Housing Policy: Free Market Vs. Help the Rich
As we all know there is an ongoing debate in politics between those who favor market solutions and those who believe that the government must intervene to protect the rich.
Okay, the first group may not exactly be market fundamentalists, but the government intervention help-the-rich faction is definitely calling the shots these days, especially when it comes to housing policy.
The economy is in recession and job loss is soaring. The banking system is on life support, with the Fed handing tens of billions of dollars to the country’s biggest banks at below market interest rates. Millions of homeowners are facing foreclosure, and more than ten million are now underwater in their mortgages, owing more than the value of their house.
In such dire circumstances, Congress did the only thing it could; it gave more tax breaks to banks and homebuilders.
Yes, that is really what Congress, or least the Senate, proposes as the answer to the crisis facing the country’s homeowners. The Senate has approved a bill that would give a tax break worth more than $6 billion to homebuilders facing losses due to unsold homes and banks facing losses due to bad mortgages. That should make troubled homeowners sleep more securely.
But, there’s more. Congress is also providing a $7,000 tax credit for people buying homes that are foreclosed. That’s great news for banks with lots of foreclosed homes looking for buyers. This credit doesn’t provide any obvious benefit to the people worried about losing their homes. Nor will it help millions of moderate-income families who are potential buyers for foreclosed properties, since they don’t owe enough tax to get the full value of the proposed credit.
But wait, there could be even more. There are many members of Congress who would like to see the government have a large-scale bailout of the housing market, guaranteeing hundreds of billions of dollars of mortgages. This may not be a bad idea in many markets, but in markets that are still bubble inflated, like San Diego, Miami, Los Vegas, New York, and Boston, the main effect of these guarantees will be to give tax dollars to the banks currently holding the mortgages. The homeowners it “helps” are still likely to leave their homes with no equity, and to pay much more in housing costs than they would to rent a comparable unit for the period when they are still owners.
The Center for Economic and Policy Research, along with the Low Income Housing Coalition, just did a paper that looked at relative ownership costs and rental costs in 20 major cities. The basic story is simple, if home prices are 20 or even 30 times the cost of renting a comparable unit, as is the case in many bubble cities, then the cost of owning will be two or three times as much as the cost of renting a similar unit. The extra housing costs for these families will come at the expense of spending on health care, child care and other necessities.
In all of these cities house prices are now falling at double-digit rates. There is no reason to believe that they will not continue to fall until sale prices return to levels more consistent with rents. The government will have no more success in sustaining the bubble prices in these housing markets than it would have been in preventing the NASDAQ from deflating from its 5000 peak in 2000. (The NASDAQ closed today at 2363.) This means that taxpayers will be out tens of billions of dollars making good on its loan guarantees and homeowners will again have no equity, even after being helped by the government. (Of course the banks that held the original mortgages are happy, the government allowed them to cut their losses.)
If anyone in policy circles cared about such things, there are real ways to help the moderate-income homeowners who got trapped in the housing bubble. As I have written before, we could temporarily change the rules on foreclosure to give moderate-income homeowners facing foreclosure the option to stay in their homes as renters paying the fair market rent. This would provide housing security to homeowners, but more importantly it would give the mortgage holders real incentive to negotiate terms that allow homeowners to remain in their house as owners.
And, the plan doesn’t cost the taxpayers anything. And that’s just the problem. A housing policy with no government money for the wealthy will not be taken seriously in the current political environment.
Comments (17)
One idea that would be useful for those in over their heads would be to give a $50,000 debt forgiveness deduction - that is, the first $50,000 of forgiven mortgage debt is not taxed (as I understand it, currently forgiven debt is considered income). This would allow renegotiated mortgages to be less costly to consumers and reduce the amount of debt that a bank would need to forgive to get a customer not to default (i.e. if $12,000 of a $50,000 reduction in mortgage principal went to taxes, the bank under this plan would be able to give the consumer only $38,000 in forgiveness and the consumer would be just as well off).
This would in some ways help the banks because they would be able to lose less money renegotiating mortgages; but it would also help consumers because it would make renegotiation of mortgage terms cheaper for the bank and thus more attractive.
April 3, 2008 11:14 PM | Reply | Permalink
(as I understand it, currently forgiven debt is considered income)
I believe Congress passed a patch (temporary, perhaps) to avoid that for 2007 taxes, i.e., those filed this year.
April 4, 2008 1:04 AM | Reply | Permalink
What a sensible idea. One of the problems with many of the suggestions for bringing relief to those holding mortgages that exceed resale prices is that it simply rewards the banks and the housing speculators. This makes sense. Owner occupants are provided some help and the banks will have to take a loss. And the speculators will simply have to walk away from their investments with the loss of the down payment or no loss for those that secured zero down financing.
Also Dean I have been hearing you on the radio recently and you are coming across as one of the more rational voices in this crises.
April 3, 2008 11:19 PM | Reply | Permalink
Agreed; but there's no reason not to include current tenants as beneficiaries of Dean's proposal, as well.
April 4, 2008 1:20 AM | Reply | Permalink
Well no. Current tenants would not be beneficiaries of Deans proposal. Why should they be. He is talking about owner occupants, not tenants.
April 4, 2008 1:58 AM | Reply | Permalink
Which is why he's wrong.
He's wrong, as well, in allowing these "statutory tenants" to remain in the home for as long as they want to.
The properties should be returned to owner/occupiers as quickly as possible*, and that can only be done if the new owner who purchased at sheriff's sale (bank, MBS trustee, vulture, etc.) can, after selling the property to a new owner/occupier, evict the current tenant in possession.
* Keeping these properties in the rental market will reduce house price competition and keep bubble prices above their real values.
April 4, 2008 9:16 AM | Reply | Permalink
Doesn't the Mortgage Forgiveness Debt Relief Act do that already? and without any dollar limitation?
April 4, 2008 1:16 AM | Reply | Permalink
The Fed claims that if Bear Stearns had collapsed, it would have brought down the world-wide financial system like a "house of cards" with it. So they rescued Bear Stearns, leaving the "house of cards" intact, save one. The Fed facilitated a stock market bubble in the 90's, primarily in tech stocks, by keeping interest rates low, regulation lax, and allowing the bubble to inflate. When it popped in 2000, rather than let the air out of the balloon, Greenspan floated a new bubble, the housing/subprime bubble, with more easy money and more laxatives.
As a result, Inflation is rising rapidly around the world, including the U.S., though the Fed's method of computing cost of living does not show it, since it excludes energy and food, housing prices, i.e. basic necessities.
Now the Fed wants to prevent the current bubble from collapsing, by "bailing out" the banks, with taxpayer money. But the bubble is too big, and the Fed does not have the funds to keep it from deflating; nor do the taxpayers have enough money to preserve the current level of housing prices. Nor should it be: housing prices are still too high relative to income, and many potential buyers are priced out of the market.
The air will come out of the balloon, one way or another. Housing prices will come down, and the 500 trillion dollars in toxic, unregulated, under the counter derivatives, will eventually collapse. The goal of the Fed and U.S. Treasury should be to find a way to allow the bubble to deflate gradually, with minimal cost to the taxpayer and the currency. There have to be lots of bankruptices. Saving Bear Sterns, saving the banks, saving the "homeowners" will only bebase the currency, and hurt the majority of Americans who stood by scratching their heads as this stupidity unfolded over the last 7 years.
The Fed and the Treasury, aided and abetted by Bush, Clinton, and both parties in Congress, have screwed up royally over the past 15 years years, and their primary motives here are to save their Wall Street friends and cover their collective, inflated, asses.
The real bubble has been an ideological one: "the deregulation bubble". Rather than bail out the banks and financial institutions, the Fed ought to seize them in the name of the taxpayer, auction off the assets, and return to proceeds to the U.S. Treasury to pay down our 9 trillion dollar debt.
Otherwise, the country is headed down the same road Brazil took a few years ago, or Germany took in the 1920's: hyperinflation.
We need higher interest rates, not lower. And they are coming. Many emerging market economies peg their currency to the dollar, and as a result are seeing sharply higher inflation. China is allowing the renmimbi to float higher. Korea has announced it will no longer purchase U.S. ten year bonds. As the emerging market economies are forced to "decouple" themselves from the U.S. economy, our bonds will drop in value, and interest rates will climb. Look for mortgage rates to climb, and housing prices to drop over the coming years. Continued attempts to forestall the inevitable will only make it worse.
April 4, 2008 6:12 AM | Reply | Permalink
Re: I believe Congress passed a patch (temporary, perhaps) to avoid that for 2007 taxes, i.e., those filed this year.
It's a permanent tax law change, but only applies to mortgage debt. If your credit card or auto finance company charges off $10K (and you do not declare bankruptcy) the IRS will come after you for taxes on that 10K unless you can prove insolvency.
Re: The Fed facilitated a stock market bubble in the 90's, primarily in tech stocks, by keeping interest rates low, regulation lax, and allowing the bubble to inflate.
Interest rates were not particularly low in the 90s. The tech bubble was mainly created by external factors.
Re: We need higher interest rates, not lower.
So you want to throw a lot of innocent people out of work? Sorry. I can't buy that. Given a choice between inflation and unemployment I'll take inflation. It spreads the pain more evenly and overall it benefits labor (working people can pay off their debts with cheaper dollars) and hits capital.
April 4, 2008 6:34 AM | Reply | Permalink
How much inflation are you willing to tolerate? 30% a year? Look at Brazil's recent economic history. They had high inflation and high interest rates to try to contain it. What do you think will happen if the dollar continues to drop?
In 1980, when Paul Volker was trying to bring inflation down, money market rates went to 17% and stayed there for quite a while. The nation went through its worst post-war recession.
Anyway, either the Fed raises interest rates moderately now, or they will be raised for us by China, India, Vietnam, etc. etc.
Higher interest rates AND higher inflation are coming.
April 4, 2008 6:31 PM | Reply | Permalink
The Fed controls inflation by raising unemployment.
April 4, 2008 6:58 AM | Reply | Permalink
Yes; but the rate at which it comes out is crucial. Markets do adapt, but only at the speed of their components. (This is why electricity markets do not work: even if you can get minute-by-minute pricing signals, which most electricity consumers can't, you cannot react fast enough to them. This system could be made to work, by having computer-driven power purchasing decisions made on a minute-to-minute basis using the minute-to-minute pricing signals. But that's not how it has been done thus far.)
That's the old Philips Curve idea. Currently it is out of fashion. See Brad DeLong's description for instance.
(Hope all this html works)
April 4, 2008 7:58 AM | Reply | Permalink
Figures... I finally get the HTML right, and I misspell "Phillips". :-)
April 4, 2008 8:21 AM | Reply | Permalink
Thanks Syvanen,
let's hope we can keep them from doing anything too awful. (They've already done enough.)
April 4, 2008 8:27 AM | Reply | Permalink
Yo! It is not a recession; it IS a DEPRESSION . . . Perhaps the Second Great Republican-generated Depresion.
Recessions are marked by rapidly growning inflation across all or most ecomonic factors.
Depressions are marked by low or flat inflation across most indicators and negative job grow . . . While the current Administration has been attemping to prop up housing and fuel prices until they can leave town and retire to Dubai . . . Most indictators have been receding or stagmant. Only the sinking value of the dollar has been keeping prices mostly flat.
Just because the corporate media fears calling our situation for what is . . . People who can read . . . AND have taken Econ 101 should not shy away from the truth.
Recessions are not baby drepressions and we are entering a period of real hurt.
April 4, 2008 9:05 AM | Reply | Permalink
I have a question for anyone who can answer.
I'm sure I don't have enough information to ask it intelligently, but here goes;
Not long ago I heard on C-SPAN that Business wanted to be able to take credit for taxes they paid in prior years as a way of avoiding paying taxes in present years. I think profitable years and non profitable years were involved. I understood this attempt eventually failed to pass.
Our newspaper yesterday used one short sentence to tell that that bill seems to have passed.
Can anyone identify and explain the bill I'm referring to? Sorry for so little information.
April 4, 2008 11:56 AM | Reply | Permalink
I totally agree with you, for what it's worth. I even wrote my own blog entry on what Congress could do to help if they really wanted to have a positive impact.
Not that I think they have any interest in doing something correct, I just thought I should balance the negative feedback with some constructive advice.
April 4, 2008 9:57 PM | Reply | Permalink