Today's Opinions, Tomorrow's Reality
Aggravating the Hangover
By David G. Young
Washington DC, August 5, 2008 --
Home subsides are the cause of, not the solution to America's real estate crash. Creating more of the same will only make things worse.
"Drink another beer." That was the folk remedy my fraternity brothers prescribed after a night of liquor-soaked excess. The trick seemed to work -- the liquid soothed the acute symptoms of dehydration, and the alcohol numbed the pain in my head. Of course, the perceived cure was purely temporary; more drinking ultimately exacerbated the underlying problem. But as inexperienced youths, we could be forgiven for our naivete.
The same cannot be said of the architect's of America's housing bailout. Passed last month during Congress' pre-recess panic, politicians desperate to show their concern for homeowners cobbled together a collection of ill-conceived provisions aimed at rescuing an ailing system. Some programs are targeted to individuals: the bill offers government-backed fixed-rate mortgages to distressed debtors.1 It provides new tax deductions for those who don't itemize their returns, and creates a repayable tax credit for first-time home buyers.2
The bill's more expensive provisions, however, are institutional. The bill allocates $4 billion of vague aid to hardest-hit communties3, and worst of all, it creates a Treasury Department bailout of quasi-governmental mortgage giants Fannie Mae and Freddie Mac. This latter provision could have astronomical costs -- estimates range from a low of $25 billion to over $100 billion.3 The higher figure amounts to over $300 for every man, woman, and child in the country.
Like the fraternity hangover folk remedy, the housing bailout seeks to cure unhealthy excess in the housing industry with even more unhealthy excesses. Government-chartered Freddie Mac and Fannie Mae were created to ensure easy consumer access to home loans. This worked great -- for awhile. But knowing a government bailout was always possible, the financial institutions played fast and loose with credit until a bailout was a virtual certainty. Before last month's bill passed, Freddie Mac was actually insolvent -- its liabilities exceeded its assets, and Fannie Mae was close to insolvency as well.4
America's obsession with home ownership is unhealthy. In addition to subsidizing cheap mortgages through Fannie Mae and Freddie Mac, the government directly encourages home mortgages by allowing taxpayers to deduct virtually all the interest paid on a loan for their residence. The mortgage deduction is a critical linchpin of America's home-ownership cult. Without it, millions of people would find renting their home to be a more affordable alternative.
Before the housing boom began in the mid-1990s, America's home ownership rate hovered around 64 percent. As the government-subsidized system grew into a housing bubble, ever more financially marginal homebuyers entered the system until 2005, when the home ownership rate had climbed to 68.9 percent.5 Now that the bubble has popped and real estate prices are falling, many of these folks find they can't afford to pay their mortgages. Many never had any business buying these homes in the first place. So why on earth did government subsidies encourage them to do so? And what sane person thinks that the solution to the problem is to have even more government subsidies to keep encouraging people to buy houses?
By shoveling more money into an already money-soaked dysfunctional system, the new government programs will do little to foster the kind of reform and added responsibility needed to fix problems with America's housing. Instead the dogmatic pursuit of the "American Dream" where everybody is a homeowner, Americans need to accept the reality that some folks just aren't cut out for home ownership -- they either don't have the money, or aren't up to the responsibilities. Renting a home is not a terrible sin that must be addressed by social engineers. It is an often financially preferable alternative to home ownership.
Until policymakers abandon the irrational dogma of the universal virtue of home ownership, and roll back America's mortgage subsidies, there is little hope for a cure to America's housing mess. As when taking a beer chaser the morning after a fraternity party, America's mortgage hangover will be with us for a long time to come.
Related Web Columns:
Tyranny of the Irresponsible, March 18, 2008
Victimized by an Idiotic Mob, October 2, 2007
Money Out the Window, October 29, 2002
1. Associated Press, Provisions of Housing-Mortgage Relief Bill, July 31 2008
2. Bloomberg.com, ?Leveraged Bailout' Won't End Mortgage Madness, August 4, 2008
3. CNN Money, Fannie, Freddie Rescue Won't be Cheap, July 30, 2008
4. New York Times, Too Big to Fail, or to Survive, July 27, 2008
5. U.S. Census Bureau, Housing Vacancies and Homeownership (CPS/HVS), 2005