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Bailout isn't enough for housing market
Chris Mayer, Professor of Real Estate, Finance & Economics at Columbia University
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TEXT OF COMMENTARY
Kai Ryssdal: Here's another bit of housing fallout from the credit crisis: Rates on 30-year fixed mortgages have hit their highest levels in a month. Commentator and economist Chris Mayer says pushing that rate down ought to be front-and-center in cleaning up the market mess.
Chris Mayer: The news from the housing market is grim. Housing starts are at their lowest level since the early 1980s. And there are more vacant homes's than at any time since the Census Bureau started keeping data in 1960. Millions of homeowners owe more on their mortgage than their house is worth. Foreclosures are accelerating. House prices continue to fall. Whether or not we eventually pass a bailout, will have little direct effect the housing market, which is dragging down our economy and crushing our financial institutions.
But with its takeover of Fannie Mae and Freddie Mac, the federal government is finally in a position to act.
What should the first course of action be?
We must bring down mortgage rates.
Interest rates on 10-year U.S. Treasury rates fell by nearly 1.5 percent since the middle of 2006. But mortgage rates have fallen less than half that amount. Reducing mortgage rates another three-quarters of a percent or more could save homeowners billions a year in interest payments.
Yet more must be done. To reduce the inventory of vacant housing units as well as to encourage saving, the government can offer to match the downpayments of new buyers up to some reasonable cap.
And the government should allow existing borrowers to get out from under their current adjustable rate or subprime mortgages. How? By relaxing loan-to-value requirements on borrowers refinancing a non-prime loan. Homeowners could accrue additional equity in their home over time by making regular mortgage payments, while the government might receive a portion of the appreciation if housing prices recover.
Some would argue that subsidizing housing was what got us into this mess. But such arguments miss the fact that house prices have already fallen to the point where buying in most markets would be cheaper than renting -- if only buyers could get reasonably priced credit.
Two-thirds of Americans own their home. Allowing a further collapse in house prices will help no one and threatens to continue the vicious cycle driving down the economy and destroying our banks. The credit crunch will not end until housing market stabilizes.
Ryssdal: Chris Mayer is professor of Real Estate, Finance & Economics at Columbia University.
For the next six months, on any privately offered house purchased, the buyer would be able to double his/her mortgage deduction for the next five years. Additionally, the seller would receive a tax credit on the amount proven to be a loss including the cost of sale. Limit the program to homesteads and limit the deductions to median home values in the particular market. So a home purchased in Los Angeles would have a higher deduction possibility then a home in Fort Wayne. If the sellers knew that buyers were on the market again for a short six month period; prices might drop to sell the home and buyers might get some sense of urgency to start looking. If this part is not included these foreclosed homes will so overshadow the free market houses that the free market homes will become the problem very soon!
This is not a bailout; it is not a cheesy rebate check. It does not help the speculative housing market. It does not provide help to the stupid sub-prime lenders who were giving away money. It would cost the government nothing because now with nothing happening there are no tax revenues! All it does is help the common person buy or sell a home.
The right way to fix the economy.
GOOD IDEAS are never short to explain :-) Please read
Here is how we fix the problem… TAXES. Yes, that’s right TAXES!!
People are so driven not to pay taxes they will go out of their way to avoid every penny. Here’s an example, back in August 2002 the BBC ran a story (http://news.bbc.co.uk/1/hi/world/europe/2205419.stm) about grocery stores charging at extra for each plastic bag. Bag consumption was over 1 billion bags a year. So charging a surplus wasn’t doing it’s job. So the Republic of Ireland started charging a 15 cents per bag tax and it cut plastic bag consumption by 90%, now bag consumption is about 100 million bags a year. So the proof is in the bag, people will go out of their way to avoid paying any extra tax then they need.
So we should capture this fear of paying taxes and use it to get out of the current financial situation.
SO GIVE TAX BREAKS!
My suggestion is to give individual people tax credit and/or rebates by buying up homes that are in foreclosure. If we give them $5000/year for 5 years in tax relieve and then tax rebates you will see the market come back to life.
Let’s look at the number. According to Bloomberg.com (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=abGBM5cTivS8), RealtyTrac states that there are 1.5 million homes in some state of foreclosure. If we give $25,000 per foreclosure home buyer ($5000 for 5 years) we will only spend $37.5 billion dollars (if we have 2.5 million forclosures, bailout would be $62.5B) . Far less than $700 billion, 90% cheaper. And in the mean time the homes will be owned by someone and not left in disrepair. There are lots of people who are waiting to buy and wanting to buy but just waiting for the right time. This could make it the right time. Inner cities may be repopulated, urban center could be renewed… this could be the next greatest thing.
So giving the money directly to the people they will be the best at taking risk. The average person will never take a risk that Wall Street took and I think this will take us our of the current crises in a more civilized manner and with a stronger foundation then how we went into this.
I take issue with the theme that we need to free up more credit and the suggestion that we should reduce loan-to-value requirements on mortgages. This is in fact what got us into this mess in the first place, as you mention. Future home buyers need to have a reasonable amount of money to place down on a home for more than the reason to cover the fluctuating value of a home if they have to get out of it. They need to put this money down so that they have real skin in the game. If one were to buy a home with little to nothing down, they more likely will not understand the cost of maintaining a home from general maintenance, to unplanned repairs on major appliances and fixtures. When a needed repair happens, they most likely are not disciplined to have money ready for the repair, causing them to take on further debt, continuing the cycle of paying more interest and building very little wealth.
We need a major reset in the housing market, and we need to take personal ownership for the crisis that we are now in and fundamentally change the way our country uses credit.
I take issue with your statement, "Allowing a further collapse in house prices will help no one." In coastal areas, many middle-class families are still priced out of the housing market. Falling prices would allow families like ours to buy. I recognize that the government needs to do something to ease the credit crisis, but at the same time I feel like those of us who worked hard, saved our money, and resisted the lure of easy credit are paying for everyone else's bad decisions. Propping up artifically-inflated housing values would punish us yet again.
Professor Mayer is right. Although, I believe that the government should not intervene at all. If it must however, why not do it from the bottom up rather than from the top down. But the congress will not…. How else are they going to get contributions for their leadership packs. This congress is foolish, idiotic, and does not work in the interest of the people of the United States.
Finding another gimmick to temporarily prop up our home values does not seem like the proper solution. At the height of the market the value of my home had nearly tripled in the past 10 yrs. While I would love to believe it's true, lets come back down to earth. The bottom line is that home prices are still inflated. Unfortunately our entire economy has been based on this fairy tale and government has been encouraging it from many departments and branches.
Uh... professor, I pay 22% interest after I maxed out my credit card in Vegas. Do you think government should lower my credit card interest rate, too? Not too much. I'm happy with 4% interest. It'll be nice.
Marketplace, stop putting this clown professor here, and get a real professor to fill your air time.
Why is no one talking about the government buying the troubled mortgages from the banks at a discount and resetting the once variable rate to a fixed rate where it originated ? Doesn't that increase the value of the portfolio automatically and wouldn't this be help for homeowners as well as a good investment for the tax payers ? What do I know I'm just a small business owner.
