Out of Control Policy Blog

The Housing Policy Debate

David Streitfeld has a pretty good article in The New York Times recapping the current state of the housing policy debate. He first notes that the current administration policies have epically failed:

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

Of course, instead of stabilizing anything, the government just juiced a few numbers that have all dropped off a cliff in the past weeks. So what should we do. I have argued repeatedly that we need housing prices to grow from a natural bottom, not an artificially created price floor. Streitfeld picks up on that line of reasoning here:

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

Unfortunately, the administration doesn't seem to like this idea very much. And they don't want to admit failure:

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Another tax credit would be an incredible waste of money. It didn't do anything other than prop up the market a few times, as I noted with this chart. All of those "gains" in housing starts, prices, and sales are being wiped away, and should be strong enough evidence that such a program should be avoided like the plague. Though, when politics enter the picture, common sense can get tossed out the window:

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.

Another program for aiding homeowners starts Tuesday, which aims to get rid of negative equity. But given the failure of HAMP and the fact that the program is only targeted at a select group of home buyers, it won't be the answer, even if it works perfectly. After that, who knows what this administration will come up with, but whatever they do, it won't be welcomed with open arms as Streitfeld concludes:

Instead, there is a sense that, even with much more modest notions, government intervention is not the answer.

Read the whole NYT piece here.

Anthony Randazzo is Director of Economic Research


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