Sunday, October 11, 2009

A Policy: Supporting House Prices

by Bill McBride on 10/11/2009 09:45:00 AM

“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending, quoted Oct 9th, 2009 in the NY Times.

"I believe the intent of the FTHB [first time home buyer] credit (and any extensions) is to raise the floor on home prices to delay (and sometimes prevent) defaults, reducing the shock to the financial system."
reader picosec in email, Oct 2nd, 2009

And a couple more quotes from an article by Alan Heavens in Philadelphia Inquirer: Skeptics question housing recovery :

"Government intervention to date has been extremely helpful in preventing an even more dramatic decline in home prices."
John Burns, real estate industry consultant

The housing market "is showing improvement only because it is on government life support."
Mark Zandi, Economy.com

As Representative Frank notes, the policy of the U.S. appears to be to support asset prices at almost any cost. This includes:

  • The FHA insuring "bad loans" for buyers with a high probability of default.

  • The first-time home buyer tax credit (the FTHB makes no sense from any other economic perspective).

  • Delaying foreclosures, first with moratoriums and then with "trial modifications".

    We could probably include the Fed buying GSE MBS to lower mortgage rates, and other policies like increasing the "conforming loan" limit to $729,750 in high cost states.

    Intentionally encouraging loans with high default rates (insured at taxpayer expense), and the FTHB tax credit (especially allowing buyers to use the credit as a down payment) have stimulated demand. And delaying foreclosures has restricted supply.

    This has had the desired effect of pushing up asset prices, especially at the low end.

    It is "a policy", but is it a good policy?

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