The Housing Price Subsidy

To illustrate what Bill Gross was talking about yesterday, Goldman recently released a report discussing the impact of Government intervention on the price of houses. The conclusion – it increases housing prices by 5%.

“Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.”

http://blogs.wsj.com/developments/2009/10/24/uncle-sam-adds-5-to-prices-of-homes-goldman-says/

That 5% goes directly to increasing the Equity of homeowners. I think it keeps a lot of people from going into “negative equity” – and that is the goal of the government.

“Strategic Default”
Walking away from Mortgages you can afford to pay but choose to not pay, because you owe more than the property is worth.

http://www.miamiherald.com/251/story/1298873.html

Those underwater tend to walk away. It is a nationwide phenomenon.

I think the solution is to allow (or force) banks to lower the value of mortgages to levels more in line with the real value of the underlying property – “cram downs”. Washington/Wall Street seem to disagree with me…

The government is going to extend the tax credit for home purchases. This effectively decreases the after-tax cost of a home, while maintaining the selling price of the home. Think of it as a government subsidy – because it is one. It is designed to artificially prop up the selling price of the house, while giving the buyer the ability to buy the house at a lower price.

This allows your neighbor to get his house appraised at the sell price and not the buy price. This makes him appear to have more “Equity” in his house, because he is basing his appraisal value on comparable sell prices and makes him less apt to walk away from his not-quite-so-underwater house.

In the mean time, as taxpayers, you and I will be writing another huge check for this subsidy.