Market commentary Tuesday by Bill Gross over at PIMCO argues that home prices are what matters most going forward, and backs a proposal by Congressional Democrats that would serve to prop up home prices under logic that says further price declines must be avoided:
The better alternative is to initiate a limited mark-to-market write-down of private mortgage debt as envisioned in the Dodd-Frank Congressional proposal combined with government-subsidized loans at below market rates. Look at it this way: you can allow a home to fall in price from $400,000 to $300,000 and force an upside-down “short sale” foreclosure, or you can reduce the homeowners’ $400,000 mortgage to $350,000, refinance the loan through the FHA at 4% and stabilize the neighborhood and its home prices.
All of which leads me to ask: what’s the “right” price for housing, Bill? It’s both a simple and a tough question to answer, but one that Gross conveniently ignores in pumping up the Dodd/Frank plans. For one thing, he assumes that “mark to market” writedowns of individual mortgages would lead to a value that is inherently greater than whatever market price would otherwise result. Why he expects this to be so, however, isn’t clear at all — why would a short sale ever be conducted at below market value, relative to some mark-to-market price? Alternatively, why would mark-to-market prices under the Dodd/Barney plan be higher than plain-old market prices observed in a short-sale transaction? There’s only one lucid answer to that question, in my estimation: Gross, along with others who support the Frank/Dodd approach, are implicitly assuming that home prices can be propped up above some other natural equilibrium that would otherwise exist. Even if the chips do fall as Gross and Dodd and Frank suggest, who’s to say that the “new price equilibrium” established by having government intervene is one that will actually hold? What new and secret law of economics makes them believe they can maintain prices at an artificially-determined equilibrium that’s fundamentally disconnected from the market itself? I may not be a billion-dollar fund manager, but I do know this: prices must eventually harmonize with personal income. The housing inventory overhang in nearly every major housing market is huge, and likely to reach historic proportions before this summer is out. Demand has fizzled out in part because the easy credit of two years ago is gone — some would call that constrained credit, others a return to risk-appropriate lending — but also because borrowers are waiting it out. Homeowner vacancy rates are at a record high. REO is set to flood many key markets in the next few months, based on estimates I’m hearing from those in the field. In other words, prices are still too high. I’ve written for months that where our money should be going isn’t to the task of trying to prevent a needed and inevitable correction in home prices — it should be going to help those caught on the wrong end of the correction land on their feet and move forward. So far, I’ve seen too much arguing about the former and not enough consideration of the latter from legislators and erstwhile bond gurus alike.