Tuesday, November 03, 2009
No Money Down Mortgages Continue
It seems many people are taking advantage of two major programs at the low end of the housing bubble: the FHA is aggressively promoting lending with only 3.5% down, and the $8k tax credit for buying a house less than $200k. A good realtor can apply the tax credit to last years taxes, making sure that the buyer actually gets the money right away, and the HUD is actually OK with using the $8k to cover the down payment. Remember horror stories of sellers who would pay the slim down payment or closing costs, and leave the stupid investors with losses? Well, today that game is over, except for the government, which proves that stupidity in the private sector actually loses people money, causing them to change their ways. For the government, it's just more incentive to double down.
A person who can't afford a down payment should not be in a home. One needs capital to pay for routine maintenance, and most importantly, if something major happens, like if a heater breaks. A renter is someone who does not have the wherewithall to handle these large, unanticipated expenses. It is better for everyone if these people are renters, because otherwise a bad break leaves the property in poor shape, leading to a 'broken windows' problem.
No private bank would lend in such a manner, but FHA wants to take the risk, because unlike the greedy bank, it sees the 'bigger picture', presumably.
The government's program reminds me of the technique children independently discover to make it look like they've eaten up hated peas or carrots: spread them around the plate. Thus, the recent economic debacle is primarily centered on housing, especially lower-end housing financed by overeager lenders. The unavoidable endgame to this problem is fewer houses, and lower prices for those houses; demand was artificially high. But, we wouldn't want people to adjust, because every good Keynesian knows that all misallocations of resources in a complex economy can be solved via top down injections o fiat money, or "G"--they have the multipliers to prove it!
To the government every hangover needs a little more hair of the dog. A friend of mine says his rental real estate business is slow at the top end, because those renters are attracted to the FHA loan/$8k tax credit. Those kind of effects are basically unmeasurable, and what can't be measured is not counted. What about the complex dynamics implicated by the finite nature of the $8k tax credit? Preventing the pain with a temporary subsidy merely prolongs the amount of time spent in the doldrums (eg, 1933-39 was a period of very high unemployment).
Bad governments prioritize the seen over the unseen, the direct over the indirect. The sad fact is popular policies usually have highly concentrated benefits and highly distributed costs, and the politicians act like little children, hoping those watching do not notice stuff that's spread around.