Business and Finance : Your Turn to Push

Yesterday we looked at the challenges of predicting, planning and acting amid economic chaos.  Today we look at the other side of that coin.

While violent outcomes are possible in the paranormal investing environment, the chances of nothing happening present us with another kind of danger – a stagnant economy that can’t fix itself.  We have a stalled economic vehicle that is worth more to us when it is moving.  What might it take to jump-start the machine?  Let’s consider a radical Main Street push in round number terms.

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Absent economic incentives or a focused national effort, the MBAA estimates next year’s purchase money mortgage activity will total near $403 billion.

  • Given a national median home valueof $165,000 and a conservative 80% purchase financing of such a home – we come up with 3 million transactions for 2012.
  • This limited universe of activity is caused by the 1 in 4 “underwater” homeowners, who can’t be a part of the housing churn, the 15 to 25 million citizens who are unemployed or underemployed, and the 10% to 15% of the home buying population whose credit was wrecked in the economic downturn.
  • A lot of these groups overlap, but the point is these folks are so weighed down they can’t help jumpstart anything without a change on Main Street.

Per Radar Logic and other sources, we have 2 million homes in foreclosure and 4 million in some state of delinquency.  These 6 million homes need buyers.  Tough sledding in a market with 3 million opportunities.  If “motivated sales” (sales associated with this 6 million properties) remain 25% of all transactions (.25 x 3,000,000 = 750,000) you can see we have years, if not a decade, of pushing our vehicle around if we don’t jump start it.

What if we could move the 6 million homes “off balance” like we do with wars and other unplanned disasters?  Motivated sales are typically at a 35% discount to normal transactions.  The cost (.65 x $165k x 6mm homes) is a TARP like $640 billion.  But, as Ben Bernanke recently pointed out,  with Cap Rates (aka returns on rental property) approaching 8% this could be the best government real estate investment since the Louisiana Purchase.  At this rate of return, the Federal government could recover its original losses in the GSE’s in less than 4 years.  This is a loss they presently plan to collect off the back of taxpayers.

Thinking bigger, what if the underwater portion ($3.8 trillion) of the housing debt could be moved “off balance sheet” or converted from debt to equity?   This is big, the kind of money we spend on wars, medicine, retirements; but what if it was spent to acquire assets and economic rights, while putting the private sector back to work?  Such a program would require a wide range small business private sector asset managers.

As a practical matter, only a fraction of the public would commit to this transaction as the mere announcement of a credible program would signal inflation and change the public’s behavior.  Absent a change, the mortgage debt of $8.9 trillion is a mal-investment, 43% unsecured, and is a huge drag on consumer economic behavior.  If that debt were converted to equity appreciation rights in return for a new mortgage at market levels, the public’s need to hoard cash would convert into a need to deploy it.

Using the median home value again to approximate a generalized impact ($165,000 x .57 x 10 mm homeowners), the new mortgages would save them approximately $43 billion a year, money that can stimulate the economy as consumers buy new cars, appliances, do home repairs and other things they have delayed since 2008.

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Unlike current taxpayer giveaways, the government ownership of real estate (above) and equity appreciation rights would immediately benefit from the absence of housing supply for sale and the inflationary nature of the increase in money supply caused by such a program move.

With this inflation, energy prices spike, green energy becomes competitive with fossil fuels and a value-added industry gets jump started because of market demand rather than government push.

Not interested?  The car’s out of gas and it’s your turn to push.