Our friends in Washington continue to reward witless members of the financial sector. Meanwhile, those of us who don't fly bonus class think about importing guillotines from France.
Thankfully, we may not need to place the order.
All we have to do is to get Washington to listen to the best idea I've heard to end the decline of housing prices and thereby restore our confidence in the most important assets most Americans ever own. The idea comes from economist A. Gary Shilling and real-estate developer Richard S. Lefrak.
Their suggestion: Don't think about artificially low mortgage interest rates and other stopgaps. Instead, eliminate the oversupply of houses. Too many were built during our speculative bubble. And, by the way, don't spend a dime of taxpayer money doing it.
How can this be done? Simple: Open our borders to immigrants who can buy homes in the U.S. Let a million immigrants a year do this for two years and the entire oversupply of homes and condos would be absorbed. Supply would no longer dwarf demand. Prices would stabilize. The most important assets of the vast majority of Americans would, once again, be a source of pride and security.
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Although there has been much attention to the incredible decline of equity markets around the world, the reality is that the vast majority of Americans have far more at risk in the housing market than in any financial assets. Indeed, many Americans have more at risk in the used-car market than in the stock market.
According to the Federal Reserve's 2007 Survey of Consumer Finances (.pdf file), households at every level of income had more at risk in the values of their homes than in financial assets. Those in the top 10%, for instance, owned primary homes with a median value of $500,000, compared with median financial assets (of any kind) of $404,500.
Households in the middle of the income distribution owned homes worth a median of $150,000 and had median financial assets of only $18,600. Middle-income Americans, in other words, have about eight times as much to lose in the home resale market as in all of the financial markets.
As you can see from the table below, 80% of all households in America have at least three times as much at risk in the housing market as in our financial markets:
| Percentile of income | Median primary home value | Median value of all financial assets | Ratio of home value to all financial assets |
|---|---|---|---|
Top 10% | $500,000 | $404,500 | 1.2 |
Second 10% | $300,000 | $129,900 | 2.3 |
Second quintile | $215,000 | $ 58,300 | 3.7 |
Middle quintile | $150,000 | $ 18,600 | 8.1 |
Fourth quintile | $120,000 | $ 7,000 | 17.1 |
Bottom quintile | $100,000 | $ 1,700 | 58.8 |
Source: 2007 Survey of Consumer Finances
Economist Shilling estimates that the 1996-2005 boom left an excess of 2.8 million homes, or about two years' worth of building. Slower building rates in 2007 and 2008 reduced the surplus to about 2.4 million houses.
Reducing interest rates or resetting mortgage payments won't reduce that surplus. The only way it will disappear is if new customers appear and buy those homes. The fastest way to do this is to offer green cards to immigrants as a reward for buying a home in America.
Here's the formula: Buy a home. Save America. Become a legal immigrant. That's admirably direct when compared with the expensive and complex programs Congress has already funded.
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Shilling writes: "If the current excess of 2.4 million houses were purchased at today's median home price of about $184,000, the inflow from foreigners would be $88 billion, assuming they put 20 percent down and borrowed the rest in this country. If they paid cash, the inflow would be $442 billion. Besides stimulating the domestic economy, this would vastly help the U.S. foreign accounts and support the dollar. The mere announcement of this program would probably go a long way toward stabilizing house prices."
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And stabilizing house prices is very important. It may be the whole ballgame. Without productive action, economist Shilling estimates home prices will fall an additional 20% by the end of 2010. That would leave nearly 25 million homeowners "upside down," owing more on their homes than they are worth.
This is something worth writing about to your representative or senators.
Questions about personal finance and investments may be e-mailed to scott@scottburns.com. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found on MSN Money and at AssetBuilder.com.
Published April 28, 2009
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