My fellow columnist, Clifford Rossi, recently made suggestions about how to "reinvigorate the housing market." He advocates convening commissions and designing complicated government interventions.
Don't do anything like that prior to determining what results we want from the housing market—before reinvigorating it to run rampant again in the same, or another, wrong direction. Then identify the path to these objectives that minimizes cost and risk.
Much as we may have benefited from overpaying the finest fruit of our elite business schools to sell mislabeled mortgage securities into Norwegian towns and Dusseldorf banks, that particular free lunch is no longer on offer. Now we'll owe the money to, or steal it from, ourselves. So, what's the goal?
Do we want more new money spent on housing, and a higher percentage of consumers owning homes? Why should the government be promoting this? Our rate of homeownership, at 65.5%, is only about four percentage points below its all-time high, much higher than in other prosperous countries— more than twice as high as in Switzerland.
Having more of national income spent on education, research or energy independence might do more good for more people than increasing investment in housing. Additionally, if more of us rented we'd have a more mobile and hence more productive labor force, and household wealth and disposable income would be much better shielded from cyclical shocks such as interest rate increases. Rents are far less volatile.
So, let's not again inflate homeownership.
People with lower income and worse credit can own more of a fixed total number of homes only by displacing those with more income or better credit—just as allocating more of a fixed number of college places to less qualified students denies these places to better-qualified students.
Do we want higher home prices, as Rossi implies? That isn't compatible with anyone's conception of "affordable housing." It enriches home builders and real estate agents while making housing more difficult, risky and expensive to finance. With 20% of homes underwater, added home value from juicing prices would go 80% to awarding unmerited phantom gains to those homeowners who are already coming out ahead. A very inefficient subsidy to the underwater owners.
And should we subsidize any consumer's housing costs—as opposed, for instance, to medical and education costs? Why would we want to shift more family spending toward housing? The earned income tax credit is an example of successful income supplementation that leaves spending choices to the households.
I believe our long-term goals should include avoiding subsidies favoring owning vs. renting, or housing vs. other family expenses. Maintain economical and stable home prices—avoiding bubbles, steep inflation and Spanish-style mirage wealth.
Do today what will serve these long-term goals.
The largest cost of homeownership is interest. This is now setting record lows, even after a hefty increase in the cut taken by the mortgage production oligopoly that, like the other financial services oligopolies, has increased its market share to the detriment of community banks and consumers because of the crisis and the government's confused and misguided reaction to it.
So, with home prices rising rapidly and homeownership still high, what's the "reinvigoration" agenda?
Bernanke fears it's too difficult for creditworthy borrowers to obtain a mortgage. But everything has its price, including risk. If banks now overestimate risk, they will price some creditworthy mortgages higher, rather than reject applications altogether. Even at 200 basis points (more than 50%) above current rates, mortgages would still be reasonably inexpensive by historical standards.
Who's mispricing mortgage risk?
The FHA guarantees mortgages up to $729,000 with credit scores as low as 580. Down payment of only 3.5% (10% for 500-579 scores)—although collateral value is susceptible to declines of 30% or more. Sub-subprime. What rational lender could expect to earn a fair return this way?
The recent audit report shows, unsurprisingly, that the FHA is indeed losing money, headed toward its first taxpayer bailout in 78 years of existence. The resulting taxpayer subsidies serve no justifiable purpose.
There are glimmers of hope. Federal Housing Finance Agency Acting Director Ed DeMarco, the caretaker of Fannie Mae and Freddie Mac, is phasing them out. The FHA is raising its guarantee fees again. Both are finally pushing for restitution from lenders that cheated them in the past.
Given these halting steps in the right direction, it's not surprising to see the housing lobby pushing back.
The path toward sound private financing of mortgages is clear and straight. Just cut out the subsidies and the uncertainties generated by complex interventions.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.