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February 18th, 2009 7:11 AM by David W. Welch
I have been posting a lot about my ideas on how the government can most effectively address the housing market. If you have read my other posts you know that I think the focus needs to shift to the supply of homes. My argument is that it is the supply causing the problem, yet most of the solutions are focused on demand. The focus on the demand side has further deepened the problem by effectively driving prices down further. So far, there has been $2 billion set aside for "neighborhood stabilization". Yes, $2 billion out of the $2 trillion that is being brought to bare across all the efforts to turn our economy around.
As I see it, all the efforts to stimulate demand can only influence buyers ability and desire to purchase. Lower prices, lower interest rates equals lower payments. If you already have a house that is going down in value thanks to the foreclosures and short sales down the street, why would you buy another one? If the President keeps saying "it's going to get worse before it gets better", why would you buy now? If you are like me, you are buying because you are not trying to time the bottom. You are taking advantage of the lower prices and lower interest rates for the long term. At this point in time there are just not enough people influenced by the demand stimulus.
That is why I think there needs to be a much greater focus on the supply side of the equation. Today President Obama is going to begin rolling out his plan to slow down the flow of foreclosures into the market to the tune of $50 to $100 billion. That is a whole lot better than the $2 billion, but still not nearly enough. I propose taking $300 billion to purchase all the foreclosures currently on the market. As a corollary, look at the Fed's Open Market Operations and how they manage money supply. For decades now, the Fed has successfully managed money and interest rates for the most part through policy statements and the purchase and sale of treasuries. Manipulating the Fed rate has generally been a visible sign that the Fed is loosening or tightening credit. It goes hand in hand with their policy statements and open market operations.
Stemming the flow of foreclosures into the market, and buying up the foreclosures on the market already will be far less expensive and more effective than the demand stimulus packages. You can only influence demand, but you can have a direct impact on the supply by reducing it. Next, you have got to have a message that goes hand in hand with these actions. Stop saying things are going to get worse before they get better. Politics and economics have to work together for any of this to work.
David Welch, Real Estate Optimist