by Deb Cupples | An editorial in yesterday's Wall Street Journal states, in part:
"Recent news articles suggest that the Treasury Department is considering a plan to offer a 4.5% mortgage for home buyers for a period of time. Let's hope it does. It would help arrest the decline in house prices that is at the base of the ongoing financial crisis and recession.
"Raising the demand for housing makes sense now. While fundamental factors clearly played a role in driving down house prices that were at excessive levels two years ago, we have argued in a paper (to be published in the Berkeley Electronic Journal of Economic Analysis and Policy) that in most markets house values are today lower than what is consistent with the average level of affordability in the past 20 years.
Since the writer sees "little risk that increasing demand for housing will touch off another housing bubble," I suppose we should rest easy.
But I can't, because it doesn't seem that simple to me.
The only thing stopping most people from paying for housing at inflated prices is that they cannot afford monthly payments on mortgages for higher-priced housing.
Lowering the mortgage interest rate to 4.5% would enable people to pay more for a given house. I'm no expert, admittedly, but isn't that what started the housing bubble that's still deflating today?
Just for kicks, I went to an online mortgage calculator and plugged in some numbers.
- $200,000 30 years 7% : monthly payment = $1632
- $200,000 30 years 4.5%: monthly payment = $1305
That's a $300+ difference in the monthly payments, and it could make all the difference as to whether someone could afford a house priced at $200,000.
If the Treasury Department starts offering 4.5% mortgages, people may start considering buying a house, but would they get the house at today's somewhat lower price?
I doubt it, because sellers and builders have obvious and natural incentives to sell houses at higher prices. So do real estate agents -- both sellers' and buyers' agents -- because their commission is usually based on a house's selling price.
It seems highly likely that if a bunch of people get 4.5% mortgages, the first thing to happen would be that housing prices would start inflating again.
If rising prices seems like a foreseeable trend (i.e., if Treasury plans to give out 4.5% mortgages for a good chunk of time), then speculators and flippers would likely start buying again -- which would further drive up demand and housing prices.
Isn't all that what started our post-9/11 housing bubble in the first place?
The WSJ's editorial writer seems to think that stopping the decline of housing prices would be a good thing.
I wonder why. Average Americans' income has stayed pretty flat for a long time (while the price of goods and services has gone up). Unless people's income starts increasing significantly, how could higher housing prices be sustainable in the long run?
And are incomes (I mean non-CEOs' incomes) likely to start increasing? Given the current economy and unemployment situation, that doesn't seem likely.
It seems logical that if we don't allow the housing bubble to fully deflate -- if the federal government intervenes to increase demand and re-inflate housing prices -- then we'll likely find ourselves staring down another housing bubble in the not-too-distant future.
And remember, only about 11.7 million American households now hold mortgages worth more than their post-bubble houses. That's a lot of people, and my heart goes out to them (except the flippers who got stuck with houses).
Still, it's only about 10% of American households, which means that 90% of American households are not in that unfortunate position.
It seems that the people who are eager to see housing prices go up again 1) have a vested interest in higher prices, or 2) simply want to prolong an inevitable reckoning.
Again, this is not my area of expertise, so I could be wrong.
Memeorandum has commentary.
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* Caroline Kennedy Entitled to Hillary's Senate Seat?
* Cutting Executive Pay Would Save Jobs
* Lehman Execs Redistributed Shareholder Wealth (to Themselves)
* Execs Took Millions While Driving Companies into Ditch
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Sure the housing BUBBLE was not good in terms of housing affordability, but the truly vile thing about it was Countrywide, subprime, etc, funky doubling mortgage payments and whatnot screwing with the system.
Speculators are pretty burned. Not a lot of people moving on up.
Think they'll try again?
The refi sounds good to me. mmmm
Posted by: John | December 18, 2008 at 02:51 AM
You are right. Housing prices are tied directly to interest rates because buyers only look at the payment they can afford.
I survived the bust in Houston in the 1980's. It's tough for a couple years but things start to get better eventually. It will take a while but the excess housing inventory will get worked off.
Housing needs to return to being based on local wages and affordability instead of financing gimmicks that drive up prices. Buyers need to have equity going in again. We need a return to the good old days in housing.
Posted by: Pug | December 18, 2008 at 09:11 AM
John,
You make some good points. I read some months ago that a Countrywide exec even pressured Fannie Mae's CEO to invest in then-highly-questionable mortgage-backed securities.
I certainly would love to see some clawing back of executive compensation paid out during the bubble.
Posted by: Buck Naked Politics | December 22, 2008 at 09:41 AM
HI Pub,
Thanks! I'm no expert, but it does seem logical (prices, interest rates, and financing gimmicks).
Posted by: Buck Naked Politics | December 22, 2008 at 09:42 AM