Home, Home I'm Deranged Part 4

Time for another round of problem solving, Happy Face Financial Media style.  Today's issue:  the housing depression.  the problem:  people can't afford the cost of homes, specifically with housing prices dropping, people are getting underwater on their mortgages and now owe more than their house is worth.  This means they can't sell the house, and have to either come up with the higher mortgage rate or lose the house.  Since people aren't buying homes, the housing market continues to fall...a classic real estate depression spiral.

The Happy Face Financial Media solution?  Make it even tougher to buy houses, especially for first-time home buyers.

Could it be time to say good-bye to the popular 30-year mortgage?

"The 30-year mortgage is outdated, the standard fixed-rate mortgage is outdated, and it has to be improved," housing expert Robert J. Shiller told CNBC.

Shiller is Yale University professor and author, who is best known for co-creating the S&P/Case-Shiller Housing Indices, which track home prices in the United States.

"People want a more modern vehicle, and that's something we need to think about next," Schiller said.

Wait, what?   Get rid of the 30-year mortgage rate?  Who the hell is that going to help?  The banks, sure.  Home buyers?  How is that going to stabilize demand when the problem is people can't afford houses now?

"If America wants the government out of housing, it has to get used to a number of things," said Raghuram G. Rajan former IMF economist, author of Fault Lines: How Hidden Fractures Still Threaten the World Economy and professor at the University of Chicago's Booth School of Business.

"For example, shorter mortgage durations, higher interest rates [and] potentially lower housing prices, because the cost of financing has gone up. Is it ready for that? I don't know."

Shorter mortgages on lower priced housing means the payments are still the problem.  Maybe after the market is stabilized you can consider doing this, but until that happens it's suicide.  This is looking at the color of your replacement wallpaper while your house is still burning down.  Barry Ritholz?  He gets it.

Even after a plunge of more than 30% from the 2007 peak to the 2009 trough, house prices still did not fall to their long-term "fair value" level relative to incomes and rents of the past century.  Over the next year or so, Ritholtz expects prices will resume their fall and drop at least another 10% before bottoming.

What are the factors that will continue to drive prices down?  Mainly, an ongoing imbalance of supply and demand.

Basically, we still have way too many houses for the current level of demand. It's true that houses are more "affordable" than they have been for decades, but many of the folks who might be interested in buying houses have lost their jobs or are working off huge debt loads accumulated in the past.  And that means that they're not queuing up to buy still-over-priced houses again.

I personally think if Obama follows through on austerity, it's going to be a lot more than 10%.