Washington is making the housing crisis even worse
Bad policy and a bad economy make it a terrible time to buy. Instead of pushing cheap credit, Uncle Sam must let the market lower prices.
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Banks blew all their depositors’ money on bad mortgage lending, amounts way out of line with salaries. This was fine for them as long as they could get mortgage-backed bond buyers to take the risk off their hands, but the bond buyers got wise, and they don’t want any more of that bad debt. In fact, they want to make the banks buy it back.Skip to next paragraph
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The Federal Reserve exists to protect the banks from responsibility for their own bad decisions, at the expense of everyone else, in the name of “financial stability.” So we have the Fed printing cash to buy up those bad mortgage bonds – which weakens everyone’s wealth by inflating the currency – to get the banks off the hook.
Ways to make it better
What should we do?
First, the press should stop characterizing higher house prices as better. Higher house prices are not an "improvement" and lower prices are not a "worsening" of the housing market. Higher house prices are simply inflation, and inflation is bad for buyers.
The president should say that lower housing prices are a wonderful thing for buyers, especially young families. He should point out that lower housing prices are true affordability. Increased mortgage debt is not affordability, just a trap for the unwary.
Lending regulations should eliminate comps as meaningless. All lending should be based by law on what it would cost to rent the equivalent house. Fannie, Freddie, and FHA lending programs should be stopped immediately, not gradually. It is the hope of lower prices that causes people to delay purchasing. We want to get prices back down below the cost of renting as quickly as possible for the maximum buyer benefit.
People in the Midwest and South should not be forced via their tax dollars to guarantee $729,750 jumbo Fannie and Freddie mortgages for Californians when they cannot get such a guarantee for themselves. The injustice is galling.
Banks should be heavily fined for leaving foreclosed property empty and deteriorating. Foreclosures don't ruin neighborhoods – empty houses do. If the banks won't take care of their houses quickly, the title should be auctioned off to people who will occupy and take care of them. Yes, even if the auction lowers comps or forces the bank to take a loss.
No mortgage interest deduction
There should be no mortgage interest deduction. Encouraging debt has resulted in disaster. Instead, we should promote savings, and outright ownership without any debt at all, in every generation.
Current owners usually misunderstand their own interests. If they ever want to upgrade, they will benefit more from the falling price on a bigger place than they lose from the falling price on their current place. Owners who want to upgrade should be firmly on the side of lower prices.
There is a feeling of terror that if house prices were allowed to be set by the unmanipulated free market, all consumer spending would stop and a permanent deflation would take hold. That just wouldn't happen. Consumers will always spend on things they need, and deflation will naturally stop at the point where a house is once again cheaper to own than to rent.
Patrick Killelea is a computer programmer and founder of the housing website, http://patrick.net.