Friday, December 05, 2008

Treasury wants to reinflate the housing bubble

The U.S. Treasury apparently wants to fight the symptom by recreating the problem:
The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.
Economist Tim Duy thinks this is "potentially very bad policy":
The key word here is “temporary,” implying a sunset clause. This is a program, however, that screams permanency. Once the federal government defines a right to low rate mortgages, they will find it very hard to reverse their position. ... Why? Because at some point in the future, revoking the right will create classes of winners and losers, especially if it results in a steep rise in mortgage rates. And the losers will fight tooth and nail to prevent that rise; just imagine the army of lobbyists from home builders and realtors that will descent on Washington. ...

Perhaps I worry too much. Perhaps it really will be temporary. Consider, however, who is behind this proposal:
The Treasury plan is similar to ideas previously floated by the National Association of Realtors and the lobby group for home builders...
I can only think of Adam Smith’s warning:
The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.
What is the alternative? Stop focusing on the housing market. Stick to policies that will be revocable when necessary. There are virtually unlimited opportunities for good policy in education, infrastructure, and health care, to name a few (Rebecca Wilder fears there may even be too many).

8 comments:

  1. Well, I must admit...I have been on the sidelines, building up that down payment. Prices are falling, and now a 4.5% fixed may be available?

    This may be the delayed gratification opportunity that many of us fiscal conservatives have been waiting for!

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  2. I guessing this includes refinancing too? So people with adjustable rate mortgages or "teaser" starter rates could refinance into 4 1/2%?

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  3. And it doesn't do squat for people who are already underwater on their existing loans..

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  4. No, its not for refis, its for purchases only.

    Im in the same boat as you - waited patiently, and prices have come down alot...now on top of that I could get 4.5% fixed? Tempting...

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  5. It would help to reduce the existing inventory. More importantly, with the cost of renting almost being equal to the cost of owning, it would enable home ownership opportunities for the first time in years.

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  6. "No, its not for refis, its for purchases only.

    Im in the same boat as you - waited patiently, and prices have come down alot...now on top of that I could get 4.5% fixed? Tempting..."

    If prices are where they should be, you would not need a subsidized interest rate to buy. Prices have not come back to the long-term price. If you buy now and cannot keep the property forever, future higher interest rates will dictate a lower selling price. Buy now only if you don't intend to sell...ever.

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  7. back in 2005 i remember we were offered 5% fixed 30yr loan; but then my savings were earning 4%.... we rejected mortgage offer and bought a foreclosed property one year ago ( paid cash)....what is so great about 4.5% now that banks pay 1/2 % on your savings ?

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  8. "If you buy now and cannot keep the property forever, future higher interest rates will dictate a lower selling price. Buy now only if you don't intend to sell...ever."

    So basically you are saying, dont ever get the lowest rate offered because they will be higher in the future...yeah, good advice there...

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