Friday, November 14, 2008

Those in government still don't get it!

Tim Duy writes:
From the wires:
Such comments always leave me with a sick feeling in my stomach – if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. Sort of liking waiting for the NASDAQ to revisit the 5,000 mark. I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable. The stream of expected household income necessary to repay the loans exceeded the capacity of household budgets. It is that simple – there is no sense in paying $3,000 a month in mortgage payments on property with the rental equivalent of $1,000. To be sure, a homeowner could justify such a purchase as long as they thought they were guaranteed a 15% annual risk free return. But who, other than realtors and mortgage brokers, remain under that delusion?

Similarly, I find programs that purport to “help” homeowners by reducing their mortgage payments of questionable value. Lowering your mortgage payment to 38% of income might sound like a good deal – but if you have no equity, you do not really own anything. You are just a renter by another name. So if your final mortgage payment significantly exceeds the rental equivalent, has the government really made you better off? And if, as I suspect, homeowner bailouts will not stem price declines, the program recipient could soon find themselves with negative equity again in a matter of months. If you really wanted to help underwater homeowners, you would bring their payments in line with the rental equivalent. I suspect this would be extremely costly.
Again, price and affordability are inversely related. Those who want to prop up home prices essentially want unaffordable housing.


  1. "Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic."

    how about no policy whatsoever, not policy that supports something that's inevitable anyway. if we agree to a transitional policy it'll be the Davis-Bacon Act v2.0.

  2. Lower the 30 year mortgage rate enought that the PITI payment is just below the equivalent monthly rent.

  3. What Tim Duy doesn't get is that while housing may not be a driver for the economy, it (or rather the lack thereof) can be its biggest constraint. For the economy to continue to grow, it needs a never ending, always increasing population to sustain it both as factors of production and as consumers ... And that population needs places to work, sleep, eat, entertain, be entertained. In brief, it needs new construction and always more construction. Paulson is correct, Tim Duy isn't.

  4. Lance, hypothetically speaking even if you were right (you're not) that ever increasing construction is necessary, it does not follow that prices need to rise. If the asset is overvalued (it is), declines from that overvaluation could very well dominate any upward pressure from increasing demand. Your underlying premise is faulty in many ways as well.

  5. You're both wrong.

    Interest rates are too low, Anonymous and housing prices are to high. The first does not provide enough return to a lender to justify lending at thest prices, the second is inconsistent with the amount of houses in supply.

    We don't need a quick fix...we need an adjustment. Prices must fall...rates must rise...until equilibrium is reached. During that process support is provided by government...not to business...but to the general public to ease their pain and difficulties throught the adjustment period. how the free market works.