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Solving the Housing CrisisSolving the Housing Crisis
March 21, 2009
|Solving the Housing Crisis|
|Housing Could Drop Another 20% in Pricing|
|Buy A Home, Get a Green Card|
|A Real Stimulus Package|
|Las Vegas, La Jolla, and the OC|
last Tuesday the Wall Street Journal
published an op-ed by my friend Gary Shilling and Richard LeFrak. They offer a
simple solution for the housing crisis: give foreigners who will come to the US
and buy a home resident status (green cards). This is a very important proposal
and one that deserves national attention and action. Gary was kind enough to
send me two lengthier white papers offering more facts. In this week's letter
we are going to look at this proposal in more detail than the small space that
an op-ed can offer. And while this letter will be somewhat controversial in
some circles, I ask that you read it through, giving me the time to make the
case. I will also add a few thoughts as to why this could not only help solve the
housing crisis, but help put the nation back into growth mode.
Long-time readers know that I have been growing more
and more bearish of late. I have been writing for a long time that we are in
for a long period of slow Muddle Through growth as the twin crises of the
housing bubble and credit bubbles require time to heal. Today we look at a
serious proposal for cutting the time to healing for at least one of those
bubbles (housing), and at least keep the other (credit) from getting worse.
This is the most serious idea I have seen that could actually make a real
positive contribution to the economy and help put us back on a growth path.
will post Gary's papers and a link to the actual op-ed piece for those who want
to do further research, but let me make one point at the beginning that he did
not emphasize: the US is already allowing roughly 1 million immigrants a year
into the country (which for a variety of reasons I and most serious economists
of all stripes believe is a very good thing). We are suggesting that we simply
change the nature of what constitutes the conditions for acceptance, so as to
jump start the housing industry and the economy. We are not suggesting
additional immigrants, although nothing would be wrong with that. I will also
post a link for you to send this e-letter to your congressmen and senators.
me put up front a few benefits of a program that would allow legal status to
immigrants buying a home. Housing values would stabilize and in many cases
rise. The massive losses because of bad loans that are being subsidized by US
taxpayers would be stemmed, saving many hundreds of billions, if not a trillion
or more dollars. The excess inventory of homes would quickly disappear and the
millions of jobs that were lost as home construction fell into a deep
depression would come back. If housing values rise, many families would be able
to refinance their homes at lower rates and have more income left over after
paying their mortgages. $12 billion in commissions would end up in real estate
agents' pockets, helping a very battered and bruised group. Hundreds of
billions will flow into local businesses, as these new immigrants will need to
furnish their homes. This could mean as much as a half trillion dollars in
sorely needed stimulus in the next few years, without one penny of taxpayer
money and actually adding taxes back to governments from local to national. And
we are not bringing in 1 million foreigners, we are attracting 1 million mostly
middle-class new Americans, which, if we are smart in how we do this, will
result in more jobs for all Americans. So let's jump right in and look at the
Housing Could Drop Another 20% in Pricing
review the situation as it will be if we do nothing. Shilling shows that we
built 6.7 million more homes in this country between 1996-2005 than the normal
trend would have projected, partially because we underbuilt the decade before
that. New housing starts average about 1.5 million in normal times but have
fallen to 500,000 recently, and could fall further as unemployment rises and demand
declines. Even so, Shilling estimates that we still have about 2.4 million
compares rather well with estimates by independent analyst John Burns, which I cited
in the e-letter early last year. What they both agree on is that it will take
at least until 2012 to work through this excess inventory, and that assumes
that foreclosures do not increase as housing prices drop.
Excess supply of anything means
lower and continuously falling prices, and that has certainly been the case in
housing. Here is what Shilling writes:
"We believe that if nothing is done
to eliminate surplus housing, prices will fall another 20% between now and the
end of 2010 for a total peak-to-trough decline of 37% (Chart 1 below). The
resulting further negative effects on the economy will be devastating. At that
point, almost 25 million homeowners, or almost half the 51 million total with
mortgages, will be underwater... That's also a third of the 75 million total
homeowners, with the remaining 24 million owning their houses free and clear.
It would take a little over $1 trillion to reduce their mortgages to the value
of their houses, compared to $449 billion for the almost 14 million currently underwater."
This is not inconsistent with
similar projections by other acknowledged experts and independent analysts like
John Burns and Professor Robert Shiller of Yale. If nothing happens to
stimulate buying, there is a great deal more pain ahead for American homeowners.
the great majority of Americans, their homes represent the largest portion of
their assets. This is particularly true of Americans of more modest means, who
have been hit the hardest. Watching their single biggest assert drop another
20% will be devastating and for many will mean they will not be able to retire
as they had planned. More Americans own homes (68%) than own stocks (50%). This
helps explain a recent poll which shows more Americans are worried about house
prices than about the decline in stock prices.
home prices means that consumers have to save more for retirement, which
results in lower consumer spending, which translates into lost jobs and more
homeowners coming under stress -- a vicious spiral that is increasing unemployment.
Realistic estimates of unemployment rising to over 10% within the year abound.
years ago I and a few others foresaw the current housing crisis (and an
accompanying credit crisis), predicting a protracted recession and a slow,
multi-year Muddle Through recovery. Sadly, I was right about the housing
crisis. Without some intervention, there is little to suggest that the
prediction of a long, protracted recovery will not come true.
rates, as is being discussed in various circles, will help homeowners who can
make their payments, but it does nothing to really bite into excessive
inventory. Until we reduce the inventory, housing prices in many neighborhoods
all across America are going to continue to come under pressure. And as Barry
Habib points out, while the Fed may be lowering rates for securitized packages
of loans, those low rates are not available to the average home buyer. The cost
of packaging and securitization adds considerable cost.
discusses the "traditional" options for reducing home inventories, but in the
end there is no real solution other than time, or massive amounts (read
trillions) in taxpayer money being given to homeowners, which will be very
unpopular, as homeowners who were responsible and are paying their mortgages
would get no benefits. Waiting another two and a half years for the excessive
inventory to sell will keep this country in a very slow or no-growth economy,
and devastate the wealth of millions of homeowners.
But there is a solution. There are
millions of foreigners throughout the world who would like to come to live in
the US. In 2006, there were 1.1 million immigrants allowed into the US, some
63% of whom were allowed in simply because they already had relatives here.
Only 13% of visas were granted to people because of their skills. While
allowing relatives of current residents to come to the US may be a humane and
reasonable policy, it does nothing to assure they bring more than that
relationship to help them make their way in the US.
Buy A Home, Get a Green Card
What if we changed the rules for a
few years? Starting as soon as possible, we should allow anyone to come into
the country who would buy a home. They would be given a temporary visa which
would become permanent if they had no problems after, say, five years.
While Gary proposes that they be
allowed to borrow against the value of their homes, I lean toward suggesting
that initially we take those who buy their homes outright (with a few
exceptions). That means they have enough capital to purchase a home to begin
with, which probably means they are educated and have skills. In fact, if they
have enough cash to buy a home, that means they would have more actual savings
than most US citizens. We would be attracting future citizens with the capital
to invest in job-creating businesses and/or who have useful skills to assist in
the recovery of the US economy.
Of course, there should be some
rules that go along with this proposal. Background checks and references should
be required. The home could not be rented for a period of time (at least two
years), to help reduce the supply of available housing, and could not be resold
for at least two years unless another home was purchased. There should be a
minimal price, which could be somewhat different for various regions, but
$100,000 would seem to be a good minimum for most areas, with higher minimums
in certain areas.
The immigrant should demonstrate
the ability to support himself and his family for a period of time (at least one
year, preferably two), including the purchase of health insurance. Cash or
letters of credit or other guaranteed commitments would be required. Only
immediate family members (spouse and children) would be allowed to come with
the immigrant. Cousins and siblings must buy their own homes. The permanent
visa should be contingent on not having gone on welfare or public assistance at
any time in the past five years. We are trying to solve a housing problem, not
looking to create others.
I would make an exception in having
100% financing for immigrants with advanced degrees or special skills,
especially those who did their schooling in the United States. If the US is to
remain competitive in an increasingly technological world, we need more
scientists and engineers. But getting permission to stay is becoming
increasingly difficult. We are seeing a brain drain of those who would like to
stay and create new jobs and technologies (and buy houses) here in the US.
Shilling and Le Frak write:
"The authors of this report believe
that a number of people have given up waiting for those visas or don't want to
put up with the hassle and are leaving the country. This "brain drain" is
unfortunate since many of these foreigners are highly productive. In 2006,
foreign nationals residing in the U.S. were named as inventors or co-inventors
on 25.6% of the 42,019 international patent applications filed from this
country, up from 7.6% in 1998. Studies of the authorship of academic papers
show the same trend.
"U.S. educational institutions are
considered the best in the world by many and are magnets for foreign students,
especially at the graduate level. Many of them are inclined to settle and work
in this country after completing their studies, if they can obtain permanent
"The Council of Graduate Schools
survey revealed that in the fall of 2007, 241,095 non-U.S. citizens were
enrolled in graduate programs. Technological progress and the productivity it
generates depends on people educated in biological sciences, engineering and
physical sciences, but only 16% of U.S. citizen graduate enrollment was in
these three disciplines. In contrast, 55% of total non-U.S. citizen enrollment
was in those fields. Conversely, 53% of graduate enrollment by Americans was in
education, business and health sciences while those three fields accounted for
only 24% of foreign graduate students."
(There is a great deal more background
detail in the second white paper. See link below.)
Much can be
learned from similar programs already in place in immigrant-hungry countries
such as Canada, Australia, and New Zealand. The United Kingdom has recently
added new programs. Many countries realize that in the coming years there is
going to be increasing competition for the best and brightest of the world.
Again, there are more details in the white papers, but let's turn to the
effects that would result from such a program.
First, upon Congressional
approval, it would almost immediately stop the seemingly inexorable slide in
house prices, as initial demand would be significant. Let's assume one million
new immigrants would buy homes. At an average price of almost $200,000, that
would be $200 billion injected into the economy. And each of those homes has to
be furnished, food has to be bought, clothing will be needed, local taxes will be
paid. Airplane tickets to research potential areas, hotels needed during the
interim period, and other related expenditures would add up. Over two years,
this could easily be another $100 billion.
million new buyers with current US demand, and the excess inventory would be
worked through within a year, and possibly faster. This puts a floor under the
housing market, and home values could once again to begin to rise in line with
a growing economy.
Such a program
would have a salutary effect on the value of the dollar, as not only the
initial purchases of homes and materials would need to be converted to dollars,
but it is likely that immigrants would bring even more capital into the
By stemming the
fall of home values, it would decrease the likelihood of foreclosures and help
homeowners get refinancing at lower rates. Refinancing now is difficult because
most lenders want a substantial slice of equity to go along with any new
mortgage. If your home value has dropped 20% and is likely to fall another 20%,
it is hard to have enough equity to qualify for a new mortgage. Stopping the
fall in prices is critically important; and maybe if prices rise in some areas,
homeowners will be able to refinance at better rates, giving them more cash
each month to save or spend.
As I have
written in previous letters, the psyche of the American consumer is permanently
scarred. We are on our way back to a savings rates that will look more like
1987 than 2007, when it was almost zero. Just a few decades ago, we saved
7-10%. Consumer spending was only 64% of US GDP in 1987. It was 71% in 2007. It
is on its way back to that lower level.
spending will be a drag on growth for years. But bringing in 1 million already
middle-class new immigrant families will help make up for a lot of that reduced
spending. If you can spend $200,000 on a home, you are likely skilled at
something and well-educated. You will find a job, or create one, as many
immigrants do, and then you will add to our total consumer spending.
If you are a
real estate agent, you should love this proposal, as it would result in an
additional $12 billion in commissions.
If you are a
home builder, what a great way to reduce inventory and get back to the
conditions where there is a demand for your product. This would help put back
to work those who have lost their jobs in the home construction collapse. Home
Depot and Lowe's and local stores? It would help them to increase sales, which
leads to more jobs.
We are on the
cusp of the Baby Boomers beginning a huge wave of retirement, both in the US
and elsewhere in the developed world. There is going to be a need for skilled
workers to replace those Boomers, as well to provide services to the retirees.
Further, the promised Social Security and Medicare expenditures are going to
start increasing at a significant rate. We are going to need immigrants to help
pay for those benefits. Given the controversy over immigration, we will look
back with some irony in ten years when we find we are in a serious competition
with other nations to attract skilled immigrants. We should start now. I think
the concept is, let's not waste a good crisis.
Let's look at
some of the potential critics of this proposal. I was on Yahoo Tech Ticker yesterday talking about
this, and got a few irate emails and phone calls.
"Why," I was
asked, "do I hate American workers? Isn't there enough unemployment? Why do we
need more immigrants taking American jobs?" And there was considerable angst
about illegal immigrants.
First, I am
suggesting we transform the already existing legal immigrant flow, which is
going to happen anyway, into a form which helps us solve a major crisis. I am
not talking about adding another 1 million immigrants on top of the current
legal inflow. Just change the nature of that inflow until the excess housing
inventory is settled, and then we can go back to the current program, if that
is what is wanted (more on that below).
Second, I am
not suggesting we bring in or condone illegal immigrants. That is another issue
altogether, for another debate at another time.
If we do
nothing, unemployment is going to rise to at least 10%. That is certainly not
good for the American worker. Home values are going to continue to fall. That
is certainly not good for the American worker. The economy is likely to be
stagnant for an extended period of time, which means job growth in a Muddle
Through recovery will be slow and stagnant. That is not good for the American
billions more of taxpayer dollars will have to go to banks to keep them solvent
as falling home prices and increasing unemployment increase foreclosures. That
is not good for the American worker and taxpayer.
And further, I
am not talking about bringing 1 million foreigners to this country. I am
talking about bringing 1 million future Americans, who want to work hard and
live the American dream.
Let me say a
few words to those who are opposed to immigration -- and I have heard from
you. With few exceptions, US citizens reading this have an immigrant in their
genealogies. Some of mine go back to the 1600s. Some of mine were not exactly
considered welcome. "No Irish and Dogs allowed" read the signs. But immigrants
and their children have been the driver for growth in this country for
generations. It is hard-working immigrants who leave their homes for the dream
of being Americans that have been the backbone of the building of the nation --
the hewers and shapers, if you will.
It is precisely
that melting pot of human diversity that is the strength of the American idea.
Each new wave of immigrants has been viewed with trepidation or scorn, yet
within one generation they have become American. And in turn, their children's
children forget that their forebears had to deal with discrimination.
the US -- is not so much a country as it is an idea, the idea that anyone,
regardless of race or religion or gender, can come here and with hard work and
determination make their own way. Some end up owning the local deli, and some
end up founding Google. Some 25% of Silicon Valley start-ups, I am told, are by
immigrants, creating jobs at the bleeding edge of technology. They see the US
as a land of opportunity. That is why so many want to come and that is why we
can attract a new generation of affluent, self-reliant immigrants who can help
us solve a problem that we created.
can see no downside to changing our immigration policy for a few years. We
solve the housing crisis, stabilize home values, brings hundreds of billions in
stimulus to the US, and with no taxpayer outlay. For a short time, we
substitute one class of immigrant for another, to solve a serious crisis. It is
not a matter of immigrants or no immigrants, just which immigrants
which do you want? 10% unemployment and a decade of lower home values and
increasing foreclosures, with a slow, Muddle Through, jobless recovery, or a
stable housing market and home construction back to trend?
you agree with me, I suggest you contact your Congressman. You can go to
(selected at random from many such sites) and type in your address and get the
name of your congressperson and senators. Just tell them you like this idea,
and cut and paste the link where you read this into the letter. And tell them
to get into gear! I would like to point out that this proposal is not Republican or Democrat, it is just common sense.
I hope we can get broad bipartisan support.
The link to the Wall Street Journal editorial is:
The links to the white papers are:
Las Vegas, La Jolla and the OC
expect I will get a few new readers from this letter. Normally, at the end of
my regular weekly letter, I make a few personal comments. I write this free
weekly letter to my 1 million closest friends, and you can add yourself to the
You can find out more about me at
of this letter have been written in New York and Dallas, and as I write this I
am on a flight to Las Vegas to speak at a conference on natural resources. I am
sure the recent Fed actions will be at the center of conversation. There is not
enough space now to comment on that; but I did do a few segments on Yahoo Tech Ticker (one of which evidently made
the Yahoo home page), which you can listen to at the following links.
Links to the Yahoo segments:
D.C. to America: You Can't Handle the Truth
Plan to Solve Crisis: Let Immigrants Buy Houses
Fed Strategy: Spread Economic Pain Over Multiple Years
I will be in La Jolla for my annual
Strategic Investment Conference in two weeks, as well as hosting the Richard
Russell Tribute Dinner. The dinner is shaping up to be a big event, with hundreds
of attendees and many of the brightest lights in the investment writing world present
to honor Richard for 50 years of brilliant commentary.
really enjoyed my trip to NYC. I had a great steak dinner with Art Cashin,
everybody's favorite commentator on CNBC. Breakfast with Tom Romero and then a
meeting with Jim Cramer, who I found to be very personable and genuinely
likeable. Meetings in the afternoon with business partner Steve Blumenthal,
then breakfast the next day with Barry Ritholtz, Yahoo at the NASDAQ, and then
a speech at noon, back on the last flight and up writing -- and then this
plane, which I hope ends up in Las Vegas.
In addition to being with old
friends Doug Casey and David Galland (and their posse), I intend to see the
inside of the gym and spa. I need it. Tiffani has been gone for two weeks,
working on our book, and will get back on Monday; and the new chapter I was
supposed to have for her has disappeared in a reboot from this laptop. I am
quite distressed, but evidently the book gods decided it needed a major rewrite.
Have a great week, and find a few
friends and share some laughs and your adult beverage of choice.
the computer crashed again, and
this letter is going out on Saturday rather Friday night. But I did get
to see the
Jersey Boys (The Story and Music of Frankie Valli and The Four Seasons)
here in Vegas last night. One of the best shows I have seen in
years. See it when it comes near you.
And if you are in Las Vegas, eat at
Wolfgang Puck's new place, called Cut. One of the best pieces of steak I have inhaled
in years. And now it really is time to hit the send button and go attend the
Your wondering if we can actually get some action analyst,
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