Getting the housing market moving

By Felix Salmon
August 25, 2010

It’s a bit too wet to schlep into the office today, but I did manage to make it in there yesterday, and shot this reaction to the housing numbers. Warning, lots of hand-waving ahead:

The backstory here is basically the big secular shift that Richard Florida talks about a lot, especially in his latest book. In order to have more renters we’ll need more landlords, and they don’t seem to be buying, record-low mortgage rates notwithstanding. What’s going to entice them into the market? Lower prices, is my guess, along with some confidence that the market isn’t going to plunge the minute the government stops backstopping everything. Right now, there’s a massive inventory of unsold homes, along with an even bigger shadow inventory of homes which probably would be sold, either by their owners or by the banks which essentially control their fate, if only the market were healthier.

What can make the market move again? Not cheaper money and lots of liquidity, clearly: we’ve tried that. The only other option, as far as I can see, is lower prices. But the government has a vested interest in any price declines happening slowly rather than quickly. So don’t hold your breath.


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You said, “What can make the market move again? Not cheaper money and lots of liquidity, clearly: we’ve tried that. The only other option, as far as I can see, is lower prices. But the government has a vested interest in any price declines happening slowly rather than quickly. So don’t hold your breath.”
Not exactly. The economy is starved for money, and the government has added money — but not enough. I predicted in April 2008 that the stimulus would prove to be too little, too late. If instead of that original $150 billion stimulus package, the government would have input $1.5 trillion — ten times as much — the recession would have ended.
Saying we have “tried that” is like saying we gave a starving man one raisin, and he died anyway.
Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

Roger Mitchell is right. The debt-deflation money hole is a heck of a lot bigger than the 1.5 tril QE we’ve had so far. I always assumed that QE2 and QE3 would follow behind. I think the Fed is rightfully anxious that congress is doing nothing on long term fiscal imbalances that would let it do QE safely.

Laws favoring landlords (or at least not agressively hurting them) would be a start. My wife and I have thought about landlording but too many friends have had tenants that walked all over them, gaming the system for the extended time period that the law allows. The days of the nice elderly widow landlady are over. You gotta be hard and tough in the business now, and enjoy going to court.

Posted by DanHess | Report as abusive

Didn’t you just describe Japan’s problem in the lost decade? Gov’t sanctioned papering over of bad loans?

Posted by Zdneal | Report as abusive

The Fed does not want deflation (nor do I). The owner’s equivalent of rent of primary residence is a 23.593% component of CPI-U. This is before food and energy are stripped out.

The Fed purchased Agencies and MBSs to prop up housing prices or at least to stop the steep decline. You honestly do not expect their stance to change, do you? The Fed’s balance sheet needs to expand. Purchasing Treasuries with principal proceeds from MBS is not enough.

Posted by david3 | Report as abusive

> Laws favoring landlords

This describes the status quo. My father was a landlord for thirty years, and the legal system was extremely friendly to him. Anyone who lets a tenant walk all over him in the US is an incompetent or a hippie.

> The days of the nice elderly widow landlady

‘Nice, elderly landlady’ describes our current landlord. Remove ‘nice’ and you have all my landlords since 1993. You really don’t live in the real world, do you?

> The owner’s equivalent of rent

Has nothing to do with house prices. It has to do with rents. House prices remain out of line with rents. For the math of buying to let to work, house prices need to come down, or rents to rise, or both.

> The Fed does not want deflation (nor do I).

This is the best argument here. Notably, however, lower house prices are not deflation the way lower rents are. They have their own issues, but we already had that fallout. We might as well normalize prices to match economic verity.

Posted by wcw | Report as abusive

Some 70 million baby boomers have begun retiring, and it’s going to take years before this massive cohort stops offering their homes for sale, expanding supply beyond what we’ve been used to in previous decades, when the same people were buying increasingly bigger homes.

Posted by yr2009 | Report as abusive

Heh, I thought you meant a lot of metaphorical hand-waving, but no that was a very literal description. :]

With interest rates as low as they are now, it’d be interesting to look at a mortgage payment to rent ratio as a proxy for landlord affordability. I did that a couple of years ago during the bubble, but I imagine things have changed quite a bit lately. I’ll add it to the to-do list…

Posted by BenE | Report as abusive


The problem with Japan was the bad loans. The government spending prevented a collapse of the economy. Had our government spent enough, we could have avoided the recession. Sadly, the debt hawks were more concerned about deficits than the many-trillion dollar cost of this recession.

Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

7 million homes are sitting foreclosed at the banks, waiting for the banks to unload back onto the market. That is pathetic

Posted by STORYBURNthere | Report as abusive

This all gone a lot faster if the government just stayed out of the housing business. Buying a house used to be hard not just changing not just like changing your shoes.

It will take years for the excess housing inventory to be to sold or torn down. The new effect we are getting now is the demographic of the baby boom moving out of large real estate and retiring to lesser accommodations.

When the government gets out of the way, which is starting with the ending of the housing credit, prices will move to the price that generates demand. There was an anecdote in the WSJ yesterday that talked of a buyer of a home paying $120k for a home that was originally $300K. The bright side is people are getting some low prices.

Posted by freedomadvocate | Report as abusive


You keep urging that it is time for home rentals as a good investment; at least I think you say that.

So why don’t you work up a pro forma to show how a typical house rental deal would work?

I am curious to see what you thinkmwould work.

Posted by dsucher | Report as abusive

dsucher, I’m not really saying that. I’m saying we NEED a new wave of landlords, but all real estate is local, and I have no idea whether it makes sense to do the buy-to-let thing at these prices. All depends on how much you can rent out the house for!

Posted by FelixSalmon | Report as abusive


Then just pick ANY example.

On the one hand you state that it is a viable option to get into rental housing as a business (I.e. on net positive cash flow) basis. Am I wrong that you state that you believe that? And have many times?

Then prove your point by showing a particular instance of what combination of $$$ numbers make sense to you. Just curious.

If you simply believe that it would be nice to see a detached SF rental housing business then I would agree and add in a pony, too. But maybe I have misunderstood so please clarify.

Posted by dsucher | Report as abusive

I don’t think I ever said it was a good idea to get into rental housing as a business. But back of the envelope, if your mortgage is $1,000 a month and maintenance and taxes are another $500 a month, and you can rent for $2,000 a month, that looks like a good business to me.

Posted by FelixSalmon | Report as abusive

I’m confused… Hasn’t Felix written multiple times that home ownership is for idealistic idiots? How, then, can buying for the purpose of renting make sense?

If I can buy a place on a $1000 mortgage with maintenance/taxes of another $500 a month, why should I prefer to pay $2000 rent? Especially since I get a federal tax benefit from the mortgage and taxes that I do not get as a renter.

Ah, yes… If I rent instead of buying, then I can put that $50k downpayment into the stock market where it will earn double-digit returns that will make me rich. Right? Except Felix has written that the stock market is also a fool’s game… And if I put that $50k into treasury bonds, it will pay a paltry $1.5k a *year*. Not nearly enough of a return to justify the higher cost of renting.

Where’s the consistency?

Posted by TFF | Report as abusive

the main problem is that the vast majority of prospective landlords are locked out by current lending standards. it’s currently REALLY HARD to get a loan on a 2nd property even if you have cash and good credit. read joe nocera’s ny times article about this from last friday.

Posted by TEP | Report as abusive