Limited Government Intervention Needed Immediately

Here are our 5 suggested public policy solutions to solve the housing crisis:

1. Immediately Create Tax Incentives to Encourage Home Buying Activity: Allow for a tax deduction equal to 3% of the purchase price for anyone buying a home for their primary residence. This will bring buyers back to the market, which is what is needed to stabilize prices. Our data shows that home buying activity has corrected far more than the NAR data shows, which is one reason why policy makers have been so surprised by the unprecedented national price corrections that are going to continue unless something is done. This significant expense is likely to be less than the eventual expense of taking over the many regional banks that will not survive if prices continue to plummet.
2. Immediately Increase FDIC Insurance from $100,000 to $500,000: The $100,000 insurance amount was set in 1980. The Fed needs to let consumers (especially retirees) and the world know that deposits at federally insured institutions are safe, and that all federally insured deposits can be accessed within 2 business days. This will prevent a depositor run on local banks. The increased insurance expense should be charged to banks after this banking crisis is over.
3. Continue Encouraging Fannie, Freddie and FHA to Grow: Without these three agencies, the mortgage market would be virtually non-existent in many markets, especially California, Florida, Arizona, Nevada and Virginia. While this is a significant risk to their shareholders and probably taxpayers, we believe the risk is much greater if these institutions stop providing insurance or a second market for quality loans. Underwriting will need to be prudent.
4. Require the Mortgage Bankers Association to Adopt a Licensing Program for Mortgage Brokers and Underwriters: Similar to the CPA license, there should be individual and company civil and criminal liability that will allow regulators to fine and imprison brokers on loans that were later proven to be fraudulent, or pools of loans that exceed an acceptable default rate. Restrictions such as this should be phased in after the housing market has stabilized because mortgage lending needs to be made easier today – not more difficult.
5. Mandate Rating Agency Risk: Rating agencies should be required to absorb a small percentage of bond losses on future rated bond offerings. This will help ensure that risky debt is priced accordingly.

We are generally very “free market” and anti-legislation, but this mess requires limited government intervention now. We applaud our forefathers for learning from the Great Depression and creating federal insurance and housing programs that have clearly helped our economy during these tough times. By updating old statutes and creating liability for those responsible for the safety of our banking system, we can look forward to many great years ahead.

Economic Growth………………………………………………………………….C-
The economic growth indicators improved slightly, but continue to perform at below-average levels. Employment performed slightly better than expected in May, although year-over-year payroll employment growth fell to 104,000, or just 0.1% growth. The unemployment rate soared to 5.5% in May from 5.0% in April, marking the largest monthly increase in more than 20 years. The revised first-quarter GDP growth was an improvement from earlier estimates, but remained slow at 0.9% annual rate. Worker productivity rose unexpectedly in the first quarter to 2.6% year-over-year, which is above its historic average, and personal income growth also rose slightly in April to 4.8%. Retail sales growth improved to 2.4% year-over-year and core CPI – a key gauge of inflation – fell slightly in April to 2.3%.

Leading Indicators…………………………………………………………………D+
The poor performance of the leading indicators suggests sustained economic difficulties in the near future. A slight improvement was witnessed in the Leading Economic Index, as well as in the Purchasing Managers Index and Non-Manufacturing Index. However, the price of oil continues to rise against the sinking dollar, with crude oil at $125.39 per barrel for May and continuing to rise in June, further tightening the chokehold on consumer discretionary spending. All of the major stock indices that we track have shown negative growth in the last year, including the S&P Super Homebuilding index, which has fallen 50% year-over-year. Residential investment continues to decrease as a percentage of overall GDP, falling to 3.8%, which is its lowest share in more than 16 years.

Mortgage Rates…………………………………………………………………….B+
Mortgage rates are slightly improved from the previous month. The Fed Funds rate remained at 2.0% in May after the Federal Reserve cut the rate by another 25 basis points at April month-end. The 30-year fixed rate rose to 6.08% by May month-end, but had jumped to 6.32% in mid-June. The one-year adjustable rate rose to 5.22% at May month-end, but dropped to 5.09% by mid-June. The Mortgage Bankers Association reported that the percentage of ARM applications was rose slightly from the previous month but remained very low at 9.3% of all loans originated during the last week of May. The performance of subprime loans issued in the first half of 2006 continues to weaken, as measured by the ABX 06-2 BBB- series index, which has declined 93% since May 2007.

Consumer Behavior……………………………………………………………….D
Consumer behavior weakened further this month. Consumer confidence continues to fall at a rapid pace, dropping well below its long-term average to a 16-year low. The University of Michigan’s Consumer Sentiment Index also continues its downward trend, falling to its lowest reading in almost 28 years. The Consumer Comfort Index fell sharply this month following declines in April. Mortgage costs as a percentage of home value (LTV) is currently at their historical high.

Existing Home Market……………………………………………………………D
The existing home market remains week. The annualized existing home sales volume continued to decline, remaining 17.5% below its year-ago level. The pending home sales index improved in April from March’s record-low rating, which suggests that sales may improve, though bargain hunters are helping to boost these numbers. The drag in resale activity and slight uptick in inventory to 4.6 million homes pushed supply past 11 months of inventory. Prices in the resale market have fallen more than 8% year-over-year to a median of $200,700, according to the National Association of Realtors.

New Home Market…………………………………………………………………F
The new home market remained extremely weak, as sales activity remains slow against high inventory levels. The NAHB’s Housing Market Index, which measures sales and traffic, fell in May, measuring near its historical low at 19. New home sales activity rose to 526,000 annualized transactions, but remains 42% below the sales volume one year ago and 62% below its peak volume in July 2005. The level of unsold new homes fell slightly to 10.6 months of supply, but remains near its record high of 11.1 months, and includes approximately 4.1 months of unsold completed new homes alone. The Census Bureau reported that the median new home sales price of $246,100 represented a 13.3% decline over the last year.

Housing Supply…………………………………………………………………….F
The supply of housing remains at very low levels despite a slight pickup in construction levels. The annual volume of new home completions fell to 1 million – the lowest total since September 1982 – but total housing starts rose in April to 1.03 million total annualized units, signaling a glimmer of hope in the troubled housing market. Multifamily starts increased while single-family starts fell to 692,000 units. Meanwhile, single-family permit volume rose 4% sequentially to 646,000 units in the last year and multifamily permits also rose 7% from March to 332,000 units. The total seasonally adjusted permit activity rose 5% sequentially, but has fallen 34% year-over-year, and remains below 1 million permits.

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