February 5, 2012

Policy Land Mines In Uncharted Territory

Readers suggested a topic on government policy and house prices. “Is the government trying to keep house prices inflated, or are they simply trying to prevent over correction.”

A reply, “Sounds great until you take the perspective of a prospective buyer, who gets to look forward to no reward going forward for taking the risk of buying at a point when shadow inventory numbers in the millions and nobody knows where the bottom lies because everyone knows prices are propped up.”

And another. “I’ve observed strategic reaction and well orchestrated push-back by outside forces when discrediting and shaming the Housing Crime Syndicate on blogs, forums and news outlets. Frankly, most of you have no idea how deeply entrenched and powerful the HCS is and I only see a fraction of it. It’s a war fought through the media and there are paid PR firms operating on the net EVERYDAY at the behest of the HCS.”

“My speculation? The Fed reserve funds it all to keep every one spending and borrowing. Their proxies are the entrenched power structures: NAR, MBA, other banks, 401k industry, revolving credit operators. You’re asserting that prices have normalized and it’s a false assertion as is an interpolation from CS baseline. Secondly you extrapolate using a variable (interest rate). We’re going to find out over the next decades just how grossly inflated housing prices are. Enjoy the ride.”

One had this, “Yes if the pool of buyers have about the same income as when the home prices were lower. What also needs to be considered are the tax/insurance costs compared to the past and the quality of the housing stock today compared to what it was during the ‘historically normal’ valuations at 37% lower. Bigger? Better? Maintained? ‘Are these houses better off than they were 10 years ago?’”

“A way to prevent an over correction would be to work to inflate. We’re in uncharted territory on this governmental housing intervention thing.”

Another said, “You are attributing too much intention to the policy. They are trying to stabilize prices. In some places this is stopping an over correction. In some places this is keeping overpriced housing from coming down to a sustainable level. In some places, the two results can happen within 10 miles of each other.”

“What they are actually trying to do is keep housing prices from falling anymore no matter where prices currently are. This is because they see falling prices as an issue in the health of the banking and financial sector. The Fed doesn’t own all the bad assets. They are still out there in bank portfolios, insurance company reserves, pension funds ’safe’ assets, etc. As a side issue only, they think that keeping house prices from falling further will keep more people from voluntarily defaulting which puts an administrative burden on the legal system that it *cannot* handle without gobs more money that it can’t get.”

One take, “I think the interest rate policy has much more to do with propping up wall street then it does the housing market.”

And finally, “Related question: Is price fixing legal, so long as it only concerns housing? Is there any chance some U.S. presidential candidate will take the bold step to suggest that household finance decisions are private, and hence not appropriate to address by massive federal government intervention, especially the kind that involves deliberate price fixing?”

From Forbes. “The U.S. Federal Reserve and the Treasury Department have been mulling over a plan that would obliterate all market signals from the mortgage industry. The plan demonstrates once again Washington’s perverse belief that the cure for decades’ worth of government distortion of the housing market is … more government distortion.”

“The government’s reasoning is obvious, if wrongheaded. It wants to keep housing prices from falling further, which would drive homeowners into foreclosure and push banks and investors into deeper distress. To achieve this, the government has to scare up new home buyers, many of whom feel skeptical that prices have hit bottom. So the Fed hopes to lure buyers with dirt-cheap mortgages, just as they were priced during the housing bubble. The gambit could work–for a while. But in the long run, the federal plan will just make things worse.”

From PBS NewsHour. “Jeffrey Brown: Florida may be known as the Sunshine State, but like much of the country, conditions remain poor when it comes to the housing market. To date, Republican presidential candidates have largely avoided spelling out specific policies on housing, mainly arguing that fixing the broader economy is the most logical solution. In October, Mitt Romney said in an interview in Las Vegas that it was best to — quote — ‘let the foreclosure process run its course and hit the bottom.’”

“Most of the focus of the last week, though, has been on the government-owned mortgage giants, Fannie Mae and Freddie Mac. Texas Representative Ron Paul and former Senator Rick Santorum both said Fannie and Freddie should be phased out.”

“For his part, the president used his State of the Union address to call for new legislation aimed at helping those unable to make their mortgage payments. President Barack Obama: ‘Responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief. And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at historically low rates.’”

“Jed Kolko, Chief Economist, Trulia: ‘When it comes to voters, housing really is a bipartisan issue. We at Trulia did a survey of consumers, and we found that even a majority of Republicans want the government to support homeownership. And they’re actually in favor of most of the types of proposals that are on the table. The problem for the candidates, though, is almost any policy that you might come up with, such as refinancing, or reducing principal, loan modification, will either cost somebody some money — and that somebody is probably going to be the government or the banks, or both — and it’s very hard to separate people who are underwater or might lose their homes and it’s entirely not their fault from people who might have taken risks or made bad decisions that maybe they shouldn’t be bailed out for.”

“Democrats are a lot more willing to accept that some people who may be less deserving could be helped than Republicans are. And Republicans are a lot less willing to burden either the government or banks with more money. So, it means that even though Republican voters want to hear from their candidates some kinds of policies that might help the housing market, Republican candidates face these land mines of the challenge of spending more money and the reluctance among lots of Republicans to help undeserving homeowners.”

Bits Bucket for February 5, 2012

Post off-topic ideas, links, and Craigslist finds here.