There is a rampant belief that shoring up housing will put a floor under the US’s economic fall. The story goes that federal intervention at the borrower level, through foreclosure abatement via mechanisms such as loan term modifications, including forgiving some of the mortgage principal, will stem the tide of housing supply, allowing prices to stabilize. Once houses are steady, then Narnia will be free of the White Witch’s spell and the thaw will be upon us.

This fairy tale is brought to you by the same army of “economists”, “financial experts”, politicians and neighbors that failed to see the cliff’s edge for the five years they drove policy toward and then over it. Housing is a symptom but not the cure or the disease.

On the way up, the gang that couldn’t shoot straight (the army mentioned above) ignored the economic fundamental that home price growth must highly correlate with income growth (incomes fund mortgages). Unrealized paper gains, particularly in the face of 1% annual wage growth, can pay for nothing until they’re cash. Now, on the way down, the gang with the crooked shot is selling the same story from another angle.

As long as the US is experiencing a significant rate and volume of job losses, all the term modifications in the King’s court will have no lasting effect on the price of a house. It’s just economic gravity. Housing prices must fall to the level that incomes can pay for them. Since incomes are being eliminated rapidly through job losses, the price that can be paid for a house is moving steadily lower.

No artificial bandage will hold this up. The US needs job stabilization and then home price stabilization will follow. A stimulus approach that emphasizes tax cuts will bear no fruit toward stemming the decline in housing. When you’re out of work, the tax cut has no effect. You have no income to put the stimulus tax break against. Without sufficient taxable income, the unemployed also lose the benefit from the home interest deduction, which acts to increase their mortgage costs measurably.

Only a stimulus program that creates significant and sustainable job growth has the tools to put a floor in the US economy. That would mean an industrial buildout of the nation’s next generation of public works assets that have forward utility. The current idea of pushing down stimulus funds to the states who are earmarking the funds for maintenance and budget gaps will exhaust the bullets without creating the necessary ignition. Funds will go to projects with no meaningful forward value-add that are principally performed by current staff levels.