpayer through trillions of extra “liquidity”. Then add in the fantastic subsidy at the savers expense at the Fed Window, guaranteed ultra cheap funds from the Fed and immediately buying Treasuries at 3%. Hardly takes a genius to make profits that way. That is how the government are bailing out the big banks. That support does not extend to the community banks who are the real lenders to job creators ie small businesses.

        As for disrupting the market it will have a massive boost for home owners. If this leads to real estate dropping in value to sustainable levels it puts the banks in the position of foreclosing or having to accept write downs to levels that the borrowers can sustain. It is the home owners I want to support not the banks.

        What is needed is the FDIC to shut down bad banks. To split a banks assets into good and bad. Allow customers to have more power in saying “this is what I can afford write down my mortgage to this level.” That will mean that homeowners will have mortgages that they can actually afford. Local communities might create new banks if there are no local banks. If the big banks are wiped out then it will have a number of benefits. No more corruption of US politics. Banks should face local taxes for all the foreclosed homes that they own. That will help support local government as well. It will also give the banks a stark choice foreclose a property and accept liability for local taxes or negotiate a deal with the homeowner that will end the potential for further write-downs. Without that stability deflation will drag on. Lending for real estate will be subdued until it is clear that prices have stabilised. That could mean a dearth of mortgage lending for decades as prices stagnate and fall.

        Give the homeless a foreclosed home at a rent that they can afford then allow people to rebuild communities. That is the way to generate new demand for home improvements.

  2. Tom Hickey says

    Dr. Housing Bubble has been saying for some time that housing is overpriced relative to incomes and the only reason that prices were so high is lax lending practices. Now, to prevent a housing crash to a price level that incomes can sustain, which would render many institutions insolvent and create a new financial crisis, government is doing a stealth bailout through Fannie and Freddie, which are now responsible for almost all mortgages.

    Obviously, this is the interest of the maintaining the financial sector, which the powers that be see as necessary to the health of the economy and national security. It is a a rip-off but it there is a rationale, too. Unfortunately, the public is being asked to bear the brunt in a number of ways.

    However, pursuing a liquidation strategy is unacceptable and will not take place unless Congress manages impose it. That could happen after the next election if the GOP is victorious, commands government, and imposes an austere fiscal policy that embraces liquidation. Then the consequent US depression will result in a global depression.

    However, even with a soft landing, the housing market is going to adjust to tighter credit standards and income level. That means at least a mean regression and most probably overshooting the mean on the downside in the process.

    Since housing is a major determinant of economic activity, this is going to be a drag on the economy for some time.

    1. David Lazarus says

      It was not only lax lending standards. Many prime borrowers would be offered higher income multiples. Here in the UK there has been little fraud but there has been a surge in income multiples. With multiples of 6 times income or higher being common. This enabled a bubble based on legal incomes without any fraud. Low interest rates supported that bubble and the impact of an increase has meant that rates are practically a one way bet. Even with surging inflation in the UK the Bank of England are still reluctant to raise interest rates, because it will kill of any hope of a housing recovery.

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