Risking the Country's Credit for Homeowners

Yesterday, I was contacted by UrbanDigs, one of my regular readers, and he asked:

I would like your opinion on an alternative to stimulate housing instead of the government meddling with rates to 4.5% and buying up loans from GSEs.

It's such a bad idea and they are digging this country into a debt ridden hole.

Why not tweak the tax code for investors from a 1031 deferment to a 5 YR qualification primary-residence-like exemption?

GRANT THE PRIMARY TAX CAPITAL GAINS EXEMPTION BENEFIT TO INVESTORS AND CHANGE THE QUALIFICATION TERMS SO THAT THE PROPERTY PURCHASED BY THE INVESTOR MUST BE HELD FOR A MINIMUM PERIOD OF 5 YEARS

Thoughts? As an alternative to help the housing supply problem without the unintended consequences of government meddling, moral hazard, taking on more risky assets, and trying to convince people to buy for the wrong reasons, like 4.5% rates.

Okay, here are my thoughts:

1) Regarding taxation, my view is that all income should be taxed equally and regularly. I’m not generally in favor of deferring or exempting taxes on asset classes of any sort.

2) The Federal Reserve is buying up mortgage assets. Now the Treasury is thinking of subsidizing mortgage rates. Don’t we do enough in the US to overinvest in housing?

Call me a skeptic here. In credit crunches, the value of the collateral is far more important than the rate charged. I care more as a lender about the return of my money, than the return on my money. Lending to entities where the loan-to-value is high is fraught with peril. Losses occur with little regard for the interest rates charged. Life events matter more: death, disaster, disability, divorce, and dismissal from employment. Negative life events cause borrowers to choke on interest payments when refinancing is impossible.

Lowering the mortgage rate to 4.5% will subsidize borrowers who can refinance through conventional mortgages, but will do little good elsewhere. The subsidy will also add to the financing needs of the US Treasury, which is getting stretched.

The efforts of the Fed and Treasury may lower mortgage rates for a time, but as the government borrows more, there will be pressure for rates to rise. For now, it may seemingly work, but it will eventually fail, and the outcome will be worse than if they hadn’t acted.

So I’m not crazy about government action here. Why should we risk the credit of the Republic over homeowners? Let real estate prices find their levels where ordinary people can afford ordinary homes without incurring a boatload of debt.

Comments

[Going Short...:]

I agree, at the height of the bubble, logic told us that first time buyers were basically locked out to the housing market. How long could that last? Real Estate must find its natural levels, which are probably another 35% to 50% on the downside if you look at Schillers graph of real estate prices for the last 120 years or so.

Check out this website, freetradingquiz.com

2008 Dec 04 12:24 PM

[Chris B:]

Agreed. There is no need to prop up real estate prices. Housing already costs too much as a percentage of income, and in some areas high prices have made the American dream (of financial stability, not just homeownership) impossible.

Why didn't we hear calls for the government to buy stock in failed internet companies in 2001 to prop up that market and prevent a recession? Reversion to the fundamentals was/is inevitable in both cases.

2008 Dec 04 12:34 PM

[Jackson Cash:]

Sheesh, I hate to be boring, but I too agree. Let prices fall, and those of us whom have behaved will have a chance at a McMansion that presently only overstretched fiscal deadbeats are living in... makes perfect sense to me.

No bailouts, period -- PERIOD.

2008 Dec 04 01:13 PM

[mallarde:]

Thanks, Chris. Good analogy.

This is even more ridiculous because the Treasury thinks that we need to prop up housing so consumers will continue spending money they should not be spending.

It is almost like a parent saying to an out-of-control teenager: "Go on, keep injecting your drugs. You don't want to stop now because you won't like it."

2008 Dec 04 01:14 PM

[jimmy46:]

"Lowering the mortgage rate to 4.5% will subsidize borrowers"

Rates have been dropping sharply,
I'm looking at a bank that offers a 30 year fixed
@ 4.75% APR 5.1%
0.5% less than a week ago.

2008 Dec 05 01:53 PM