More on the US Housing Crisis

If any of you saw 60 Minutes last night, you probably saw the segment wherein the city of Cleveland has identified 10,000 houses that have been abandoned by owners who were far under water – homes that were then gutted and destroyed by vandals and thieves. Cleveland has already taken down 2,000 of these festering hulks, and intends to break up and remove all the rest.

City officials saw that the existence of these wrecked homes was destroying the housing values of nearby homes that were in good shape and were occupied by their owners. They decided that radical action was necessary to save the values of these still-occupied homes. These officials are to be commended for showing some courage in a situation that is unprecedented.

Radical action is also needed to save the country from years of suffering and, perhaps, from the kind of violent, revolutionary activities and the toying with communism that marked the years of the Great Depression.

I was very disappointed when not one of my readers commented on a radical plan that I support that will solve the housing crisis almost overnight. Perhaps you were surprised and embarrassed that a conservative person like myself would support a plan that smacks of extreme socialism. It’s because I think the situation that confronts us is that serious.

Please re-read the following article at this link:

Is the Housing Crisis Almost Over?

Before addressing the housing crisis, let me say that Republican support for a payroll tax cut leaves me in shock. Already this hair-brained idea has shorted the almost bankrupt Social Security Fund by more than 100 billion dollars and has forced even more borrowing with no benefit whatsoever to our economy. If we cannot trust Republicans to protect workers and taxpayers, who can we trust?

Now as for the housing situation, I noticed the following analysis on Townhall this morning. The first chart best illustrates the bubble, but pay close attention to the second and the third graphs (left-click to enlarge). They indicate that we may have to endure at least another five years of the housing crisis - with lost equity, millions of foreclosures to come, and the unemployment that comes with lost home construction jobs.
Revisiting the U.S. Housing Bubble

Townhall 12/18/2011

Once upon a time, we developed a better method for detecting housing bubbles. Today, we're going back to the data mines to do some refinement and to see where things stand today.

Our first chart shows the relationship between median new house prices in the United States and median household income for the years from 1967 through 2010.

Here, we've revised our earlier look to better define the major trends evident in the data. Here, we see one major trend running from 1970 through 1986, then a second trend running from 1987 through 1999. After 1999, we see the housing bubble beginning its inflation phase as the relationship between median new house prices and median household income became decoupled, running through 2007. Since then, the U.S. housing bubble has been in its deflation phase, which appears to still be ongoing, as the relationship between the median prices of new houses and median household income remains decoupled.

One important thing to note is the shift in the trend that occurred after 1986. We believe this shift was triggered by the Tax Reform Act of 1986, which eliminated a number of debt-related tax deductions, but which left the long-standing mortgage interest deduction in place, even increasing the amount of the deduction.

The changes brought about by the Tax Reform Act of 1986 had two main effects. First, it incentivized home ownership by enhancing the tax benefits associated with owning property and having a mortgage. Second, in eliminating the favorable treatment of other debt interest, it made the home mortgage the primary channel by which people would choose to accumulate debt thanks to the interest on that debt being tax advantaged.

These changes however are not the cause of the U.S. housing bubble, as there is no correlation between the shift in trend and the beginning of the bubble in 2000. More interestingly though, we see that both trends would project nearly the same median new home price given the current level of the U.S. median household income.

Looking at the more recent trend that was defined in the period from 1987 through 1999, we can see that the relative affordability of a median new home in 2010 is still well elevated above where it would have been during that period. The following chart shows the percentage deviation between the 1987-1999 trend and actual median new home prices from 1987 through 2010, which gives a sense of how overpriced the median new home has been since 1999 thanks to the U.S. housing bubble:

Here, we see that the relative affordability of the median new home with respect to where it typically was from 1987 through 1999 peaked in 2005, with a percentage deviation of 25.7%. Since then, the median price of a new home has fallen, bottoming in 2009 at a level 11.9% over where the linear trend that ran from 1987 through 1999 would place it, before bouncing back up to be 14.4% higher than the level of the projected trend in 2010.

What's interesting to us is that it appears that we stumbled directly into something that looks very much like the Case-Shiller house price index.

Here, looking at both the 10-city and 20-city composite indices, we find that our representation above closely follows the pattern traced out by the Case-Shiller 20-city composite data - at least with respect to the linear trend we created in the chart for the period from 1987 through 1999.

But unlike the Case-Shiller data, because our method correlates house prices with household income data, it will better communicate the relative affordability of homes in the U.S. over time!

Since the Case-Shiller data has been updated more recently than the Census data, it appears that house prices in the U.S. have resumed falling in 2011. And even though those falling prices are making homes more affordable today, they would have to fall by roughly another 12-14% before they would be in the same ballpark for affordability that they were in the years from 1987 through 1999.

Or as the projected trend works out to be from our first chart, the same level of affordability that they were for Americans in the years from 1970 through 1986 as well.

Rush and Winning the Presidency in 2012

Rush Limbaugh gave a fascinating interview on Greta last night, but I disagree with him that only a real conservative can win.

I am very conservative on most political and societal issues, and the lack of political courage often shown by RINO Republicans usually makes me disgusted. However, in 2012 the only thing that matters to me is that Obama be defeated by someone who will go on to reverse Obama’s policies and slow down spending. As Michael Medved shows in the piece below, the only reasonable chance we have to win is to nominate a candidate who can frame the issues and also win the votes of moderates. While Gingrich has proven to be a superb debater, and I agree with more of his positions than with Romney’s, I am supporting Romney for president because he can win, and Gingrich, who is already starting to implode, can’t.

Seizing (or Blowing) 2012 Victory

By Michael Medved 12/14/2011 Townhall (Excerpt)

“In a much-debated Op-Ed in the Wall Street Journal (“Conservatives, Romney and Electability,” November 23rd) I insisted that “the electoral experience of the last 50 years does nothing to undermine the common-sense notion that most political battles are won by seizing and holding the ideological center. In the last two presidential elections, more than 44% of voters described themselves as ‘moderate,’ and no conservative candidate could possibly prevail without coming close to winning half of them (as George W. Bush did in his re-election).”

Please note: I argue that a conservative candidate must earn moderate votes in order to win, not that a centrist nominee is the only formula for victory.

The math here isn’t complicated: even if the Republican nominee drew every available conservative voter (an obvious impossibility, since exit polls show that even the heroic Reagan got less than three-fourths of them in 1980) then he would still need more than a third of self-described moderates to win a popular vote majority.

Suggesting that conservative candidates need to appeal to the center as well as to the right if they want to win isn’t a matter of opinion; it’s a simple statement of fact. There has never been an election in the history of exit polling where a majority of voters described themselves as conservative. In the Bush victory of 2004 and the McCain defeat of 2008, identical percentages (34 percent) called themselves conservative.

When ideological purists claim that conservative candidates who succeeded in the past (including Ronald Reagan and George W. Bush) relied only on the support of their fellow right-wingers, they diminish the real achievement of these formidable campaigners. For instance, the esteemed economist Thomas Sowell wrote a syndicated column (“Lessons of History?”) that took me to task for suggesting that the outcome of every election depends upon uncommitted voters in the center. “But just when did Ronald Reagan, with his two landslide victories, ‘seize the center’?” demanded Dr. Sowell.

Actually, the answer to that question is easy: Reagan swept voters who placed themselves in the center of the electorate in both 1980 and 1984. He won “moderates” in his battle to unseat Carter (49-43 percent), and did even better against Mondale four years later (54-46 percent).

Nor did this success represent some happy accident, or the magical force of President Reagan’s considerable charisma. The general election campaign against Carter aimed squarely at the center, beginning with the selection of the moderate, country-club-Republican George W. Bush as the Vice Presidential nominee (after Reagan tried, but failed, to work out a deal with another moderate – Gerald Ford – to join his ticket).

Every history of the epic 1980 campaign reports the determined GOP effort to locate the party’s nominee within the national mainstream, and to avoid the disastrous Goldwater experience of allowing Democrats to characterize his candidacy as dangerous and extreme. Reagan’s famous line “there you go again” in the televised debate meant to reassure the public and defuse Carter’s suggestion that a Republican victory might endanger Medicare – a program which Reagan had, in fact, energetically opposed in the 1960’s. When running for re-election, Reagan ran a gauzy, feel-good “Morning in America” campaign that pointedly avoided ideology and emphasized the administration’s practical achievements, leading to a sweep of 49 states (including New York, California and Massachusetts).

As much as all Republicans revere the Gipper’s memory, it’s also important to recall that he was by no means the only modern GOP candidate to win landslides. Richard Nixon’s heterodox approach to the economy (wage price controls), the environment (he launched the EPA), and foreign policy (recognition of Red China) certainly qualified him as a moderate rather than a doctrinaire conservative, but he swept 49 states in 1972. In fact, Nixon’s share of the popular vote (61 percent) exceeded even Reagan’s in his biggest win (59 percent).

I greatly admire Dr. Sowell, but I can’t understand his citation of an utterly fictitious “long string of Republican presidential candidates who seized the center – and lost elections.” In this context, he mentions Thomas Dewey, who was beaten by Truman in long-ago 1948, without acknowledging that the famously centrist Eisenhower won a crushing landslide just four years later (442 Electoral Votes) and then did even better in his 1956 re-election drive (57 percent of the popular vote, 457 Electoral Votes).

Dr. Sowell’s “long string” of losing centrist candidates consists of only two consecutive campaigns in the last 60 years: the failed re-election bid for the “kinder, gentler” first President Bush in 1992 and the dismal effort by an aging Bob Dole to unseat Bill Clinton four years later. It’s noteworthy that Dole, despite his Washington insider background, attempted to run to the right, not the center, in the general election. He proposed dismantling the Department of Education, cutting capital gains taxes by half, and selected conservative hero Jack Kemp as his running mate. Both Dole and Bush, however, found themselves badly damaged by the quixotic Third Party campaigns of Ross Perot, which drew heavily from voters of the center-right and helped make Bill Clinton twice victorious without ever winning popular vote majorities.

This history bears review because it makes the point that selecting the strongest candidate doesn’t always mean selecting the most conservative candidate. Losing GOP campaigns aren’t simply a matter of “’Republican In Name Only’ failures” (in the words of one of the letters to the Wall Street Journal protesting my column), any more than triumphant Republican candidacies only involve robust, unapologetic conservatives.

This year, the party will certainly pick a conservative nominee because the party’s become more than ever unequivocally conservative and because none of the seven presidential contenders counts as authentically “centrist” or “moderate.” All of them take positions on issues that place them well to the right of Rudy Giuliani and John McCain, who both conducted serious campaigns last time.

The conservative stance of the party’s ultimate champion (almost certainly either Newt Gingrich or Mitt Romney) won’t doom the ticket to defeat, any more than a more moderate tone by the nominee would assure victory. The outcome of the election will depend on the public’s verdict on Barack Obama—and solid Republican arguments that his unbending, doctrinaire, impractical liberalism has damaged the country and delayed recovery.

But in making that case the GOP must do more than rally conservative true-believers and must make a serious, successful effort to persuade the moderate-minded voters who inevitably and invariably decide the outcome of every major election.” Townhall

The Whole Truth for a Change

His mother was an unabashed hippie from 1960s central casting. His father was an openly avowed Communist from Kenya. While his father wasn't around much, his devoutly progressive grandparents arranged for him to be mentored during his adolescent years by a dues paying member of the U.S. Communist Party, Frank Marshall Davis.

When he went to college, he was attracted to the Marxist professors and student activists, according to his own published memoirs. When he graduated, he moved to Chicago and became an instructor for the left-wing extremist organization ACORN in the social manipulation methods of radical Marxist agitator Saul Alinsky. He attended for close to two decades the Trinity United Church of Christ, which practiced neo-Marxist Black Liberation Theology. That church was headed during those years by the openly socialist Rev. Jeremiah Wright, who declared that the 9/11 terrorist attack on America was "America's chickens coming home to roost." He also famously preached from his pulpit, "Not God bless America, God damn America…."

He launched his political career in the living room of the home of Bill Ayers and Bernardine Dohrn, co-founders and former leaders of the openly Communist domestic terrorist organization, the Weather Underground. That organization conducted several bombings in America and engaged in other violence that resulted in several injuries and even deaths.

All of this is documented in the public record. This is the man the Democrat party took off the streets of Chicago, then pursuing a career as a Marxist street agitator, and launched into the White House, favoring him over Hillary Clinton because she was too moderate for the party. They did that because he best reflects the heart and soul of today's radical-left, Che Guevara Democratic Party. It is in this context that we should understand and analyze Obama's Hugo Chavez speech given last week at Osawatomie High School in Kansas.

Obama's Hugo Chavez Coming Out

In that speech, he drew a picture of America as a struggling third world nation, saying at stake today "is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home, and secure a retirement." In fact, he said, "there are millions of working families in this country who are now forced to take their children to food banks for a decent meal."

This sounds more like Indonesia, or Venezuela, or Nicaragua. But it is not America "long before the recession hit."

He explained the roots of the problem as:

Over the last few decades, huge advances in technology have allowed businesses to do more with less, and made it easier for them to set up shop and hire workers anywhere in the world…. Steel mills that needed 1,000 employees are now able to do the same work with 100, so that layoffs were too often permanent, not just a temporary part of the business cycle…. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs or the Internet.

This Luddite analysis fundamentally misconceives the role of technology in a modern economy. Such advancing technology increases worker productivity, and, therefore, wages and standard of living. Technological progress over the decades is why the average American worker in 2000 enjoyed 7 times the standard of living of the average American worker in 1900.

He then tries to pin the blame for his failures on others, saying, "Now, in the midst of this debate, there are some who seem to be suffering from a kind of collective amnesia. After all that's happened, after the worst economic crisis since the Great Depression, they want to return to the same practices that got us into this mess."

The policies that got us into this mess included primarily the so-called "affordable housing policies" Obama himself and other Democrats long advocated, with the government forcing the banks by overregulation to drop their traditional lending standards to provide loans and mortgages to low and moderate income applicants who could not qualify under those traditional standards. (See the full documentation and discussion in Paul Sperry's The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Financial Crisis and Gretchen Morgenson and Joshua Rosner's, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.

The other major factor was the Fed's loose monetary policy starting under Bush in the 2000s, which funded the housing bubble. Both policies were departures from the fundamental planks of Reaganomics. As I discuss in detail in my own book, America's Ticking Bankruptcy Bomb, the four planks of Reaganomics had been effectively abandoned by 2008, and that was the cause of the financial crisis, which ended the 25-year economic boom from 1982 to 2007 that Reaganomics had created.

Obama tries to continue his historical revisionism, saying, "Remember that in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts in history, and what did they get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country."

Here is what really happened. Those Bush tax cuts quickly ended the 2001 recession, despite the contractionary economic impacts of 9/11, and the economy continued to grow for another 73 months. After the rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs and the unemployment rate fell from over 6% to 4.4%. Real economic growth over the next 3 years doubled from the average for the prior 3 years, to 3.5%.

In response to the rate cuts, business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter. That is where the jobs came from. Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled. Capital gains tax revenues had doubled by 2005, despite Bush's 25% cut in the capital gains rate.

The deficit in the last budget adopted by Republican Congressional majorities was $161 billion for fiscal 2007. Today that deficit is nearly 10 times as much. Total federal revenues under Bush soared by nearly 30%, from $1.991 trillion in 2001 to $2.568 trillion in 2007. The day the Democrat Congressional majorities took office, January 3, 2007, the unemployment rate was 4.6%. George Bush's economic policies, "the failed policies of the past" in Obama's rhetoric, had set a record of 52 straight months of job creation.

What has continued to fail us now is that Obama's own policies, the exact opposite of Reaganomics in every detail, have failed to produce any timely real recovery from the last recession. Before this last recession, since the Great Depression recessions in America have lasted an average of 10 months, with the longest previously at 16 months. But here we are today 48 months after the last recession started and there is still no real recovery. Instead, we have record poverty, and record extended unemployment.

They can't say that is because the recession was so bad, because the historical record in America is that the deeper the recession the stronger the recovery. Based on the historical record, we should be ending the second year of a booming economy right now. The failure to achieve that is the responsibility of Barack Obama.

Obama himself was counting on precisely this history making him look like a hero. That is why he so confidently told the Today Show on Feb. 2, 2009, "a year from now I think people are gonna see that we're starting to make some progress…if I don't have this done in three years, then this is going to be a one-term proposition."

Before Barack Obama as President, the rest of the world looked to America as the example for the economic model that works to achieve prosperity. But today Obama tells America "It doesn't work. It's never worked. It didn't work when it was tried in the decade before the Great Depression. It's not what led to the incredible postwar boom of the 50s and 60s. And it didn't work when we tried it during the last decade."

But it's President Obama, who fundamentally doesn't understand his own country, that doesn't work.

Obama's Tax and Spending Fantasies

In his Kansas speech, Obama offered as his solution increased government spending as the foundation for rising prosperity. He says:

Today, manufacturers and other companies are setting up shop in places with the best infrastructure to ship their products, move their workers, and communicate with the rest of the world. That's why the over one million construction workers who lost their jobs when the housing market collapsed shouldn't be sitting at home with nothing to do. They should be rebuilding our roads and bridges; laying down faster railroads and broadband; modernizing our schools -- all the things other countries are doing to attract good jobs and businesses to their shores.

Instead of the American capitalist model maximized by Reaganomics, Obama tells us to look at the basic infrastructure spending of other countries as the model that works. But American economic growth is not suffering because of a lack of basic infrastructure like a third world country. It is suffering because Obama is so doggedly pursuing the opposite of every policy that would free the economy to produce and boom. Under such Obamanomics, soon enough America will be suffering from the lack of a reliable energy grid like a third world country.

Obama whines that Bush's massive deficits (if his deficits were massive what are Obama's?), supposedly caused by his tax cuts (not--revenue again rose during the Bush years), "have made it much harder to pay for the investments that built this country and provided the basic security that helped millions of Americans reach and stay in the middle class -- things like education and infrastructure; science and technology; Medicare and Social Security."

But spending on all of those items soared during the Bush years, and they have rocketed up all the faster under Obama. To no avail, because government spending is not the foundation of increased economic growth and prosperity. Increased production, spurred by ever stronger incentives, is.

Of course, essential to all of President Obama's essential spending is to increase tax rates on the rich, otherwise known in English as the nation's investors and job creators. As President Obama tutored us in Kansas last week:

But we don't have unlimited resources. And so we have to set priorities. If we want a strong middle class, then our tax code must reflect our values. We have to make choices…. Do we want to make the investments we need in things like education, and research, and high-tech manufacturing? Or do we want to keep in place the tax breaks for the wealthiest Americans in our country? Because we can't afford to do both. That's not politics. That's just math.

So there you have the Obama formula for economic growth and prosperity. After the greatest runaway spending spree in American history during the Obama Administration, the answer is for government to increase spending even more, financed by increasing tax rates even more on the very investors and job creators that produce the jobs for the middle class and working people in America's economic system. That is a perfect prescription for another recession, not the long, long overdue recovery America is still waiting for under Obamanomics. Obama tells us, "It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay a higher tax rate than somebody pulling in $50 million." That would be wrong if it were true. But it is not.

What Obama is peddling to America on tax policy is only the ugliest example of his well-established rhetorical style of calculated deception. It is based on what he thinks the average voter does not know and will not know, and can be manipulated to believe to Obama's political advantage. For the picture he is painting of the rich getting away without paying their fair share while working people bear most of the tax burden is the opposite of reality.

Even before Obama was elected, under those "failed policies of the past," the top 1% of income earners in 2007 paid 40% of federal income taxes (up from 17.6% when Reagan entered office), while the CBO just reported that they earned 17% of the income in 2007. Moreover, that 40% of federal income taxes paid by the top 1% was more than paid by the bottom 95% combined, according to official IRS data. While the top 1% paid 40% of federal income taxes, the bottom 40% paid no federal income taxes as a group on net. Today 47% pay no federal income taxes.

Yet, Obama has already enacted under current law further tax increases on the nation's job creators, investors and small businesses going into effect in 2013, when the tax increases of Obamacare become effective and the Bush tax cuts expire. Consequently, that year the top two income tax rates would rise by close to 20%, the capital gains tax would soar by nearly 60%, the tax on dividends would nearly triple, and the Medicare payroll tax would rocket up by 62% for these disfavored taxpayers. This alone would take us well beyond the Clinton tax rates, despite Obama's outdated talking point that he is still repeating from 2008.

This is in addition to America suffering with virtually the highest corporate tax rate in the industrialized world at nearly 40% on average, counting state corporate rates. As I have previously noted, even Communist China imposes only a 25% rate, with the rate in the EU even less on average. Our Canadian neighbors, enjoying a booming economy since Obama was elected in America, will enjoy a 15% rate next year, down from 16.5% this year.

Yet Obama barnstorms America calling for still more tax increases on American business, large and small, and the job creators and investors on which jobs and prosperity for working people depend. The galloping regulatory burdens he is now imposing effectively involve still further tax increases stifling production. It all adds up to a brew for another recession in 2013, unless the American people force a change in course in 2012.

By Peter Ferrara on 12.14.11 The American Spectator