Thursday, December 13, 2007


Yet another bailout for the bull in the china shop who splashed his money around during the housing run and now finds himself facing increasing mortgage payments - exactly as stipulated in the contract he knowingly signed. This article posits that the government is wrongly focused on keeping people from losing their homes when it should instead be focused on making people wealthier, which is quite a different thing.
If two percentage points on a mortgage rate decides whether someone can afford to keep their house or not, then they can't afford to keep their house. They're paying too much. By continuing to pay too much, they'll divert their would-be savings to an asset that's likely twice as expensive as it should be right now, and even if it's not, tends to produce poor returns over long time periods.

House prices have swelled since World War II to the point where renting, for most people, now makes far more financial sense than buying. The ratio of house prices to rents has more than doubled during that period, as has the ratio of house prices to incomes. That's because the government has worked in earnest during that time to make houses more affordable by subsidizing down payments. In doing so, it has increased demand, and with it, prices. Ironically, affordability efforts have made houses more expensive than ever before. And we're still pushing them. The Federal Housing Administration still talks about owning a house as a key part of the American Dream, while the less-math-inclined members of my profession still talk about renting as "throwing money down the drain."
Stocks tend to return 7% a year after inflation over long time periods, while houses tend to return zero. So at today's prices, I'm keen on renting the latter while owning the former.

Once upon a time in America, before the FHA, we didn't need the government to intervene in the decision about whether we should buy, or continue to own, houses ... while things like clothing, cars and food have grown more affordable since World War II, houses have become a bad deal.

If I'm right, the government isn't doing any favors for recent house buyers who are struggling to afford their payments by guaranteeing that those payments will keep coming at their current pace for five years. It's merely forcing those same homeowners to divert too large a percentage of their income to a no-growth asset, while leaving little or nothing to invest in a fast-growth asset. The government isn't doing that because it's mean. It's doing that because it honestly believes it knows better than its citizens how they should allocate their money. What's particularly sad about that is that the government has overspent its own checking account by $1.6 trillion since 2002, thereby increasing the national debt by as much. On Thursday, struggling homeowners got misguided financial advice from a source that can't even pay its own bills.
Don't we vote Republican to avoid this sort of policy from getting pushed through?


Tom said...

That's why WE vote for Republicans. But we just haven't voted for the ones brave enough to buck popular opinion.

One of the guys at work made a bad loan and we can't talk the issue objectively without feelings getting in the way. It's the same reason that bad legislation like this is hard to vote against.

E said...

Total agreement with Dude. We preach personal responsibility and market solutions and then, in power, become what we despise: govt steps in to protect people from themselves. Very disappointing. But it's an election year, what are you gonna do? Be the party that kicks young marrieds and their newborns out of their houses? Your opponents only need one or two of those stories to make hay, and you'll give them thousands, no matter that everyone with any sense knew this was going to happen. Everything is political.

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