On Thursday, CNBC's Rick Santelli delivered what many have called "the rant of the year," railing on the government's new plan to help keep troubled borrowers in their homes. Some said he was crazy; others said he was sparking the revolution of the responsible American citizen. Well, you know what, Rick? I'm on board.
Why am I joining Rick's crusaders? It's not because I'm sitting pretty with my house. In fact, my Las Vegas residence is so far underwater, I have to wear a scuba tank inside. But I was a responsible borrower, putting hard-earned money down and taking out a 30-year fixed-rate loan that I could afford, and which I fully intend to pay back.
I've taken a big hit, yet I'm still paying the loan I agreed to. To listen to what my less responsible fellow citizens are clamoring for, you'd think I was an idiot for living up to my word. And maybe I am -- particularly now that I'll be paying not only my own mortgage, but seemingly everybody else's as well.
The problem with the plan
As I see it, the problem with the $275 billion plan to save the housing market is twofold.
First of all, there's supposedly some inherent good in "keeping people in their homes." While I certainly support efforts to keep Americans from being homeless, there are plenty of rental properties that non-homeowners can occupy. Owning a home should be a privilege, and a reward for saving money and being responsible. But it should not be considered an inalienable right of all Americans.
Second, throwing money at the housing market will not solve the real problem. Quite simply, housing prices got way out of whack, and they need to find equilibrium again. If you allow supply and demand to fall back into step, home prices will stabilize. Throw money to irresponsible borrowers, though, and you are artificially floating a market that needs to sink.
How to value a home
If you listen to much of the media, you'd think that there's no way to accurately value a house. Supposedly, because you can only price a home based on "comparable sales," a falling market will inevitably feed on itself, sending housing prices into a death spiral.
If you believe that, please reconsider, because I'm about to share exactly how to value without using comps. Ready? You take the rent that you could collect by renting the place out, deduct interest and other ownership costs, add up the totals over the next 30 years of expected rents, and discount the sum back to today. Sound familiar? It's a discounted cash flow, and it can be used on houses just as easily as it applies to factories, companies, or a Bluth-style frozen banana stand.
Comps can be a good quick analysis tool, but in many cases, they're hogwash. Comps justified many investors' decision to pay ludicrous multiples for stocks like JDS Uniphase (NASDAQ:JDSU) back in the Internet bubble years -- and it allowed homebuyers and speculators to pay crazy prices for homes just a few years ago.
Allow home prices to fall far enough, and you'll start to see savvy investors who know how to accurately value an asset start to pile into the market for the right reason: Because they know that they can make a good return. Throw funny-money at the issue, and you'll just end up with a confused market.
And suffer they will ...
Sure, this type of approach would be painful for a lot of companies. Homebuilders like Centex (NYSE:CTX), Toll Brothers (NYSE:TOL), and KB Home (NYSE:KBH) will continue to weep as demand stays slack. They'll keep having to fess up that they paid too much for the land they speculated on. Meanwhile, banks from Citigroup (NYSE:C) and Bank of America (NYSE:BAC) to the smaller local and regional outfits will feel the pain of more mortgage defaults. We're also likely to see insurers like AIG (NYSE:AIG), which binged on risk during the boom, take some gut shots.
But that's simply a necessary dose of pain. We saw the Nasdaq tank in 2001 and 2002, driving plenty of Internet "companies" (really, they were more like Internet ideas) to go bust. Similarly, we need to see housing prices come down, and we need banks to deal with their loans realistically.
But I won't go all the way, Rick
Mr. Santelli and I don’t completely see eye to eye, though. He tends to prefer that the government keep its hands off the economy as much as possible. Me, not so much.
I'm not happy about the circumstances we're in nor the way we got here, but I do think that many of the government's actions have been on point. Although it's clear that many folks think the banking bailout was a terrible idea, I think that it's not only needed, but also that it doesn't go far enough. I think the Fed also has the right idea of keeping rates low to stimulate the economy from a monetary angle. And while the stimulus plan ended up getting way too politicized, I do agree with the need to jolt the economy with a fiscal infusion.
I'll be the first to admit that making policy decisions during a time like this is no easy matter, and despite having studied economics, I'm a long way from an expert on the matter. But as I watched Jared Bernstein -- Vice President Joe Biden's chief economist -- struggle this morning to come up with any semblance of an argument that defends the idea of throwing taxpayer money at irresponsible borrowers, I was convinced that this is a clear example of the government swinging and missing, big time.
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