Dom's Thoughts For December

As we close out 2008, it is safe to say we are somewhere between a recession and a depression. It may not be the great depression of the 30’s but it is not a little recession either. At this point it is probably the Great Recession of 08. We do not want the economy to get any worse because that would be very bad for America and the rest of the world. We must focus our attention and resources on the root of the problem and not on the collateral damage caused by the problem. The bleeding will stop if we close the wound and address the source of the problem.

$700 billion dollars plus is being used to bandage the credit markets in a failed attempt to restore American's confidence in the banking system that in large part caused the problem by making loans available to people who could not afford to buy homes. This large infusion of cash into the banking system will never cure the problem because there is no assurance that the banks will loan this money to people who want to buy homes. The Federal government has already taken unprecedented steps to improve the economy by buying mortgage backed securities, by lowering long term interest rates to historic lows, by bailing out insurance companies, banks and unregulated financial institutions, by encouraging banks to work with delinquent home owners to modify their loans to keep them out of foreclosure and by promising to bailout the American auto industry to prevent massive layoffs. Much has been done by our government but the actions so far have not stabilized the economy and the housing sector because they have not attacked the festering wound.

The problem is based on the law of supply and demand. As a result of all the foreclosures there is a glut of homes on the market. When the supply far exceeds the demand, prices must fall to attract buyers. The root of the problem is decreasing home values caused by excessive inventory. Because of decreasing home values, we have lost trillions of dollars of equity, borrowing power and buying power. Lenders do not want to loan money to people to buy real estate when real estate is depreciating in value and people do not want to buy real estate today that will be worth less tomorrow. So what should the Federal government do to stabilize home prices and reverse depreciating home values? The answer is simple and it directly attacks the problem.

The government should make better use of the $700 billion dollars plus and start buying homes on the market thereby decreasing the inventory. Many of the homes on the market are owned by banks and as a condition of buying bank owned homes the government should require the banks to segregate the funds in a pool for the sole purpose of loaning the money to people who need a mortgage to buy a home. The decrease in inventory will cause home prices to stabilize, rather than decrease because the supply will be in balance with the demand.  People will want to buy today rather than wait until tomorrow when the price will be higher. This will generate the needed demand and when demand exceeds supply, prices will rise again. When home prices start to rise, the problem is over and the economy will heal and the government can gradually increase interest rates to prevent the real estate market from over heating.

The housing sector led us into this financial crisis and it will eventually lead us out of this crisis but the government must intervene and eliminate the excess inventory which the banks inadvertently caused. What will our government do with all these homes? There is plenty of need for affordable housing in this country. The government can fix the houses up and rent them out to displaced families who lost their homes to foreclosure, minorities, and low income families. Forget, for now, about improving our infra structure as our President Elect is proposing and concentrate solely on housing. Put the unemployed back to work by renovating, remodeling and managing these homes. Once we get the housing problem under control, we can work on our roads and bridges.

The taxpayers would be better served by holding title to homes rather than worthless mortgage paper which is what the $700 billion is currently buying. The real estate values will eventually increase and over time the government can sell these homes in an orderly fashion for a higher price and pay down the national debt.

In twelve months or less we should all be cured of this terrible hangover caused by an excessive supply of homes on the market. Let us all be reminded that all bubbles eventually burst. Real estate prices simply rose too quickly and the market could not support the inflated values. Real estate is still a very good conservative investment because it is more than just an investment; it is our home. America’s population is constantly growing but there will never be more land in America. There will always be a demand for homes and as long as the supply does not get excessive, prices will rise.

The lesson to be learned from the last five years is that if you are receiving more than a modest return on your investment, something is wrong and a bubble may be forming. The next time we experience something that seems too good to be true, stand back, resist the temptation to jump in and yell loudly for others to stay clear.

Dominic J. Mancini
133 Fuller Road
Hinsdale, Illinois 60521
(630) 325-2580 fax (630) 325-5169