Housing problems, and how to deal with them.

I just started reading this idea about how the Obama Administration will have to choose between helping current homeowners or future homeowners.  The belief is that, so far, not much has worked to stimulate the housing market to drive it into a strong rebound, and therefore, something else completely different needs to be pursued:

"Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve."

This idea that future homeowners would benefit from some sort of "shock therapy" is pure folly for five reasons:

• Negative emotions spark irrational fear, especially when it comes to money.
• This one can be seen all the time, everywhere you look.  The Great Depression is noted for many things, but specifically to this point of irrational fear, is how children of the Great Depression took to saving their money in secret hiding places at home instead of sitting in a bank earning interest, protected by the FDIC (created by one of the two Glass-Steagall Acts).  If housing is allowed to drop without any intervention - and we all know we are currently entering the second wave of mortgage resets - the majority of people will go through a negative emotional state, forming an enormous deterrent to risk.  This leads to the next reason.
• Deflation.
• When people see prices dropping - particularly if they drop rapidly - if there is no backstop to the drop, they assume prices will continue to fall.  After all, why buy now, if in the future, it'll be cheaper?  To understand this, see Japan's Lost Decade.  This ties into the next reason.
• Standard investment advice.
• I'm not proffering an argument that this is sensible, but everywhere you read, the advice says that you don't add to a losing position.  You don't buy when prices are continuing to fall and you have no idea how far they're going to fall.  If you do buy even as prices continue to fall, you will have to wait for prices to bottom, then rise to the level that you purchased at, in order to break even.  Sounds great in theory (buying at the bottom), but in practice, it is much more difficult.  Nonetheless, if people see that the rest of the economy is not doing so well, it feeds into the belief that prices will continue to drop.  Which leads into the next reason.
• An assumption that housing will lead the economy out of the doldrums, is false, unless of course, you want speculators to fill the gap.
• According to Moody's, at the end of the second quarter, there were 1.8M more units empty than what would have been the norm, on average, based on the past 20 years.  Looking at Census data, rental vacancy rates in the US have increased 30% since 2000 while homeowner vacancy rates have increased 63% during that same period.  It seems to me, that people who have lost their jobs or moved out of their homes, have not moved into rental units, but have moved into homes already occupied.  It appears that, unless they were to find jobs, these people would not be able to buy another home, and even at that, it will take some time to gain enough capital to buy again.  It also seems clear, that with the stricter lending standards, not many people would qualify that didn't already own a home.  This leaves us with just one group: non-homeowner investors, of which in a previous post, I described how there is one particular subset, the speculator, aka flippers.  Not that they're a big group - especially with stricter lending standards - but I would not want speculators to drive the housing recovery, given their contribution to the asset bubble in the first place.
• Bank capital losses.
• If home prices are allowed to plunge, what happens when banks lose even more of their capital?  Seems to me, that these people fail to reflect upon the cycle of the credit crunch of 2008!  If investors see that values suddenly plunge and homes are lost to foreclosure, those losses become realized by both the former homeowner but most explicitly by the banks and investors holding the mortgages.  Where do the new loans come from, when there is even less credit?

So you see, it is pure folly for people to believe such nonsense, that letting the housing prices drop, will be good for anyone, let alone some phantom future homeowners.  Or rather, I see this as the speculator's dream, for prices to be allowed to dramatically drop.  With cash in hand, no other group could benefit more than those with liquid assets, and lots of them.