If anyone has thoughts,, feel free to chime in....
Senator Chambliss,
I write this to you as a proposition from a common sense point of view with regards to our housing debacle and a possible solution for it. I hope this letter finds you well, and with about 10-15 minutes of your valuable time. What is mentioned below, though a tough solution for a single sector in our economy, at the end of the day, will serve the greater good of not only this country, but the world economy as a whole. (In terms of business, and as a result, individual wealth in this country and abroad). This viewpoint is based off the simple economic view of supply and demand. This thought is something I have not yet heard even mentioned in the media (national news, CNBC, etc..), but seems so much a common sense thing to me.
My proposal is this. Proposing and lobbying for a law that will take the amount of building permits issued in any given individual county or municipality in the last 5 years, and cutting the amount of those new home building permits by law, to 25% of that 5 year average, for the next 5 years only. This is the economic side of this. Cut supply, and eventually, demand will catch up.
We, based on recent reports, currently have 2 million homes in this country in foreclosure status, with a possibility of many more multiples of that to come, as ARM loans reset going forward. This sets us up for a supply glut, with banks not willing to loan money (implied risk) at a reasonable interest rate. (Last week as of march 3rd, as compared to today, a 30 yr fixed rate home loan is going for a .6% higher rate, from 5.5% to 6.1%, and this is based on internet quotes from bankrate.com). Ben Bernanke, as the bond market is calling it, has priced in a 100% chance of a .5% drop as of today, upon the occurrence of the Federal Reserve board meeting next week. In the past, mortgage rates would drop on this by that amount or thereabouts, but in fact, exactly the opposite has happened. So now the consumer will be paying about 2-3 points more for that same loan than what they should be.
As a consumer with excellent credit, above average or even average credit, I would tell the bank that they can keep their money for that interest rate; I don't want it. Why would I pay up in interest when I know, with the fed rate being at 3%, and heading for 2.5% next week, that I will now pay 6%+ for a fixed rate mortgage? Assuredly, people with fair credit with a resetting ARM are going to be paying way up for these loans. They would be in the same position, if they could even get that refinancing done as they are in today. Might as well send the keys to the bank. This obviously will not do.
The thing is, the banks want nothing to do with a loan of any sort, especially a mortgage on a home, simply because the risk is too high for the bank; even though I might be a good risk, the house value itself might not be. All the sub prime junk they are holding onto now that they can not sell for any price (I do realize they brought this on themselves with their reckless lending behavior in prior years), is on their books, and makes it nearly impossible for them to take the risk of making the aforementioned loan to me, in fear of that junk being defaulted on. A default, as I am sure you know, would squeeze them for cash they would have lent to me, and as a result, they would either meet that margin call or without that money they lent me, they default.
The key to what I propose is the stabilization of the housing market. If you take new homes being built, and cut that 75%, we can much more easily work through the supply of foreclosed properties, as well as existing properties for sale. New buyers will come for those great deals, as prices are greatly deflated from the highs of a few years ago, and banks are just trying to get them off the books, at almost any cost. People with good credit will be buyers, and will flock in upon the announcement that a bill like this is even on the floor of the Senate. This will, in the end, stabilize prices, as sentiment will change, further reinforced by reports that will come in that inventory of homes available are on the decline. This intern will bring more buyers, as they will feel more comfortable in taking the risk that they will not be upside on their mortgage in 6 months. Concurrently, banks will be able to more easily take on risk, as declining home values are taken out of the equation that is currently being used. Like a dog chasing its tail here… and the strengthening would continue.
The sad part is that some of these homebuilders, as a result will be squeezed out of business. But there are only about 10-12 major home builders in this country, with a combined market cap in the 1-2 trillion dollar range, give or take. Our financial companies are not only the financiers of the individuals and businesses in this country, regardless of the type of business, but they finance the world's large and small businesses, encompassing many multiples of trillions of dollars of economic activity. If any of our major institutions break, the suffering would be spread amongst all around the world, resulting in losses I would rather not speak of, current dollars, and the jobs that go with them, not only for the bank afflicted with the default, but many of the businesses financed by them. With some homebuilders, who eventually would have to shut down as a result of this law, our losses could be much, much less, and isolated to only businesses involved in residential construction.
Not to make a pointed statement, but it is not a fiction that 80% of the homebuilder’s employees (the ones phsyically building the homes) are here without official papers, and as a result are not paying taxes. As a result, govt. tax revenues probably would not suffer that much. Lose a major bank or 2, well; there would be hell to pay on both sides of the aisle.
I can write on and on about this, how a housing rebound, and a method to this madness would stabilize our currency vs. other worldwide currencies, thereby pushing oil prices lower, commodities would take a dive as a revaluation of our currency takes place, pushing out speculators who would all be on the wrong side of the trade (aka – we defeat the inflationary pressures staring us in the eye). This only hurts one sector, one where tax revenues would be minimally impacted (a great thing!!).
The whole key to this is confidence. The confidence of the consumer to pick up a good deal on a house that is available. The confidence of the bank to lend to someone whom is a good credit risk, at a reasonable rate. The recovery of our currency, because of new found confidence worldwide, that we are no longer in recession. The drop of oil prices would come with, as USD's are what barrells of oil are denominated in. It all keys in on one thing; that is Americans home values, at the minimum, stabilizing. In my feeling, the simple idea I have outlined above would achieve this objective. Please take this into consideration and speak of it with your fellow senators, see what they say. Have them run it by their economic advisors if they have them on staff. I’m sure I have missed some things, but I have a 10,000-character limit in this email, and though I would love to address it further, I am about to meet that limit (the next part of this would be well beyond the 2,000 characters I have left).
Thank you very much for your time with this matter. Please write me if you would like any further input.
[size=12]With great concern and respectfully,
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