Topic: Finance, Banking & Monetary Policy

Federal Bias Toward Homeownership

The Wall Street Journal ran the story last week: “U.S. Now a Renters’ Market.” Apartment vacancies hit a 30-year high in the last quarter of 2009, and rents are falling in most markets. For current or former homeowners trying to stumble out of the debris left from the government-fueled housing bubble, a renter-friendly environment is a positive opportunity.

But it’s also a reminder of how the government’s obsession with homeownership continues to distort the market for housing. As the Journal notes, “Government efforts to prop up the housing market also threaten the apartment sector by making it easier for some renters to buy homes. Some landlords have reported a slight uptick in renters moving out to buy homes.”

Homeownership in the U.S. began an upward trajectory following the federal government’s plunge into the housing market during the Great Depression. Prior to that fewer than half of Americans owned their own home according to University of Pennsylvania Prof. Thomas J. Sugrue. Owning one’s home is now viewed in this country as American as apple pie. but as Sugrue points out, this mentality is “a story riddled with irony”: 

[F]or at the same time that Uncle Sam brought the dream of home ownership to reality—he kept his role mostly hidden, except to the army of banking, real-estate and construction lobbyists who rose to protect their industries’ newfound gains Tens of millions of Americans owned their own homes because of government programs, but they had no reason to doubt that their home ownership was a result of their own virtue and hard work, their own grit and determination—not because they were the beneficiaries of one of the grandest government programs ever.

Indeed, the housing industry “army” remains a potent force behind the government’s distortionary housing policies, as I discussed in a policy analysis on the Department of Housing and Urban Development’s failures:

An important driver of the bad policymaking is the large influence that housing lobby groups have in Washington. Ultimately, federal policymakers are responsible for their actions, but a brief review of the political power of the housing lobbies illustrates where policymakers get a lot of their bad ideas.

Since the financial crash, one would think that Congress and the administration would be moving to withdraw federal housing subsidies from the market because they have caused so much damage. However, the opposite is happening. Policymakers are following the advice of the various housing lobby groups that continue pushing to expand federal intervention in housing markets.

Politicians justify the federal government’s vast array of subsidies for homeownership on its alleged civic virtues. But as we’ve seen in the wake of housing bubble’s bursting, there’s nothing virtuous about putting people into homes that they can’t really afford.

Wharton real estate professor Joseph Gyourko recently described “Five Myths about Home Sweet Homeownership” in the Washington Post. He dismissed the idea that homeownership makes better citizens:

This is the rationale behind the government’s many efforts to subsidize and expand homeownership, and there is an appealing logic to the argument. Since homeowners have a financial stake in their communities, one might expect them to be more responsible and involved citizens. But there’s no overwhelming evidence that higher homeownership rates make for better societies. Austria, Germany and Denmark all have ownership rates in the low 40 percent range, meaning that just over two-fifths of all housing units are occupied by their owners. This is well below the 68 percent ownership rate in the United States, but those countries don’t appear to be suffering a shortage of civic-mindedness. At the other end of the spectrum, Spain’s ownership rate tops 80 percent, but no one seriously claims that this makes Spaniards better citizens than Americans.

Gyourko also frowned on the idea that owning a home is cheaper than renting one:

It’s true that if you own, you don’t have to write a check to a landlord. However, you have to cover all the costs of maintaining the house. It is the same house with the same operating costs, whether you pay them directly or whether you pay rent to cover them. By covering these costs as the owner-occupier, what you spend (including your mortgage payment) comes very close to what you would have spent if you rented your house.

I often hear people say that owning a home is better than renting because with the latter “you’re just throwing your money away.” But I would question just how much one truly “owns” when, for example, a person puts down the Federal Housing Administration’s minimum of 3.5 percent. As one of the increasing number of Americans living in a house with a mortgage that’s “underwater,” I don’t view myself as owning anything. I’d much rather be “throwing my money away” on rent to a landlord than being in debt to my mortgage company.

Gyourko has stated elsewhere that “we should have a level playing field” when it comes to homeownership versus renting. This can only be achieved by removing the government from the housing market. Unfortunately, Washington policymakers in both parties are very, very, slow learners, and we all pay a price for that.

Don’t Trust Economists

Sometimes a picture really does tell a thousand words. Here’s a chart, based on data from the Philadelphia Fed, showing actual economic results compared to the predictions of professional economists. As you can see, my profession does a wretched job. Comparisons based on predictions from the IMF, OECD, CBO, and OMB doubtlessly would generate equally embarrassing results. This does not mean economists are idiots (insert obvious joke here), but it is an additional reason why Keynesianism is misguided. If economists are unable to predict what’s going to happen with the economy in the near future, why should we expect anything positive when politicians tinker with short-run economic performance? That’s especially the case when they pass so-called stimulus legislation that increases the burden of government spending.

This doesn’t mean that economists - and others - are never accurate with predictions. But I am quite confident that we will never see an economic model that successfully predicts future economic fluctuations.

h/t: James Montier, via Paul Kedrosky, via Andrew Sullivan

A Double Dip for Housing?

Washington is fretting this week over news that mortgage applications fell dramatically in November. Coupled with earlier indications of renewed softening in the housing market, there is growing fear that housing is headed for a “double-dip downturn” that could further damage the economy. As a result, Federal Reserve policymakers are considering additional stimulus, while the National Association of Realtors is suggesting an(other) extension of the “temporary” homebuyer tax credit.

Remarkably, neither policymakers nor the media are asking the obvious question: Given all of the emergency interventions in housing that government has undertaken, and the fact that the housing market continues to erode, do such interventions do much good?

Since the bursting of the bubble in 2006, the great unknown has been whether housing prices will revert to their historical trend (and possibly to below trend for a short period), or stabilize at some permanently higher level because a portion of the bubble (aided perhaps by public policy) would prove enduring. There is good reason to expect reversion to trend, but the economy can surprise us.

Let’s use an example to understand this better. The graph below depicts the course of house prices for my hometown of Hagerstown, MD, an area within commuting range of suburban DC that was hit particularly hard by the bubble and its deflation. The black line is a house price index computed by the Federal Housing Finance Agency for 1989–2009. The red line is an extended linear trendline drawn using index data from the period 1989–2002. (You can do the same analysis for your area using these FHFA data.) The question, then, is whether house prices will fall all the way back to the trendline or will stabilize at a level above the trendline. 

Figure

The sharp downward slope at the end of the price line and  the latest housing news suggest that Hagerstown is destined to revert to trend (perhaps after a period below trend). I’ve drawn similar figures for several other locations and they show similar patterns. It looks like the nation’s housing markets, for the most part, are reverting to trend.

When this crisis first began in 2007, Bush administration officials vowed to “stabilize house prices at the highest possible level.” However, despite their efforts and those of the Obama administration, Congress, and the Fed,  reversion to trend appears inevitable. At best, those efforts may have slowed the reversion — in which case, I suppose the Bush goal has been met.

It can be argued that a gentler reversion to trend may be more tolerable than a sharp return. On the other hand, there are fears that a lengthy softening of the housing market will lead to more defaults, less worker mobility, continued weak consumption, and a long period of high unemployment and stagnant wages for those who are working. Perhaps a sharp return would be the quickest way to shed the ill effects of the bubble.

This leaves us with a final question that policymakers, the media, and the public should be grappling with: If all of these emergency housing interventions only result in a slower reversion to trend, then is that benefit worth the cost?

Credit Card Dementia and Boundary Cases

credit cardsThe most interesting libertarian-related conversation I’ve read today comes from Rortybomb, by way of Andrew Sullivan, with commentary by Megan McArdle. Here’s a challenge to libertarians from Rortybomb, aka Mike Konczal:

I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long-time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:

- 1) What is your age?
- 2) What day of the week are you taking this survey?
- 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?
- 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?
- 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?
- 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?
- 7) Write a sentence you’d like us to hear about anything, good or bad!
- 8 ) How worried are you you’ll leave legal and financial problems for your next-of-kin after your passing?

Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini-mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny-staters out there who’d want to coddle citizens here…

I smell money – it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash-constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source.

Clearly, only an evil person (or a libertarian!) would allow a scam like this one. Megan responds, I think rightly:

I’m not sure why this is supposed to be a hard question for libertarians. I mean, I might argue that preventing people from ripping off the marginally mentally impaired would, in practice, be too difficult. Crafting a rule that prevented companies from identifying people who are marginally impaired might well be impossible – I’m pretty sure that if I wanted to, I could devise subtler tests than “What day of the week is it?” And while the seniors lobby is probably in favor of not ripping off seniors, they’re resolutely against making it harder for seniors to do things like drive or get credit, which is the result that any sufficiently strong rule would probably have.

But it’s pretty much standard libertarian theory that you shouldn’t take advantage of people who do not have the cognitive ability to make contracts. Marginal cases are hard not because we think it’s okay, but because there is disagreement over what constitutes impairment, and the more forcefully you act to protect marginal cases, the more you start treating perfectly able-minded adults like children.

The elderly are a challenge precisely because there’s no obvious point at which you can say: now this previously able adult should be treated like a child. Either you let some people get ripped off, or you infringe the liberty, and the dignity, of people who are still capable of making their own decisions.

I’d add two responses of my own.

First, I can’t believe there’s all that much money to be had here. Anyone who wanders into Tiffany’s and back out again without remembering what they bought is, generally speaking, a bad credit risk. Mildly irresponsible people – those who slightly overspend, then have to make it up later – those are probably great for creditors. Lesson learned: If you’re not demented, don’t be irresponsible. (If you are demented, you’re not going to follow my advice anyway.)

Second, I am always amazed at how border cases are dragged out, again and again, as if they proved something against libertarianism. Border cases – How old before you can vote? How demented before a contract doesn’t bind? – are a problem in all political systems, because all systems start with a presumed community of citizens and/or subjects. We always have to draw boundaries between the in-group and the outliers before we have a polity in the first place.

What makes the classical liberal/libertarian approach so valuable is in fact that it draws so few boundaries. Where other systems depend on class boundaries, race boundaries, religious boundaries, and so forth – with annoying boundary issues at every stop along the way – libertarians make it as simple as I think it can be. We presume that all mentally competent adults are worthy of liberty until they prove themselves otherwise.

The boundary cases are still there, but they are fewer and more tractable. Konczal just wandered into one of them. It proves much less than he thinks.

Popping Bubbles

David Leonhardt’s column today in the New York Times, in reaction to Ben Bernanke’s recent speech at the American Economic Association meetings, asks an important question:

If the Federal Reserve failed to detect the housing bubble when it occurred, why should we entrust it with that role in the future?

But he doesn’t follow the logic of his question far enough and instead embraces a financial equivalent of the National Transportation Safety Board, as if technical solutions exist and could be implemented if politics got out of the way.

In our recent Policy Analysis, Jagadeesh Gokhale and I examine a more complete list of technical and political problems that stand in the way of asset bubble management. Can bubbles be detected using scientific techniques (econometric models) with little controversy? We argue no.

Would stopping bubbles involve the simple implementation of a technical solution such as raising interest rates, or would they instead involve trade-offs with other policy goals? We argue the latter.

Even if bubbles could be detected easily with no controversy and policy solutions involved no tradeoffs, could the Fed maintain political support by stopping booms if the benefits of such a policy (preventing busts after financial bubbles burst) were never observed? We argue no.

And finally, even if all the previous problems were solved, how would raising interest rates reduce the supply of capital to housing markets given that a rate increase would increase the supply of capital to the United States and interest rates for both long-term and short-term housing loans have become decoupled from federal funds rates?

Our reasoning, like Bernanke’s, suggests that the events of 2008 were not the result of “bad” monetary policy. However, we believe that granting additional regulatory authority to the Fed will not prevent similar episodes because of the technical and political difficulties we describe in our paper.

Did the Fed Buying MBS Make a Difference?

Recent years have witnessed a multitude of new Federal Reserve programs aimed at bringing stability to our financial markets.  One of the largest programs has been the Fed’s purchase of Fannie Mae and Freddie Mac guaranteed mortgage-backed securities (MBS).  The program was initially announced in November 2008 with the goal of buying up to $500 billion, later expanded to $1.25 trillion.  Clearly we are talking a lot of money.

The ultimate objective of the FED MBS purchase program was, in the words of the Fed, to reduce mortgage rates “relative to what they otherwise would have been.”  Did the Fed meet this objective?  According to a new study by Stanford University Economists Johannes Stroebel and John Taylor the Fed did not. 

More specificially, the professors “find that the MBS program has no significant effect.  Movements in prepayment risk and default risk explain virtually all of the movements in mortgage spreads.”  So while it is clear that mortgage rates declined over the time the Fed has operated the MBS purchase program, those declines were due to factors outside of the Fed’s control.

Professors Stroebel and Taylor only look at the claimed benefits of the Fed’s MBS purchase program, leaving aside the issue of cost.  Since any losses on MBS purchased by the Fed reduces the amount of funds transferred from the Fed to Treasury, these losses are ultimately borne by the taxpayer, as that reduction will have to be made up elsewhere.  With close to a trillion in purchases, even minor declines in value can result in large losses for the taxpayer.  For instance, a 5% loss in value would translate to $50 billion loss to the taxpayer.  Another good reason to audit the Fed.

The Bailout Bowl

Neal McCluskey wrote an op-ed on the ways that taxpayers subsidize college football bowl games. As a college football fan, it pains me that I can’t even get a respite from big government on game day. This Wednesday’s matchup between Central Michigan and Troy will be particularly insulting to taxpayers because it’s the annual GMAC Bowl.

GMAC, the former in-house financing arm of General Motors, has been sponsoring the bowl game since 2000, when it paid $500,000 for the right. More recently, the firm was battered by the collapse of GM and the housing market, and it was allowed to restructure as a bank holding company, which made it eligible for TARP bailout funds. The federal government has given GMAC $12.5 billion in return for 35.4 percent ownership stake in the company. However, the bailout just got larger. From last week’s Wall Street Journal:

The Treasury Department on Wednesday said it will provide GMAC Financial Services with an additional $3.8 billion in capital and assume a majority stake in the firm. The money, along with adjustments to existing aid already provided to the firm, aims to close a capital shortfall identified by government stress tests in May. The additional aid brings the total U.S. investment in GMAC to $16.3 billion and raises the government’s ownership interest to 56 percent from the current 35 percent. In exchange for committing more funds, the Treasury will appoint a total of four directors to the company’s board instead of two as previously planned. The company will also continue to be subject to pay limits set by U.S. pay czar Kenneth Feinberg.

Whatever GMAC is currently paying to sponsor the bowl game, it’s not a large sum compared to the billions in billion funds it has received. Nonetheless, it is a poke in the eye to bailout-fatigued taxpayers that a government-owned corporate failure continues to blow money on a largely irrelevant football game.

People used to think of the government’s proper role in the game of business as a neutral referee between competing companies. Today, when private companies lose the game, Uncle Sam can step in to be the quarterback. Although Uncle Sam isn’t any good at the game, he’s able to change the rules to benefit his team at the competition’s expense. In addition, Uncle Sam’s team doesn’t pay his exorbitant salary –- the competition and the fans (i.e., taxpayers) foot the bill.