October 25, 2015

What’s The Alternative?

A weekend topic on a pair of articles related to the housing bubble. MarketWatch, “President Barack Obama was in Phoenix earlier this year to talk up something as hot as the desert sun—housing. In a January speech, he announced a new Federal Housing Administration policy to lower the mortgage insurance premium enough to save the typical borrower $900 a year, assuming a $180,000 mortgage. That FHA fee drop was aimed at helping middle-class families. ‘Over the next three years, these lower premiums will give hundreds of thousands more families the chance to own their own home, and it will help make owning a home more affordable for millions more households overall in the coming years,’ Obama said.”

“In fact, what’s happened—for those on the outside, trying to get in—is that owning a home has become less affordable, directly as a result of the FHA move. CoreLogic tracks house prices nationally. What Sam Khater, deputy chief economist of CoreLogic has found, is that prices on lower-end homes immediately vaulted in price. First, a quick explanation of what is a lower-end home—for purposes of the data presented here, it’s one that 75%, or less, of the median transaction price. For the chart above, the median price of a low-end home was just over $140,000 in August.”

“Khater says that lower-end prices, which had been growing at an 8% year-over-year clip, accelerated after the FHA move. In August, the most recent month for which data is available, prices in this segment have grown 11%, faster than the 7% growth for all segments. That extra 3%-per-year in home price growth, on a $180,000 home, amounts to $5,400, or basically, six years of insurance-premium savings. On a $140,000 home, that extra premium amounts to $4,200.”

“The FHA move certainly has helped stimulate demand. Year-to-date, FHA single-family endorsements for purchase have boomed by 24%. But CoreLogic’s Khater says that is not what the housing market needs at this point. ‘In today’s market where supply is so tight, it’s not helping the cause to artificially stimulate demand,’ he said.”

“The White House referred questions to a spokesman for the Department of Housing and Urban Development, who defended the program and said the market, not the government, sets prices for homes. ‘After months of declining home prices, we are seeing markets recover and families seeing equity build in their homes. The MIP reduction makes refinancing and purchasing more in reach for families across the nation,’ he added.”

“That point about refinancing is worth emphasizing—FHA refis have doubled this year. The move was a benefit to those already in their home who then refinanced under the FHA program.”

From Business Insider. “Former Federal Reserve chair Ben Bernanke has no patience for the idea that Fed is creating inequality and hurting savers. In an interview with the Financial Times published Friday, Bernanke takes to task the idea that the Fed’s policy of cutting rates to 0% and keeping them there to support a slow, plodding post-financial-crisis economic recovery has helped enrich the already-wealthy and punished ‘Mom and Pop’ savers who just want a safe return on their money.”

“‘It’s ironic that the same people who criticise the Fed for helping the rich also criticise the Fed for hurting savers,’ Bernanke told the FT’s Martin Wolf. ‘And those two things are inconsistent. But what’s the alternative? Should the Fed not try to support a recovery?’”

“Bernanke told Wolf, ‘If people are unhappy with the effects of low interest rates, they should pressure Congress to do more on the fiscal side, and so have a less unbalanced monetary-fiscal policy mix.’ And in this Bernanke is telling Wolf that Congress approving additional government spending is the thing you’re really looking for if you want additional economic stimulus.”

“The Federal Reserve, in Bernanke’s view, did its part and avoided a Great Depression. ‘A Great Depression is not going to promote innovation, growth, and prosperity,’ Bernanke told Wolf.”

Bits Bucket for October 25, 2015

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