The Mortgage Blow Up BS

This NPR program goes into great detail and clearly explains the problem we are all in today. After listening, I am even more opposed to the bail out. It is worth the time to listen.

NPR

The entire process is disgusting. It is really disturbing how much fraud was part of this blow up. Now they want tax payer money? I am also convinced the government will not make money on this deal. Taxpayers will be stuck with the worst of the worst investments resulting in huge losses.

The irresponsibility that permeated this mess will cost us all dearly. My guess is it will occur again within 10 years. Privatizing profits and socializing losses makes everyone forget the nasty side effects of risk.

Living the High Life, On the Taxpayer.

This story in the NT Times today really makes me mad.  The story is about low-income people moving to the suburbs which is great.  They are able to get away from crime and drugs that are destroying inner city neighborhoods which is very positive.  What angers me is the fact the government is subsidizing this move and giving families large quantities of tax payer dollars to do it.

Ms. Payne, a 42-year-old African-American mother of five, moved to Antioch in 2006. With the local real estate market slowing and a housing voucher covering two-thirds of the rent, she found she could afford a large, new home, with a pool, for $2,200 a month.

Two-thirds of $2200 per month!  That is nearly how much I pay for my mortgage.  A pool?  I do not even have a pool.

To begin with I am against all forms of long-term government assistance.  The only thing this does is create dependency.  What incentive does Ms. Payne have to get off the tax payer payroll?  She has a nice home with a pool in the suburbs (of course I am not sure how she affords to pay for maintenance of the pool or the utilities).

In addition, the government is killing the value of homes in many neighborhoods by creating a large rental market.  Everyone can see the decline in any neighborhood once it turns into rental properties.  People do not have the incentives to take care of the homes, so you naturally see destruction.  Yet the government does not understand why home values are falling in California?  Again, when the government gets involved bad things usually happen.

Oil and Housing

Don Boudreaux made a great point today at the Cafe Hayek blog that I have not thought about. Why is it okay for one type of asset to increase in price and get government scorn and yet another asset declines in price (moderately I would say, 10-15%) and the government does everything it can to get the price to rise? Let's call the first asset apples and the second asset oranges.

Would people say it is fair to have government suppress the price of apples yet welcome the increase in oranges? In fact government is proposing programs that would use money made by apple growers (windfall profits tax) to support the prices that orange growers get for their oranges. That does not seem right does it?

Now replace the above apples with oil and oranges with housing and see if it makes any more sense. It does not. Assets are assets and there are times when it is better to own or produce assets over others. Right now it is better to own oil production than a nice home on the coast. 5 to 10 years ago it was certainly the other way around when crude was around $10 per barrel and homes on the coasts were appreciating 10-20% per year.

Cheap oil is not a right and neither is a guarantee your house will appreciate in value. Both assets' prices are functions of the market and what consumers around the world value. Right now consumers value crude oil more.

Farm and Home

There is nothing better than an article that combines elements of farm policy and the recent housing problems into one argument.

Here are a couple elements of a very insightful column:

In case you hadn't noticed, this last year has been a banner one for farmers, thanks to bountiful harvests and record commodity prices. The average farm household income in 2006 was $77,654, or about 17 percent higher than the average for nonfarm households. And next year, that's expected to rise to $90,000.

But for Max and Chuck, that's no reason to cut back on farm socialism. No siree. Farmers are expected to pull in $13 billion in federal subsidies this year. And there will be plenty more once Congress gets around to passing a new five-year farm bill later this spring.

Contrary to what you might be hearing, the goal here shouldn't be to prevent housing prices from falling. In fact, the aim ought to be to get them to fall as quickly as possible to a level consistent with the incomes of the people who live in them, or could potentially buy them. For it is only at that point that sellers, buyers and lenders will regain the confidence necessary to start selling, buying and lending again.

I agree with Mr. Pearlstein when he says "Hypocicy that's hard to Bear."

A House Lost is a House Gained.

Steven Landsburg has written a fantastic column on the website Slate on the unseen side of the housing bust entitled The Case for Foreclosure.  

The point I like in this piece is that there is a bright side to a foreclosure.  When a home is foreclosed on, the lower resulting price allows a family to now afford a home that probably could not before.  This is particularly evident in the very expensive markets of California and the Northeast US.  We all see the people leaving the home, but rarely do we think about the new family moving in.

The subprime mortgage allowed families that could not attain homes with traditional mortgages (due to the high risk they represented to a lender) to finally achieve their dream of home ownership.  What is/was unfortunate is that many of these families could not afford these complex mortgages once mortgage rates that were adjustable, re-adjusted.  To compound the problem, homes have now fallen in value which has resulted in a negative equity position for many home owners since very little money down was required.  As a result, these people cannot afford to sell their property and pay off their mortgages.  So the logical thing for most of these families is to stop paying the mortgage and move on with their life.

When these families move on, it allows other families to move in.  This is a great prospect for these new families as they finally can realize the American dream.  In some cases, it will allow young people to get established that could not afford housing that has risen some 60% in the last 5 years.  The bright side to falling prices is greater affordability.

Houses that are foreclosed on do not disappear.  The asset does not vaporize into thin air.  It becomes a domicile that is now cheaper and thus becomes more affordable for more hard-working families.  That is a good thing.