In it’s attempt to stabilize the housing market, there is an 800 pound gorilla in the room that government is not adequately addressing. What is not being addressed is the answer to this question: "What should be our priority? Do we want to fill empty houses with "homeowners" or keep people in their homes?" It is critical to answer this question because we cannot do both.
There are estimates that there is a shadow inventory of seven million units out there- that’s a lot of homes to fill. During the boom the housing industry cranked out more than enough homes for all the credit worthy buyers- and more than enough for those that weren’t. Now a poor economy has hurt the incomes and net worth of many Americans- limiting the pool of credit worthy buyers still further.
The government has a stated goal of wanting to stabilize home prices, and that can’t be done with a massive supply on the market. Government backed lending has basically taken over the mortgage market in by providing easier [therefore riskier] loans than private lenders are willing to provide. As Federal Reserve chairman Ben Bernanke said yesterday:
[I]t is true that the FHA de facto has replaced … the riskier part of the mortgage market. It’s got a very high share now of new mortgages because it’s the only source of mortgages where down payments can be less than basically 20%. And so it is providing mortgage access to a large number of people who could not otherwise buy homes.
There’s a price to be paid for getting all those people into homes though- they can’t seem to hold onto them. According to the Mortgage Banker’s Association:
The percentage of loans with foreclosures started, the percentage of loans in foreclosure and the percentage of loans 90 days or more past due are all records for FHA. While the foreclosure starts rate for FHA loans at 1.15 percent is lower than all other loan types with the exception of prime fixed-rate loans, the FHA percentages have remained low due to a large increase in the number of loans outstanding, the so-called “denominator effect”. If the number of FHA loans had stayed the same as a year ago and we saw the same number of foreclosures, the FHA foreclosure rate would be almost 1.5 percent.
Now there is a bill in Congress to raise the downpayment requirement for FHA loans to reduce defaults. There are those who are opposing it though as it will further restrict the number of buyers. According to Ben Bernanke yesterday:
“You’ve got two conflicting public policy goals here,” Federal Reserve Chairman Ben Bernanke told lawmakers at a hearing today, referring to the FHA. “On the one hand, it’s providing support to the housing market and homeownership. On the other hand, clearly, I think it’s fair to say, given the low down payments, there’s certainly greater risk of loss there that would ultimately be borne by the taxpayers.”
Bernanke said it was a “trade-off” Congress needs to examine.
I rarely agree with Bernanke, but I do agree that this conflict has got to be addressed. It seems that if you talk to a legislator about foreclosures, you’ll get talk about how we need tighter lending standards and tougher regulation. Talk to legislators about falling home values, and they’ll start talking about housing credits and the need to making affordable loans available. The result is a multi-shotgun approach- and the guns are facing each other.
We need to accept that there is a limit to the number of people who can or should be homeowners. Homeownership is not for everyone. It is a mistake to believe that owning a home makes people prosperous, rather, prosperous people tend to buy homes. If government wants to increase homeownership rates, it should be done by promoting economic prosperity- not by promoting policies that put people in homes that can’t afford them.
What about all those empty houses though? We are going to have to accept this unpleasant fact:
Unless we are willing to get out there and bulldoze the silly things, we are going to be stuck with a large inventory of unwanted homes for years. Yes, it’s a situation that will depress home prices. Yes, it will mean boarded up homes and foreclosures blighting neighborhoods. Yes, it’s going to play havoc with the balance sheets of lenders. [And by extension, taxpayers.] If we are unwilling to accept an inventory hang though, what’s the alternative?
At the moment the approach to inventory reduction is to continue to try and sell homes to people who can’t afford them. Unfortunately this just perpetuates a cycle of foreclosures- which depresses prices, blights neighborhoods , and hurts lenders.
Priorities need to be made. There should be a consensus that homes should only be sold to people who have a good chance of being able to hang onto them. Then we need to come to grips with what to do with the rest of the inventory. It can perhaps be bulldozed, sold to investors, sold to government- but it shouldn’t be sold to people who can’t afford to own a home.
Right now policies to stabilize the housing market are reminiscent of Doctor Little’s Pushmi-pullyu– headed in two directions at once, and they are going to keep the housing market from going anywhere.
[Thank you L for the links!]