I suggest that a class of mortgages be introduced where the interest is not deductible by the mortgage holder and the interest income to the investor is tax free.

This would lower the necessary rate to attract capital to about 70% of “market”, similar to the interest rate advantages that tax free municipal bonds enjoy.

John

Also, people who buy 700k houses should be in a higher tax bracket. If they’re in the 28% bracket, I don’t think they’re making enough money to qualify for the house in the first place. (which is why I guess they need bailing out!)

you are right – this crisis is going to be devastating, particularly if you live and/or are invested in CA, NV, FL and other boomlet locations. I suspect that metro NYC will also have some rough times aheaad, given the high leverage of the economy there to the health of the financial svcs industry.

You are also right that a major recession/depression will have consequences much broader than just punishing errant speculators. A bailout of some kind to prevent a collapse of the financial industry is quite possibly necessary in an effort to prevent more serious economic shocks.

I share your desire to prevent sellers (often speculators or outright frauds) from getting a bailout at the expense of everyone else.

Moreover, your position is original.

What you are arguing is that rather than reduce supply (foreclosed homes) it is easier and more practical to incite demand (through a purchase subsidy). Fair enough. Your proposal would indeed change the fundamental value of owned real estate (by reducing carrying costs of the asset) – but it would only do so if the subsidy were permanent. It would likely be so. Even if it were originally proposed as temporary in order to get through the slump, politically, it’s hard to see how anyone could oppose extension – it’s like the home mortgage deduction, people can’t live without it and sellers want the higher prices buyers can offer because of it.

Plus, if it were temporary, it might not be that helpful. Buyers would know that in 5-7 years (when they might want to be selling) the subsidy will no longer be available and they still might be facing negative equity.

Finally, it doesn’t guarantee demand for the current excess stock. It might be that homebuilders use this opportunity to build additional stock.

I grant you that focusing on the sell side, as was done in the 1980s with the formation of the RTC, also has its weaknesses. It’s very expensive and tends to cause problems for years (the RTC spent seven years unloading speculative real estate and depressed prices until 1995). Treasury will be attempting to manipulate the market sufficiently to create a market where home prices will remain stable, and home construction will fall short of household formation, so that it can sell its own stock can be absorbed. This is really tough to do. But, at least it is self-liquidating.

As I said in my earlier comment – I commend you for taking a shot at a solution. Your approach is definately different than the other proposals.

Again, my opinion is that we are basically facing an abyss. The collateral economic damage can easily be wide-spread and affect everyone of us in terms of holding my or your own job.

That can only happen if they entire global financial system burns to the ground, and the leaders of it burn up with it.

I understand your thinking, and agree that there are going to be painful consequences, but in my view their have to be. The sooner the world deflates some of the asset inflation that has bubbled through it in the past few years, the sooner we’ll see consumers doing more useful things with their money than spending it on housing. And, more importantly, we’ll see more efficient use of capital other than putting it into flipping condos etc.

Anyway, just my 2 cents, no offence meant.

I want to give you credit for taking a stab at a solution. I disagree with you completely, but I respect the effort.

I read your posts every day, because I find them interesting and well thought out. This post is interesting, but it is not well thought out. The only thing on which we agree is the fact that this financial crisis will be the biggest we have seen in a very long time. But that is where it ends.

Your proposal is NOT a market solution. It’s a government-sponsored market manipulation.

I am also confused – you suggest that this is a subsidy to the buyers, but then your math suggests that this applies to anyone who owns a home. Does it apply to existing homeowners as well? Your later math suggests that it does.

How long will this subsidy be available? Do you really think you can get rid of it once you put it into place? Once you get rid of it, what will happen to housing prices? If I don’t have credit or capital, how can I take advantage of the subsidy? Why should renters, who will have to bear the cost of the subsidy with their income taxes, subsidize homeowners?

It seems to me that if the objective is to support home prices, the emphasis has to be on preventing forced selling. This is why the admittedly irritating proposals have all focused on preventing foreclosure. A solution that just entices buyer to saddle up one more time doesn’t really fix the problem. It just delays the inevitable. The fact is, we have more residences than we need in America, particularly in boom locations. No one wants that condo in FL. That was always the problem.

The best option open to the government for preventing massive forced selling is still monetary devaluation. This can be done as a one-time effect. For those with fixed rate mortgages, the inflation will lead to higher nominal wages and a fall in real housing costs. It will also allow for an increase in rents so that the “investors” can make payments. Of course, it will make mortgages expensive, so selling will still be a drag later, but it will minimize the forced selling en masse now.

Still, this won’t really solve the problem. Prices have to adjust to reflect the intrinsic value of the assets. Trying to prop up the economy with various “stimulus” is what caused the bubble in the first place.

The problem isn’t going to be the spanish family up the street that overpaid, got a crappy rate, and foreclosed. It’s going to be when a failed flipper mails 15 sets of keys to the bank. THAT will devastate a neighborhood. The 40% of demand between 2003 and 2006 that was investors and speculators is what we need to worry about. Obviously these people have greater resources than our poor subprime friends, but like everyone else they will eventually cave. The jig is up.