Tag: Housing

Doubling Down on Failed Policies

Today in Las Vegas, President Obama will take another $1.5 billion in taxpayer money and let it ride another spin on the roulette wheel otherwise known as foreclosure assistance.  This time, however, he’s not even bothering to send the money to homeowners; its all going to state governments.  

That’s correct, he’s sending a huge check to select state governments to use in almost any manner they choose, as long as it offers some pretense at propping up the housing market.  

The assistance will be targeted at those states that have seen at least a 20% decline in home prices.  Subsidizing states because their housing markets are getting more affordable almost makes one yearn for the days when we subsidized states because their housing markets were too expensive.  What we are really subsidizing is those states whose destructive land-use policies contributed to the magnitude of the housing bubble.  Basic economics tells us that as supply becomes more inelastic (think growth boundaries), prices become more volatile.  It’s bad enough that most of our housing subsidies, both homeowner and renter, have ended up going to states that have crippled their housing markets, but now we are sending them a big check to reward such behavior.

Washington needs to end its constant attempts to prop up the housing market.  The only viable solution to an over-supply of housing is a further decline in prices.  Most of the worst-hit areas, such as California, do not lack for families wanting to buy homes.  They lack a supply of homes at affordable prices, which would be solved by letting prices fall.

Good News on Housing!

The Wall Street Journal reports that some mortgage insurers and lenders are beginning to relax their down-payment requirements, so that buyers in some parts of the country can now borrow 95% instead of 90% of a property’s value. Buyers who can’t come up with even a 5% down payment can turn to the Federal Housing Administration, which will make loans with as little as a 3.5% down payment. Unsurprisingly, the FHA is increasing its market share.

Meanwhile, the Treasury department is pressuring mortgage companies to reduce payments for many more troubled homeowners, averting foreclosures. So, good news: people who lack income and assets will be able to take out loans to buy houses, and if they can’t make the payments they signed up for, the government will pressure their lenders to accept lower monthly payments in return. We’re back on the road to easy, universal homeownership.

Oh, wait.

Thursday Links

  • Doug Bandow:  “Congress has spent the country blind, inflated a disastrous housing bubble, subsidized every special interest with a letterhead and lobbyist, and created a wasteful, incompetent bureaucracy that fills Washington. But now, legislators want to take a break from all their good work and save college football.”

Perpetuating Bad Housing Policy

Perhaps the worst feature of the bailouts and the stimulus has been that, whatever their merits as short terms fixes, they have done nothing to improve economic policy over the long haul; indeed, they compound past mistakes.

Here is a good example:

For months, troubled homeowners seeking to lower their mortgage payments under a federal plan have complained about bureaucratic bungling, ceaseless frustration and confusion. On Thursday, the Obama administration declared that the $75 billion program is finally providing broad relief after it pressured mortgage companies to move faster to modify more loans.

Five hundred thousand troubled homeowners have had their loan payments lowered on a trial basis under the Making Home Affordable Program.

The crucial words in the story are “$75 billion” and “pressured.”

No one should object if a lender, without subsidy and without pressure, renegotiates a mortgage loan. That can make sense for both lender and borrower because the foreclosure process is costly.

But Treasury’s attempt to subsidize and coerce loan modifications is fundamentally misguided. It means many homeowners will stay in homes, for now, that they cannot really afford, merely postponing the day of reckoning.

Treasury’s policy is also misguided because it presumes that everyone who owned a house before the meltdown should remain a homeowner. Likewise, Treasury’s view assumes that all the housing construction over the past decade made good economic sense.

Both presumptions are wrong. U.S. policy exerted enormous pressure for increased mortgage lending in the years leading up to the crisis, thereby generating too much housing construction, too much home ownership and inflated housing prices.

The right policy for the U.S. economy is to stop preventing foreclosures, to stop subsidizing mortgages, and to let the housing market adjust on its own. Otherwise, we will soon see a repeat of the fall of 2008.

Weekend Links

CAP’s Proposal to Add ‘Public Members’ to Corporate Boards Is Flawed

Today the Center for American Progress rolled out its proposal that we add “public directors” to the boards of companies that have been bailed out by the government.  CAP scholar Emma Coleman Jordan argues that “public directors will provide a corrective to the boards of the financial institutions that helped cause the crisis.”

One has to wonder whether Ms. Jordan has ever heard of Fannie Mae and Freddie Mac.  If she had, she might recall that a substantial number of the board members of Fannie and Freddie were so-called “public” members appointed by the President.  Perhaps she can ask CAP adjunct scholar and former Fannie Mae executive Ellen Seidman to review the history of those companies for her.

Where’s the evidence that any of those Fannie/Freddie “public” directors, whether they were appointed by Republican or Democrat Presidents, ever once look out for the public interest?  In fact all the evidence points to these public directors looking out for the interests of Fannie and Freddie, often lobbying Congress and the Administration on the behalf of these companies.

I suppose CAP would tell us that having the regulators pick the directors instead of the president would protect us from having those positions filled with political hacks.  Ms. Jordan argues that “regulators should determine most of the details of the public directorships—after all, they have the most direct experience in trying to regulate private companies that have received public funds.”  We tried that route as well.  In contrast to Fannie/Freddie, each of the twelve Federal Home Loan Banks had to have a number of its directors appointed by its then regulator, the Federal Housing Finance Board.  It was well known within the Beltway that these appointments were more often political hacks than not.  For instance one long time director of the Federal Home Loan Bank of Pittsburgh was the son of a senior member of the US House Committee on Finance Services.  Once again we’ve gone down this road, we know how this story ends.

If we are truly interested in protecting the taxpayer, we should, first, end the ability of the Federal Reserve to bailout companies, and second, as quickly as possible remove any government involvement in these companies.  Having the government appoint board directors only further entangles the government into our financial system; and if Fannie and Freddie are a good guide, actually increases the chances of future bailouts.

Republicans Just as Guilty of Flawed Keynesian Thinking

The core of Keynesian economic policy is that the government must come in and replace reductions in private sector demand with public sector demand, therefore bringing overall demand back to its previous level.  One of the many flaws in this thinking is in assuming that the previous level of demand was “correct” and getting us back to that level is the appropriate policy response.

Take the example of the housing market and the government response.  The primary response of Republicans in Washington has been to offer tax credits and other incentives to replace the drop in demand for housing.  Witness Senator Johnny Isakson’s  recent comments on why we need to extend the $8,000 homebuyer tax credit: “If you take that kind of business out of what’s already a very weak housing market, you do nothing but protract and extend the recession.”

This analysis could not be more wrong.  The tax credit largely acts to keep housing prices from falling further.  However, that is how markets are supposed to clear in an environment of excess supply.  If there’s too much housing, the way to address that is to allow housing prices to fall, which attracts buyers back into the market.

We should also recognize that the tax credit does not help the buyer, it helps the seller, by allowing the seller to charge that much more for the price of the home.

Perhaps the worst impact of the policy is that it encourages the continued building of homes, only adding to the over-supply, which itself will “protract and extend the recession.”  Witness the recent news that housing starts in the US just hit a nine month high.  While these levels are still low in historic terms, and housing inventories are declining, we still have an excess of housing.  The damage done by creating a false floor to housing prices is that builders don’t respond to inventory, they respond to prices, and as long as there is a positive gap between prices and construction costs, builders will build.  The tax credit only serves to widen that gap between prices and construction costs.

Back to Keynes: the central flaw in the thinking behind the tax credit proposal is its assumption that we need to re-inflate the housing bubble.  The previous level of housing demand, from say 2003 to 2006, was not driven by fundamentals; we had a bubble.  There will be a correction in the housing market.  Our choices are to either take that correction quickly and move on, or to prolong that correction, maybe even make it worse, by trying to create a false floor to the market.