The economic Catch 22

How does the country turn around the housing market? Start bulldozing some of them, according to one expert.

David Rosenberg, chief North American economist at Merrill Lynch, says the country is “attacking the symptoms” instead of the problem.

“It’s pretty foolhardy to believe anything is going to reach any sustainable low until we put in a firm bottom on residential real estate prices,” he said today, which is economist-speak for create a supply problem to create a demand.

If the Treasury Secretary can tell bank officials, “you’re going to take this bailout money no matter what,” then maybe municipalities need to stop issuing building permits.

He made a similar suggestion this week in the Financial Times:

What we probably need is a supply-side resolution, either creating regional land banks to ring-fence the inventory or a moratorium on new housing starts to prevent further corrosion in residential real estate values. Supply-demand divergences are likely to persist through 2009, in our view, and will require even further contraction in construction activity before balance is restored in the real estate market.

It is a frugal future, indeed, but we believe the US economy will endure nonetheless and will inevitably emerge all the stronger.

The negative wealth effect will subside and, along with that, the savings rate should start to level off – likely near its pre-bubble normalised level of 8 per cent.

“I’m flabbergasted we’re seeing housing starts at all,” he said today.

What would the effect be of a moratorium on housing starts around here? Probably property tax increases. Look at Woodbury, one of the fastest-growing communities in Minnesota over the last decade. It financed city operations largely on the strength of the money it made from housing permits. It issued only 14 permits in December, and is now trying to slash its budget to account for the lost income. The city doesn’t take local government aid from the state.

And therein lies a significant part of the economic problem: One hand doesn’t know what the other hand is doing. Some cities are depending on money from a policy — if you believe Rosenberg — that is only making the economic situation worse. In this regard, efforts to boost the housing sector are only making matters worse.

  • bsimon

    Is it a supply and demand problem, or is it a cash flow problem?

    If there are more housing units available than we have the population to fill them, its a supply/demand problem (i.e. oversupply). But if its a cash flow problem, where buyers can’t get the loans or don’t want to invest in real estate as landlords, then destroying housing won’t solve the problem.

  • Alison

    Another example of one hand not knowing (or paying attention to) what the other hand is doing is taxing. You have federal officials trying to cut taxes because they can go into debt. You have officials in lots of states thinking of raising taxes because they have less revenue and can’t raise taxes. What do you want to bet many people will wind up paying about the same net taxes? Hopefully the feds are taking a careful look at how to help the states whose budgets are in trouble.

  • bsimon

    Alison- the tax priorities of the Feds vs States has partly to do with how they budget. Feds can run a deficit, most states are required to balance their budgets. Therefore Feds borrow & spend, while states have to either cut spending or increase revenue – i.e. taxes (and fees).

  • Alison

    Yeah, I know. That’s why I said ‘…because they can go into debt’.

    Of course, thinking about it some more, it might work to get people to spend a bit of money in the short term. If you get a check from the feds you might be inclined to spend it right away without considering that you will lose it to the state later. The extra money to the state will either trickle out slowly or not be aparent until tax day.

  • Mary Bibb

    A good way to stop/discourage new home building would be for Fannie and Freddie to only issue new mortgages for existing homes and not for new construction. Do this until housing prices begin to increase. The tax breaks which home builders are asking for on Capital Hill as you read this should not be offered for new homes either: only offer tax breaks for purchase of existing homes until prices increase. When prices increase we will know it is time to start expanding the supply, but not until then. When people realize that the government is serious about decreasing supply, there will be a perceived scarcity which will rapidly change the dynamics of the deflationary spiral which is dangerous, still in place, and caused by the expectation of lower prices coming up. The government should firmly announce it is taking this action and won’t change until deflation has ended. When people believe that, they will buy.

  • Peter T

    Affordable housing – is this what we need? Government spends a lot of money on it. Then it would be madness to spend additional money to bulldoze livable houses to keep housing prices at the artificially high levels of the last housing bubble. Mary’s proposal, however, to prevent Fannie and Freddie from issuing loans for new houses sounds reasonable to me – but I’m no homebuilder and don’t work in construction either.