Oct. 4, 2008

A Plan to Prevent Further Slip in the US Housing Market

A Plan to Prevent Further Slip in the US Housing Market

Everybody agrees that the economy faces a critical moment. What investors and practically everybody fears the most now is that the housing market may continue to slip, notwithstanding the massive bailout plan. This would reduce the quality of assets that financial institutions hold and erode their chances of survival, and would undermine the quality of the toxic assets that the government acquires with the bailout funds. Such fears reduce the credibility of the bailout plan. It is imperative that we stop the further slip of the housing market with a fool-proof plan.

My proposal may sound drastic. But it will cost the US taxpayers the least money and will produce the greatest bang for the buck.

To be specific, I propose that the US Government, with backing from the Fed., announce that it stands ready to buy any housing unit that costs below the national median price at a price equal to the last actual transaction price indexed against the national housing price index. The government will hold any units thus acquired until the market is ready to absorb them at a price no lower than this acquisition price.

Now let me analyze the effects of this proposal.

Given the backing from the Fed., the announcement is credible. It immediately puts a floor on the housing prices of the cheaper 50% of the second-hand units currently on the market.

The announcement will at once strengthen the confidence of homebuyers for the cheaper units. The prices of these units will not slip any more. Financially able homebuyers will resurface. Some sellers of homes will withhold their units. Some homeowners who plan to default will think twice. The actual number of units that the government has to acquire will be much smaller than might be thought.

The announcement will also benefit more costly homes indirectly. Some of the owners of the cheaper units, upon selling their units, may buy the more expensive homes that they can afford.

The announcement will immediately improve the prospect of the “toxic assets” held by financial institutions. The outlook of these firms will improve at once. The stock market will advance, further boosting confidence.
Confidence worldwide will rebound. Global capitalism is saved.

No comments: