Wednesday, February 11, 2009

Why The Government Can’t Fix The Housing Crisis

It appears the government is ready and willing to do whatever it takes to fix the housing crisis, but there is one little problem: They can’t. As part of the new stimulus package, there will likely be a $15,000 homebuyer tax credit, and not just for first-time homebuyers, but for all homebuyers purchasing a primary residence. In addition, the government will likely attempt to drive mortgage rates down to around 4.5 percent and work particularly hard to modify troubled loans to keep homeowners out of foreclosure. With these new measures in place the housing market will surely recover…right?

The answer to that question depends on your definition of recovery. Will it be enough to stop prices from falling, and possibly even help them start going up again? It’s definitely possible, but the problem won’t be fixed even if prices do turn around. Artificially inflated prices caused the housing crisis in the first place. Homeownership became an attractive option for more people than ever before through financing options that were cheap and widely available—a little too widely available, we are now discovering. ARMs, interest-only and other creative loan programs kept monthly payments low, and people could suddenly afford a more expensive house—or so it appeared. When interest rates started rising and ARMs reset, housing values stopped climbing and all hell broke loose.

So why would we believe that artificially boosting housing values will be sustainable this time? What do we think will happen when mortgage rates rise again and the tax credits expire? We won’t have to worry about ARMs resetting this time around because they are now shunned by banks for the most part, but the fundamental problem remains that housing is just too expensive compared to income. Interest rates can’t stay this low forever, and the tax credit will expire after the end of the year. Then homebuyers will only have their personal income to rely on to pay for their homes. This is how it has always been (minus government intervention), and it is how it should be. People making $50,000 a year shouldn’t be living in a $400,000 house—It’s that simple. People need to live within their means, but the government doesn’t seem to grasp this and keeps pushing measures to modify home loans. We can try to modify people’s loans all day long, but if they can’t afford their homes, then they can’t afford their homes. According to the Wall Street Journal, over 40 percent of borrowers were at least 60 days past due eight months after their loan was modified. It seems to me that these loan modifications are just delaying the inevitable and costing banks and taxpayers more money.

Before the housing crisis can truly end, housing prices must come into balance with incomes. When this happens, the problem will solve itself. When buying a home starts to make more sense than renting, people will start buying again. It isn’t that hard to figure out. Spending taxpayer money to prop up housing is not only a waste, but an unethical perpetuation of the problem. It is completely unfair to renters as well as our youth. Unfortunately, those groups represent the minority, so their voice isn’t likely to be heard. If these measures are passed, expect to pay handsomely for it and to see another bubble burst a few years from now. At least this time no one should be able to use the excuse that they didn’t see it coming.


Anonymous said...

This "housing crisis", just like the last one, originated from inflated appraisals. I am a former appraiser. You can't be an appraiser unless you inflate values and leave out the negatives.

And government CAN fix this. Last time they implemented FIRREA and appraiser licensing, but that actually made it worse.

The FBI is taking care of it, now that it has been exposed that the FBI fully briefed the White House that mortgage fraud was "Epidemic" long ago.

Find and read, "The Truth About Real Estate Appraisal" by Stephen Bishop.

Anonymous said...

You have said it exactly right. I only hope people will listen.

Anonymous said...

The $15K tax credit you mention is now officially toast.

Dead End said...

Nice article, nothing that I haven't been saying on my blog for almost a year.

Anonymous said...

There's no driver for home ownership. Who's going to buy? You have half the country waiting for the other hapf to die off, and then buyers will step up. The answer is in demographics, not interest rates. We all know that interest rates are just another teaser.

Anonymous said...

I do believe that the government needs to fix the unemployment crisis before they are to fix the housing crisis, good postpost

Anonymous said...

You've said it. That's why we're still renting at this time. It would be nice if the government would just let things "self-correct". While it might have been more tumultuous at first, things probably would have leveled out a lot faster. I'm afraid that instead of another bubble burst in the future, we're just having this one drawn out to hurt everyone over a longer period of time.

Anonymous said...

This article is great in its simplicity and accurateness. It is absolutely maddening to me that the fundamental economic reality of income vs. home prices is completely ignored time and time again in many mainstream discussions about the housing crisis and these disgraceful bailouts.

Anonymous said...

everyone has forgotten 9/11 and what the economy was like back then, it stunk. So our geniuses at the Fed started dropping interest rates hard & fast. It takes 9 months before an interest rate move has an effect. The Fed didn't see results immediately so they kept dropping them.

Then the market started to pop and things were good. Then they got too good to the point of jets, yachts and mansions.

The Fed decided "hold on" "we like it, but we like like too much".

So they raised rates 17 times in a row. Like pumping up a balloon, then one day "pop" and we have a global meltdown.

Unfortunately the problem is to big. The issue is with our government charge it's like putting an arsonist in charge of all the fire stations.

Just like in the early 90's opportunities are abundant in the pile of rubble.

Anonymous said...

There are good reasons for the government to help stabilize housing markets and the related financial markets. This post and the previous comments are correct that the markets must stabilize based on the income of people who actually want to occupy the houses and can pay for them and their mortgages with an appropriate part of their income.

Stabilizing the housing markets has little to do with job creation in the short run. Homebuilders and their lenders will not rush to put people back to work building new houses unless there is demonstrated demand from people with jobs and income. Putting people to work is what the stimulus bill should be and is mostly about, though frankly I think tax cuts accomplish little in that regard.

The funding and tax credits for weatherization and residential energy efficiency should put some people in the housing trades to work with long term benefits for homeowners, global climate change and energy self-sufficiency.

Joey Marino said...

The government can try, but in the end it's a free market.

richmond homes for sale said...

The housing crisis is certainly an attractive target for intervention by the government. Government programs to stimulate housing sales have not helped. In fact, what these programs was to create more uncertainty and market distortions, which were yet to recover from the bias and uncertainty over a decade of government intervention that created the bubble and the collapse of buildings and homes.