A good gauge of prices looks good at 75 percent and looks to have a better good future.
The Housing Opportunity Index measures housing affordability by tracking price against median income – now at $64,400 (See chart below).
At the bubble high in 2006 only 40 percent of homes were affordable to the median-income family. Now we are at 75 percent and rising.
You will never guess who has been working to stop this growing trend toward affordability. It’s your federal government obviously.
“Since the housing market began to turn in 2007, Washington has tried to keep prices from falling with every policy gimmick known to politics: Foreclosure mitigation, more guarantees from the FHA, higher guarantee thresholds from Fannie Mae and Freddie Mac, Fed purchase of mortgage assets, and the $8,000 home buyer’s tax credit … “ (The Housing Illusion, WSJ)
The editors at the Wall Street Journal suggest money is better spent elsewhere on “capital investment in plant and equipment, new ideas and new companies.”
That would be a money-for-jobs program. Not the money-for-bubbles thing which has been so successful and so destructive.
housingstory.net 
To me, Michael’s “Orange” solution seems outside the box in regards to the size of the conversion. (Maybe 5 trillion!) And, it would certainly be socializing the problem. Jaime, what you are saying, I think, is more than a quick fix is needed such as a long term fundamental solution that builds investment confidence. That seems to me to require involving a whole host of basic social issues which can not be solved by financial formulas. (Family, education, ethics, work skills, etc.)
It seems like the U.S. Feds think that the way out of this ‘ticking time bomb’ is eventual high inflation and a devalued currency (not being an economist, it seems they are one and the same). Is it a good solution? Certainly unfair as those, many older folks, who are holding cash are going to be smelling rope burns on their necks. There will be benefactors such as Jim Rogers who has already purchased Canadian farmland. As individual investors, thinking outside the box is necessary such as Michael’s “Orange” solution which serves as an example. (Thanks, Michael, but crazy as you say). The thought of ‘uncollaterized loans’ as a result of most real estate values still dropping, can be described as daunting.
Michael’s Orange solution is not exactly outside the box. That’s what happens in bankruptcy court in any insolvency. Debt to equity conversions were being discussed during the crisis by many people – just not anyone in the insolvent organizations or our gov’t (publicly, that is – I’m sure it came up plenty behind closed doors). Debt holders were the ones rescued here, in Ireland, in Greece… but not in Iceland apparently. There is risk in managing money. When you socialize losses you turn our economy on its head. Making money then becomes more a speculation on government’s next move (lobby-led gov’t, that is), rather than investment based on fundamentals and market risk analysis.
I found the WSJ article cited in this blog shallow. However I always find Michael White’s blogs excellent but found this citation somewhat surprising. Jamie, your appreciation of the authors and analysts you mention is commendable. I have read much of it and viewed the various movies and documentaries as well. You might enjoy “Adaption of Life” by George E. Vaillant.
The benefactors, besides the bankers, have been many! John Paulson, Warren Buffett…..the list is very long and I should include myself as a result of the run up of the stock markets since March 2009, and I hope, yourself. I am now busy purchasing real estate in very select markets thanks partially to Michael White. Oh, let’s not forget the authors that you mention as benefactors, too.
Why is my appreciation of analysts commendable?
I will check out Adaptation to Life.
Hello Ron i hope your investments are doing well. thanks for your comment. mdw
It is always easy to criticize what the government has done but one has to think if their actions hadn’t taken place. We would have had a very quick financial collapse in this country so severe the nation could have had people starving in the streets. I think most of us knew the measures that were taken by the government wouldn’t solve the causality of the problems but they certainly eased the wreckage. One has to ask: What would have you done? When I ask that question, no one gives me a satisfactory answer.
You have to understand who owns the WSJ! Murdock profits off of negative and fear-mongol reporting throughout the world. There is nothing wrong with suggesting incentives for manufactoring and new ideas, however, highly skilled people are required and new ideas take years to implement. Therefore the time factor had to be considered in what stimulus programs were implemented. I think both political administrations reacted exactly as they should have in dealing with the financial collapse.
If you think our options were “what the government did” or letting the entire world’s economy implode, you are working off a false dichotomy. There were many many options available to our leaders in terms of how to use taxpayer money to ensure liquidity. They chose the option that most benefited their benefactors. If you really want solid answers to your question, I suggest reading some Barry Ritholtz, Joseph Stiglitz, Christopher Whalen, Jim Grant, and William K. Black. I have dozens of other analysts’ names to share if you get through those.
Hi Jaime, i don’t read financial statements. i have heard pros say the big banks are impenetrable. their obvious Achilles’ heal: 2nd liens which they hold in big numbers. how many of those credit lines are uncollateralized loans now? mdw
Hi Ron, to manage the financial crisis dig deeply into the debt structure of financial institutions and convert debt to equity massively. thus do you kiss leverage good bye. then stand aside while the massive price destruction goes full force into the housing sector. lenders take massive losses and borrowers default and start over. if the banks need more capital go back to step one and reach down further into the bank’s balance-sheet debt. crisis solved. done deal. thanks for your comment. Michael
ps if you want to read my crank’s theory for solving a credit crisis please check here:
https://housingstory.net/2009/07/02/burn-the-skunk-plan-orange-immolates-mortgage-crisis/
Michael, I should have included you in that list.
Can you answer this:
Since it was national housing price declines that exposed the insolvency of banks, are the banks insulated enough now by mark-to-fiction accounting to withstand a 10% decline in housing? 20%? Do we have to worry at all about the banks? Or have we given them enough license to maintain solvency no matter how badly their balance sheets would look with mark-to-market accounting?
It’s not just the government that has been doing everything to keep housing prices from falling to a market-determined level. The New York Times is doing their part as well: http://www.capitalismwithoutfailure.com/2011/05/friendly-request-to-new-york-times.html
Hello Jaime, will check this out thanks mdw