I live in Pasadena, California. For the past six years, my wife and I have been wanting to buy a house (we'd be first-time home buyers), but since we did not want to take out an option ARM or some other exotic loan, we've not been able to afford any houses in our community.
The median price for a single-family home in Pasadena in January of this year was more than $420,000, down from more than $650,000 a year ago, but still too high for us. (For the record, our household income is more than $100,000 a year.) And, I suspect, that's way too high for most families in Pasadena. The median household income in the city is about $54,000 a year. (That's the 2005 estimate - the latest I could find.) Half the kids who attend my children's public elementary school are on free or reduced price school lunch.
When you look at this data, the nation's economic problem seems clear: Houses cost too much. They cost more than people are able to pay, so banks won't loan the money. And since people won't, and can't pay, these prices, banks are having to eat the money they lent for folks to buy homes at even higher prices.
But no politician appears willing to come out an admit that housing prices are too high, and that because the banks bet on higher housing, they're insolvent. Instead, we get the Geithner plan, a fancy "auction" designed to find a true market price for housing-related investment.
Which would be great, if the federal government weren't putting its thumb on the scale, subsidizing the bids in an effort to inflate the price of housing once again.
This time, though, I'm willing to play along. The way I figure, the best way for me to buy a house for my family is:
- To loan myself $1 million dollars for a four-bedroom home.
- To sell the $1 million dollar loan to myself.
- To not make payments on the $1 million loan to myself that I sold to myself.
- To declare my $1 million loan a
toxic legacy asset and make it available for divestment to the FDIC.
- To buy the loan at auction from the FDIC, with a non-recourse loan with 85 percent of the purchase price. According to Krugman's math, the most I'd have to bid would be $1.3 million. But since the FDIC covers 85 percent of that, to control my $1 million loan, all I'd have to pay would be $195,000.
- Now, according to Nemo's analysis, the Treasury will provide 50% of that equity funding, so I'm on the hook for $97,500.
- To sell the house for whatever I can get. So long as I get more than $195,000, the Treasury and I are covered, and we split the profit. However, unless the house sells for at least $1 million, the FDIC is screwed.
Hmmm, now assume that "I" am, oh, say, Wells Fargo or Chase. Doesn't this plan give me a huge incentive to buy up a ton of property, leave it empty and go flip, flip, flipping away? How's that going to clean up the housing bubble and get families into the right homes, ones that they can afford.
Here's my message to President Obama, Secretary Geithner and everyone else in Washington and on Wall Street:
Homes are places for people to live. Real people, families. They are not "financial instruments" and they should not, and must not, be things for multimillionaires to gamble with, at the expense of working families' lives.
Houses cost too damn much. Still. And the nation's economy will not recover until housing is priced at a level where real families can afford to make the payments on the 30-year, traditional, pay-the-principal-and-the-interest-on-time mortgages they take out to pay for them.
Pouring more free money into an economy already drowning in debt is like pouring water on saturated ground. It's just gonna run off, wasted. When will the administration recognize this, and quit kissing up to the con artists who flooded the ground?