We Should Have Left Bad Enough Alone

Except for housing, much of the American economy is slowly but steadily recovering from the recession that began more than three years ago. The housing sector might be recovering by this time too, if we had not tried so hard to help it.

The centerpiece of those efforts was the first-time homebuyer credit, enacted under the George W. Bush administration in 2008 and expanded in the first months of the Obama administration in 2009. It was ultimately increased to $8,000 and extended to include many people who already owned homes, but who signed contracts to buy a new principal residence through April 2010. All of this was an attempt to drum up activity in the home market.

It succeeded in making the market more active, but not in making it any healthier. After $22 billion in fruitless federal spending, the housing market is about where it was in the depths of the downturn. The Standard & Poor’s/Case-Shiller index of property values in 20 cities fell 3.1 percent from January 2010, Bloomberg reports – the biggest year over year decrease since December of 2009. Rising foreclosures and falling consumer confidence mean prices probably won’t rise any time soon.

Housing starts are, unsurprisingly, down as well. It’s not hard to see why developers would hesitate to build new projects in this climate. New home sales are at their lowest point since recordkeeping began almost 50 years ago, according to MSNBC. Though a recovery will come eventually, the signs all point to a long, chilly wait.

Not everyone is surprised. As I have discussed before in this space, the homebuyer credit was, for the most part, a bonus to those who would have purchased homes anyway rather than an incentive to those who would not have otherwise bought. The government, by paying people to do what they would have otherwise done, artificially sustained demand by dragging future purchases to the present. Buyers moved existing plans forward to take advantage of the credit before it ended last summer; we’re now in the gap where that demand would have been.

Prices have fallen back to where they were, or even farther in some places. The S&P/Case-Schiller index indicated that, in 11 cities, prices are at their lowest levels since the initial housing bust.

If the government had left the housing market alone, a few things would be different. First, we would have saved $22 billion in federal debt. Second, prices would have probably fallen further sooner, which would have enabled many buyers to pay something close to the same net amount, since the lower prices would have offset the lack of the federal subsidy. Third, we would by now be much closer to the end of the housing slump, or at least past the worst of it, and thus be closer to a sustainable turnaround.

The Obama administration continues to make the situation worse, even after the credit’s expiration, by doing what it can to keep the brakes on the foreclosure rate. Leery of sanctions and regulators’ scrutiny, banks are hesitant to foreclose. Fewer properties are making it to market as a result. The Financial Fraud Enforcement Task Force, which Obama established, is pressing hard to find any hint of wrongdoing in the foreclosure procedure, leaving banks understandably slow to act.

While keeping people in their homes is superficially appealing, the Obama administration continues to miss the deeper point. There are still families and individuals in houses that they can’t afford. Until the process of default and foreclosure is allowed to run its course, recovery will be limited, because those homes won’t go to people who are willing and able to pay for them. Artificially postponing the worst of the housing crash has only succeeded in delaying the inevitable pain and the recovery that will eventually follow.

We should have left bad enough alone.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

2 Comments on We Should Have Left Bad Enough Alone

  1. Very well done Larry. I couldn’t agree with you more. The tax credit was like a band aid. And you can remove a band aid one of two ways – you can either slowly pull it off your skin, which makes the pain last much longer – or you can rip it off fast and get it over with quickly. The real estate market would be healthier today if the feds would have taken the fast approach.

  2. It was a really dumb idea. Delay the housing recovery and put more homeowners underwater…. and we paid billions for this. The stupidity of Congress is matched with their utter corruption and capitulation to the demands of the realtor association, the criminal enterprise that pushed for this credit.

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