patrick.net

So far, most of the threads about the Housing Bubble's aftermath have pretty much stuck to one of two themes: (a) How the crash is likely to play out in the financial markets and overall economy, or (b) How to profit from the crash or hedge against the damage it will inflict. We haven't yet really had an in-depth discussion about what (if anything) can be done to prevent future asset/credit bubbles from forming in the future.

Is it even realistic to think that government regulations/incentives (or removal thereof) could prevent future speculative bubbles from forming? If not, are there at least steps that can be taken to reduce their magnitude and frequency (and the severity of resulting crashes)? What are your suggestions (if any) and why do you think they would work?

By now, most of you know that I am of the opinion that the government, by way of the Fed/Treasury, GSEs and poor policy decisions are largely to blame for this mess (negative real interest rates to mitigate Tech Bubble fallout, MBS risk-shifting, lax lending oversight, etc.). Yes, speculator mania/psychology shares much of the blame for perpetuating and growing it beyong all reason, but what got the ball rolling in the first place? Personally, I doubt that increasing government interference in the RE (or any) market will help, any more than dousing a fire with gasoline is likely to extinguish it. I also have strong feelings about supposedly well intentioned laws designed to "help" some needy group by introducing market distortions (rent control, Urban Boundary Limit laws, Prop. 13, etc.), which inevitably seem to produce the exact opposite result of what was originally intended. The Law of Unintended Consequences. Nonetheless, despite my quasi-Libertarian bias, I do feel that intelligently designed (and realistic) public policies and regulations can occasionally do some good, especially when they're all about reducing government interference in free markets.

Here are some of my ideas:
1. Pass a law outlawing greed, ignorance and manic behavior.
(HA --just kidding!)

Federal level:
1. Increase the 1997 Homestead Exemption's minimum residency period from 2 to 5 years for primary residences. This should weed out the speculators without impacting long-term owners too badly. Means-testing it would help as well, but I won't hold my breath for that.
2. Institute a minimum "hold" period for 1031 exchanges on investment properties (3-5 years?). Same reason --encourages buy-and-hold long-term investors over flippers. I'd like to see it abolished entirely, but I'm realistic.
3. Force mortgage lenders (especially sub-prime) to hold a substantial percentage of loans they originate on their books for the life of the loan --say 50%. That should put an end to NAAVLPs. the best part of it is, government doesn't even need to dictate how lenders should tighten lending standards --it will happen automatically!
4. Fully privatize (and de-monopolize) the GSEs (Fannie Mae, Freddie Mac & Ginnie Mae). Why should taxpayers have to guarantee default risk for companies that are basically private & for-profit? And why should they enjoy a huge advantage over private banks (by being able to borrow money at the Fed's discount rate)?
5. Force the BLS (Bureau of Labor Statistics, a.k.a., "BuLlShit") to start accurately reporting the true rate of inflation in the CPI (put energy, food, healthcare & education costs back in; eliminate statistical gimmickry like "hedonics" & substitution). This should help restore the missing "risk premium" in the bond and mortgage markets, and make recent buyers feel a little less "house rich" at the same time.

State & local level:
1. Shift the Realtor fee structure from sales commission/%-based to a flat service fee. This alone would greatly reduce the incentive to inflate property prices far beyond intrinsic value.
2. Support any efforts to sheild home appraisers from Realtors and unscrupulous lenders (see naifa.com).
3. Eliminate or at least mitigate anti-development NIMBY laws in the community. Anything that reduces housing supply without also reducing housing demand (population) only drives up the cost of housing long-term. So until they close the border (or legalize mass murder), better get used to seeing more urban sprawl. Or, you could advocate building more high-density "smart growth" housing. Unfortunately, these are pretty much our two options until population pressures diminish.
4. Bitch-slap the next dumb-assed motherf***er who says "housing never goes down" or "they're not making any more of it".

Discuss, enjoy...
HARM

#housing