The US taxpayer is about to be saddled with hundreds of billions of dollars in bailouts to pay for the idiotic decisions of those that gleefully inflated the housing bubble.
…an unlimited line of credit to Fannie and Freddie, allows the government to insure up to $300 billion in refinanced mortgages and extends a tax break of as much as $7,500 to first-time home buyers.
While it is probably inevitable by now, the Senate hasn’t voted yet, so there is still time to contact our Senators and try to explain what a horrible idea this is.
Maria Cantwell:
Phone: (202) 224-3441
Fax: (202) 228-0514 Email Form
Patty Murray:
Phone: (202) 224-2621
Fax: (202) 224-0238 Email Form
Here’s an excerpt from the summary (emphasis mine):
The collapse of the bubble in the U.S. housing market is creating chaos in financial markets while throwing the economy into a recession. It is also threatening millions of homeowners and renters with the loss of their homes. In recognition of the problems in the housing market, Congress is considering measures that will alleviate the crisis. However, it is important that Congress recognize the full nature of the problem as it crafts legislation.
This paper compares ownership and rental costs in twenty major metropolitan areas. It shows that in many areas, ownership and rental costs are more or less in balance. This means that it might be practical and desirable to craft policies for these cities that are focused on keeping homeowners in their homes as owners.
However, the paper also shows that in many cities homeownership costs are greatly out of line with rental costs. These are cities, mostly on the two coasts, that have seen an extraordinary run-up in house sale prices over the last decade that have not been matched by any comparable increase in rents. In these markets, homeownership costs could easily be double, and even close to triple, the cost of renting comparable units. Paying these inflated ownership costs will take away money that might otherwise be used to pay for health care, child care or other necessary expenses. Similarly, a government that intervenes at these prices will have less money for other needs.
Furthermore, because prices are now falling rapidly in many of these markets, homeowners are unlikely to accumulate equity. In fact, it is likely that many homeowners will end up selling their homes for less than their outstanding mortgage, even if new mortgages are issued with substantial write-downs from the original mortgage. In these bubble markets, government efforts to support homeownership are likely to do little to help homeowners and could leave taxpayers with a substantial bill in cases where homeowners leave their houses with negative equity.
They compare 20 cities, of which Seattle is one. Here are the relevant data tables from the paper with Seattle highlighted.
Note that yes, Seattle is in bold, which means that they classify us as a “bubble market,” despite what local realtors would like to believe. Also note that even the low end of the monthly ownership costs are more than double the monthly rental costs. This is of course not news, but it’s still nice to have it validated by another source.
Translation: it’s a great time to buy a home in Seattle… if you don’t mind a high likelihood of being $100k under water in a few years.
They conclude the following:
In cities that have seen home price appreciation that has raced ahead of rental cost growth, however, it likely makes little sense to use public resources to encourage or subsidize severely troubled homeowners to maintain ownership. Similarly, it likely makes little policy sense to encourage or subsidize households to become homeowners in the near term as the market goes through a downward adjustment in prices.
All in all, an excellent paper. I suggest you download and read it for yourself. Keep in mind that the CEPR isn’t some “bitter bubblehead,” it’s a serious agency filled with economists and ivy-league professors. Not quite as easy to dismissively ignore.
I have added this paper to the Library for future reference.
You can listen to the full three-minute segment on NPR’s website. Here’s a little clip of my appearance:
The house Mr. Kaste and I were standing in front of, which he says “may be the last gasp of Seattle’s bubble” is 145 NW 76th St, 98117, which I mentioned on the Audacious Flips and Renovations thread in the forums. Bought for $315k in 2005, now asking $800k.
At the end of the segment he used a quote where I talked about housing braggarts getting what’s coming to them. He was definitely fishing for a comment like that during the entire interview, so I’m not surprised that it ended up on the air. However, taken alone, it sounds like I’m cheering for people’s financial destruction, which is not the case.
Yes, I admit that I’ve got some schadenfreude with respect to one specific set of people: blowhards that simply would not shut up about their home’s ever-rising “value” during the bubble years (such as…). But do I take pleasure in seeing anyone foreclosed on or losing their job due to recession? Of course not.
All in all, I think it was a good segment. The UW professor quoted in the piece does make a good point that more people than just bubble-buyers are going to suffer as this unwinds. However, I agree with Sniglet’s comment in the forums that a bailout “will prevent the economy from properly re-balancing itself and clearing out mal-investments.” Recessions suck, but sometimes they are necessary to get the economy back to a solid foundation. I made this point in my interview with Mr. Caste, but obviously that clip didn’t make the final cut.
The UW professor said that “people depend on their home equity,” which is certainly true, but should they? This needs to be allowed to play out naturally so we can get back to a rational, sound economy.
There’s a new site called Stop the Mortgage Bailout that aims to draw attention to the anti-bailout cause and educate people about what a bailout would really mean.
From the site:
A bailout is morally irresponsible because it encourages irresponsible and irrational behavior. Here is a short list of the many “moral hazards” that a bailout enables:
A bailout sends the a wrong message about personal responsibility.
A bailout tells responsible Americans that they are suckers.
A bailout allows banks, mortgage brokers, speculators, and refinancers to benefit from their abuse of the system.
A bailout will force Americans who acted responsibly to pay for those who did not.
A bailout is also fiscally irresponsible:
A bailout props up over-inflated housing prices.
A bailout creates perverse incentives.
A bailout shifts the risks of falling market prices from financially secure banks to the American taxpayer.
A bailout is contrary to the free market principles upon which our economy is based.
The primary purpose of the site appears to simply be to raise awareness, but they also strongly encourage readers to take action by contacting your Representatives and Senators. I’ve made it clear before how I feel about government bailouts, so I definitely support what they’re trying to do here.
Go check it out, and encourage those you know to read it and realize just how irresponsible a bailout would be.
[Update:] How timely. Here are a couple bailout stories from the Associated Press that popped up just today in my inbox:
A measure billed as boosting the slumping housing market showers money-losing businesses with $25 billion in tax relief in the next few years but offers just $3 billion to homeowners.
The estimates released Thursday by the Joint Tax Committee, which explores for lawmakers the effects on the Treasury of tax legislation, lend credence to accusations that the measure helps businesses like home builders while doing little to help millions of families threatened with foreclosure.
Again, for the record, I’m equally opposed to bailing out businesses or individual borrowers. Neither one is acceptable.
A bill in the U.S. Senate could send $122 million to Oregon and $210 to Washington state to boost demand for housing and help homeowners avoid foreclosure.
The money is part of a $10 billion mortgage revenue bond program for state and local housing agencies.
Yes that’s just what we need to do, artificially boost demand. Yikes. Give me a break. It’s not immediately clear to me whether these two stories are referring to the same or different bills.
You can listen to the full segment at the link above. Here’s a short excerpt from the beginning:
It seems that most of the people that called in were against a government bailout, despite the fact that both Hilary Clinton and Barack Obama would like to spend billions to do just that. I don’t like to get too much into politics on here, but I have to wonder if the democratic candidates really have their finger on the pulse of their base when so many people from a town like Seattle call in to say that they disagree with both of them.
Anyway, the program is an interesting listen. I wish I would have known about it while it was airing and could have called in.
Here’s a follow-up to yesterday’s condo re-version story. Just in time for the condo conversion mania to switch directions, while supply and demand do that thing they do so well, here comes the State Legislature to “fix the problem.”
Renters forced from their apartments to make way for condominiums would get more time to find a new home and extra money to pay for it under a new law expected to pass the Legislature.
House and Senate bills being considered could require developers to pay many tenants up to three months rent in relocation assistance, provide at least 120 days’ notice for a condo conversion, and ban construction work during the notice period.
Presently, renters get 90 days’ notice and, in some cases, $500 in relocation assistance from developers.
…
The House already has passed a measure, House Bill 2014. The Senate is considering a more expansive version, Senate Bill 6411, that would give renters 180 days’ notice and also give local governments the ability to cap the number of apartments being converted to condominiums.
Way to go guys. Maybe next you can “do something” about dot-coms with no cash flow that pay their employees in stock options. I hear that’s a big problem.
