Friday, November 18, 2011

More Housing Missteps By Congress

Yesterday's Wall Street Journal's lead staff editorial reported the disappointing news that, with so much public attention focused on Fannie Mae and Freddie Mac, the FHA is being granted a rise of about $100K in value, to almost three quarters of a million dollars, in the size of mortgages it can guarantee.

Various data detailing the FHA's precarious capital position (about .25%, rather than the mandated 2.5% or so) and enormous, though underestimated future defaults on its portfolio.

FHA was supposed to be the original low-income government-assisted housing loan program. I recall selling my first home some twenty years ago to a veteran who received special treatment under the FHA loan for which he applied. Incredibly, as the seller, I had to pay his points. Imagine my surprise at the closing when I learned the couple had therefore gone and borrowed significantly more than they had initially represented in their purchase offer, sticking me with higher fees for selling my house.

The FHA program was designed long ago as a vehicle to assist the emerging middle class in what was then viewed as a laudable goal- home ownership.

It's hard to see how even in the New York Metro area, at this time, a $725K home can be considered either a starter, or deserving of any sort of special government assistance.

No doubt those defending this increase in FHA mortgage size will claim it is to boost housing demand in order to rescue the housing sector, create sales and, somehow, magically, ignite housing starts.

How many times have you heard pundits and, of course, National Association of Realtors officers blather on about how a US recovery must begin with housing? How we have to get housing fixed to fix the economy? How much the US economy relies on the construction sector which is sustained by housing?

What happened to letting the US economy, with its hundreds of millions of actors, determine sector activity through their genuine demand for various goods and services?

From my youth, to now, I can cite three industries which were supposed to be the backbone of the US economy in their day- steel, autos and, now, housing.

Each had a parasitic union which ultimately sapped its host nearly to death. Each sector had its productivity peak, the bulk of its value-added fall victim to lower-wage, and thus, higher-productivity foreign competitors. Which led to the exit of US producers as the products became more commoditized and the US lost competitive advantage in those products.

Housing, being a locally-produced and -consumed good, didn't get sent offshore. We killed this one by over-subsidizing it.

I've been very impressed by the studies I've read that demonstrate home ownership to be the enemy of the once-vaunted mobility of the US labor market. And never moreso the low end of the income distribution. The absolute worst thing you can do for the lower income worker is to chain her/him to a home, so that when their semi-skilled job vanishes, they can't pick up and move immediately. Oh, and by the way, when that job does vanish, probably with hundreds or thousands of others like it, local property values will plummet, causing them to lose what little savings they had, as the home goes upside down with respect to its mortgage.

Maybe it's time we finally just stop subsidizing any sectors out of an arrogance which assumes a few legislators, with the 'help' of lobbyists for a sector, know what's best for American consumers and the US economy.

As of 2011, we've reaped a moribund housing industry from too many years of subsidizing the consumption of ever-larger houses by ever-more Americans. We've binged on housing, and now the value of that housing stock has fallen.

Market economics would lead us to let housing prices go where supply and demand take them. In this case, falling to a point where a newly-enabled tranche of buyers can afford that which was previously beyond their means, and at realistic interest rates and by appropriately careful lending standards.

No other path will resolve the housing sector's ills, nor cause it to have a positive effect on the US economy.

Rather than listen to politicians and pundits who declare we need this or that special program to incent consumers or business owners to behave in a certain way, to 'jump start' the US economy, perhaps, now, after several years of lackluster growth and a subsidized-housing-sector financial crash, we might just let market forces, in their own time, produce a real, sustained recovery driven by genuine market demand and, consequently, supply.

No comments: