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Wednesday, December 17, 2008

Bad housing policy proposals never die ...

by Calculated Risk on 12/17/2008 11:04:00 AM

they just get recycled on the WSJ opinion page.

R. Glenn Hubbard and Christopher Mayer are back again: Low-Interest Mortgages Are the Answer.

Here was my response to their previous proposal.

I found this sentence interesting:

"While fundamental factors clearly played a role in driving down house prices that were at excessive levels two years ago ..."
Oh yeah? Well why didn't they say that two or three years ago? Instead, Dr. Mayer wrote in 2005 (with Charles Himmelberg and Todd Sinai) that there was "little evidence of housing bubbles in almost any of the markets we have studied". I disagreed with Dr. Mayer in 2005, and I disagree with him today.

And look at this logic:
[A] 4.5% mortgage rate will raise housing demand significantly. A simple forecast can be obtained by applying the 2003-2004 homeownership rates to 2007 households. We use the 2003-2004 home ownership rates because those were the years of the lowest previous mortgage rates (the average mortgage rate was 5.8%).
Oh my. Yes, rates were lower in the 2003-2004 period, but lending standards were already lax (especially in 2004). Are the authors suggesting a return to the "fog a mirror, get a loan" standards of a few years ago to raise homeownership rates? Bring back the liar loans, NINJAs, DAPs, pick-a-pay lunacy - and yes, maybe a few more people will buy homes. Of course now lenders would also have to ignore recent foreclosures too.

And this brings me to a serious comment. One of the tragedies of the housing bubble was that some people were enticed to buy a home before they were really ready to be homeowners, and others to extend themselves too far. Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. Only the passage of time will salve their wounds. There is nothing anyone can do to convince them to buy right now. I've seen this behavior before in California after previous (and much smaller) bubbles - and I believe we will see it again now. I wonder how this behavior factors into the author's forecast.