How To Solve the Housing Crisis Once and For All

How Not to Solve the Housing Crisis

To solve the housing crisis one might be tempted to think that the government could somehow have the Federal Reserve buy empty foreclosed homes with newly printed money and then simply keep those homes empty so as not to disturb the rental market. The Fed has no legal authority to do so and there is no reason to think Congress would approve a change in the Fed’s charter to allow this or that the Fed would want to do it.

Another wrong idea about how to solve the housing crisis would be to go retro and return to the world of easy qualifiers (liar’s loans) that existed from 1984 to 2009. But that is exactly what got the country into this mess in the first place.

What is the housing solution?

One must first recognize that a mistake was made during the great housing bubble of 1983-2008. There is no way to get reimbursed for the tragedy that occurred. People chose to overpay for a house because they were brainwashed by the “Greater Fool” theory and chased after a bubble. The people who made a mistake can’t expect society to subsidize them and make them whole for their mistake.

The solution is for the market to mark down the values of homes to a low enough level that investors will buy houses for the purpose of renting them to tenants, instead of for short term “flipping”. The current price level is close to the proper level where the market will clear in a few depressed areas.

Therefore Congress should do nothing to subsidize housing. Instead Congress should remove the tax benefits associated with home ownership. If people chose to be a renter (or to own a very small, low cost house or condo) why should they pay extra income tax to subsidize the deductions that homeowners with luxurious, gigantic homes get?

What is the solution for excessive unemployment?

High, long lasting unemployment has been attributed to the housing crisis. This is probably true, but re-inflating the housing bubble is not a realistic way to create jobs.

What needs to happen is that the hard core, long term unemployed need to get career training in a new field that has minimal risk of being hurt by foreign competition and for which a lot of demand exists. These fields are:

  1. Health care: nurses, medical technicians, nursing home operators, physical therapists, etc.
  2. Information technology: domestic jobs involving security, IT training, retail sales, customer service. It may include using software for marketing and distribution especially when used to support sophisticated domestic services such as advertising agencies, entertainment, law firms, etc.
  3. Education: there is a need for educators to train people for professional, vocational, paraprofessional skills. Also many foreign students come to the U.S. for college.
  4. Foreign tourism: because Emerging Markets currencies are getting stronger many of their citizens will come here for vacation. They will need guides, drivers, translators, etc.

This week there was an article in FT.com that said call centers in India are no longer cheap and it is now more efficient to open one in the depressed northern part of England. So the next time you call a software help phone line they will talk to you and say “Blimey Mate would you like some fish and chips with your software?”

I don’t accept the theory that unemployed U.S. factory workers, Realtors, loan agents, etc. can’t learn to transition to the “New Economy”. When foreigners get desperate they learn a new language, a new culture, new personal skills such as automobile driving, a new career, new country’s customs and come to work here in the U.S. So I expect unemployed Americans to learn new skills and not come up with excuses that they are too dumb to be retrained or their personality is only suited for selling houses, etc.

About the author

Don Martin, CFP®

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