The latest incantation of the U.S. Treasury plan announced by Secretary of Treasury Geithner, while addressing the problem, focuses on the symptom, not the problem. The real “banking” problem is that housing prices continue to move lower thus reducing the value of the assets on banks’ balance sheets. The median price of houses sold in the nation declined by approximately 18 percent last year. My own estimates indicate that average home prices across the U.S. need to drop by another 14 percent to get back to the long term sustainable ratio between housing prices and income.
So what needs to be done? In order to underpin the housing market, President Obama’s 2009 Stimulus Package provides an $8,000 tax credit to first- time home buyers. This is inadequate since many of those who qualify do not currently have the resources to make the purchase, nor do they have the tax liability to fully benefit from the credit. Instead, the Obama
Administration’s 2009-10 budget proposal should provide a tax credit of $15,000 for all 2009 home purchases, not just first-time buys. Additionally, President Obama’s 2009-10 budget propsal has proposed a reduction in the mortgage interest rate deduction for families earning more than $250,000. This will have a negative impact on housing sales, prices, and ultimately the health of the banking industry.
The Obama Administration’s plan to cut agricultural support payments will more directly affect RM banks. The plan that has been advanced calls for limiting agriculture support payments for farms with revenues greater than $500,000. This ceiling would snare about half of the farms in Nebraska, for example, and place even more downward pressure on farm land prices, and ultimately the profitability of RM banks. During these fragile economic times, this is no time to be placing additional financial stress on rural communities dependent on farm income.
As an additional step to improve the banking industry, “mark to market” accounting should be abandoned for two years. In 2007, the Securities and Exchange Commission (SEC) implemented what was termed “mark to market” requiring that financial institutions mark or write down assets to market value. This has meant that, due to the inability to price or value packages of mortgages on their balance sheets, these institutions have marked them to practically zero in some cases under the overly restrictive assumption that they will collect nothing from the disposition of these assets. This is clearly draconian and reduces the ability of the financial institutions to make loans thus further weakening the economy.
As indicated by Dale Torpey, president of Federation Bank in Washington, Iowa in our February 2009 survey, “Land prices have leveled off and in some instances have dropped slightly. If some of the farmers can’t renegotiate their rent prices we could be looking at losing some of them in 2010.” Thus, banks, even in those in agriculturally dependent parts of the nation, likely face challenges for 2009 that call for greater attention.
Ernie Goss
1 comment:
I wouldn't assume Geithner's assumption is misplaced. He's viewing the problem more along the lines that the investment banks are no longer receiving principal payments on the mortgages; many of which are sub-prime. Let's leave value alone for a minute. A big problem is people aren't making their principal payments on the mortgages. More to this point in the last paragraph.
Obama's tax credit is a full tax credit, meaning it can result in a refund vs. a zero and out. Some call this a negative tax rate or negative income.
I'm not understanding why we would provide a tax credit for home buyers who already have a home. This is counter-intuitive when one considers the goal to reduce debt and increase home mortgage principal payments. We still want to encourage first time home buyers but don't necessarly want to push second and third home buyers or 7th, etc.
Let's also consider the tax receipt benefit to the gov't of the reduced interest rate deduction. The deduction basically is similar to the interest rate, a cost of borrowing. The cost of borrowing has gone up in Obama's case. One can make the argument such an increase is minimal to the value of a home verses the home's location.
At a macro level however is a more entrenched problem. That is the average American can no longer afford the lifestyle once common to Americana. This conclusion isn't hard to reach given the flatlined growth in salaries, wages, and benefits per American over the past decade.
The concentration of wealth in our country is falling in the hands of fewer and fewer individuals. Some may call this unfair. Many are asking for change. A few are even demanding so.
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