Homes are undervalued by $6,000?

Rather than try an idea that might work and has the added benefit of extending liberty, President Obama unveiled his $75,000,000,000 plan to rescue us from the foreclosure crisis. Presumably Obama’s plan is precise and complicated, but Doug Mataconis has a succinct explanation at The Liberty Papers for why this plan will fail. His entire post is worth reviewing because he gives a concise summary of the various incentive problems involved, but his basic, widely-applicable conclusion is this:

Most of all, this part of the plan seems to be aimed at the idea that the government must reinflate the housing bubble so that housing prices return to the “correct” level.

Here’s a clue, though. The only “correct” price for your house is the price that someone is willing to pay for it. Today.

Exactly. As much as I’d love to be able to sell my house for what I paid for it in 2005, that’s not where the market is at in 2009. That is unfortunate, but the only way the government can help me is to get out of the way and allow the market to stabilize itself. They’re self-correcting that way. It’s a little lot painful, yes, and, although I bought what I could afford rather than what the bank was willing to lend me, I still made my choice despite the warnings. Lesson learned. And I wish it wasn’t so, but pain is how most people will have to learn. Buffeting them from that only prolongs the faulty thinking.

Unfortunately, even in the misguided belief that propping up the market is an effective method for stabilizing it, President Obama’s plan ignores the reality of the market. It appears to be nothing more than Do Something at its worst.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it,” Obama said at a speech in Mesa, Ariz. The White House released an early transcript.

Those of us who played by the rules are those of us who bought what we could afford and continue to pay for what is not worth what we owe. We don’t need or want to be “rescued”. Giving me money that you will extract from me later through taxes is hardly a bargain worth applauding.

If the plan rescues people like me:

Finance companies cannot currently refinance a loan if the homeowner owes more than 80 percent of the home’s value. But under the plan, Fannie and Freddie — which were taken over by the government last year — would be able to refinance a mortgage if it does not exceed 105 percent of the current value of the property. For example, if the value of the borrower’s property is $200,000, but the homeowner owes $210,000, he or she could still qualify for the program. The program will not launch until March 4.

The housing market in America is far worse than a 1.05 loan-to-current-value ratio. I’d flip cartwheels up-and-down my street if I had a 1.05 ratio. I think most people with negative equity are in the same situation. (If the administration knows something to the contrary, now might be a good time to provide that information.) This plan hardly seems a response to that, under the not-conceded belief that the government should get further involved. President Obama wants to add further government involvement and debt to rescue people who would lose no more than 5% if they sell today? A homeowner who can’t cover a 5% loss shouldn’t own a home. A homeowner with a ratio larger than 1.05 will apparently see no benefit.

Maybe the theory is that propping up home values by the claimed $6,000 will grease the market into action. That’s unlikely, at best, but it’s not the claim the administration is making. This plan gets us nowhere other than $75 billion further in debt, with a more-entrenched, market-distorting incentive system.

Housing cents in Congress is not housing sense.

Any punditry on government tinkering on the path to a mortgagee bailout that includes this sentence in the opening paragraph probably shouldn’t be taken seriously:

First Congress produced a timely and well-crafted stimulus.

Sebastian Mallaby wrote that in today’s Washington Post. It’s wrong, even if it miraculously results in actual spending on the part of recipients who understand that it’s a loan against future tax increases. Welfare is hardly a stimulus. However, that’s not the most egregious statement. Instead, this:

Of course, some fall in house prices is necessary. But absent federal action, market failure will cause real estate to fall further than the basics of supply and demand would justify. …

Naturally the market failed, because if supply and demand don’t match, the market clearly failed. Buyers aren’t able to prefer a lower price than sellers will accept. Sellers aren’t able to prefer a higher price than buyers will pay. The value each places on her preferred price can’t possibly rule out a short-term willingness to agree. Can’t we all just get along?

It doesn’t get better.

… In a healthy market, foreclosure would be rare, because it pays for a lender to forgive, say, 20 percent of a loan rather than booting the homeowner out and seeing 30 percent of the property value evaporate in the process of eviction. But because mortgages have been sliced up and distributed among far-flung investors, it’s difficult to get their consent for partial forgiveness. Homeowners get dumped on the street, and more value than necessary is destroyed.

Perhaps this is true. I’d like to read a source for this. But how does Mallaby know what specific resolution would be appropriate? Is a 20 percent forgiveness wise for the lender? Do they get the chance to work out these details with the borrower? Would the borrower be able to pay the remaining 80% of the loan? And how much financial gain resulted from the slicing and distribution of mortgages? Does that gain offset the value destroyed by the current crisis? These questions matter. We should have answers before we jump to a federal bailout of anyone.

So, although Congress would be wrong to launch a broad attempt to prop up home prices, it would be right to address the market failure that produces excessive foreclosures. The Senate is working on a smart reform that would begin to do this: It would give service companies that collect mortgage payments on behalf of creditors a legal safe harbor, allowing them to forgive part of a loan without having to fear that a few opportunistic creditors will sue them for being soft. Lenders as a whole would benefit, because the measure would reduce wasteful foreclosures. The flow of capital to future home buyers would not be compromised.

Again with the “market failure”, but more useful is Mallaby’s endorsement of Congress rewriting contracts it no longer deems acceptable under its subjective, uninformed economic analysis. How might that affect the loan market – housing and beyond – in the future if borrowers and lenders know that the key to limiting their own risk is to fail big? The last sentence demands proof more compelling than Mallaby’s wishful thinking.

Failure is not a sin to be prevented at everyone’s expense.

I’m slowly beginning to figure out that politics is a test of wills. Whoever has the most endurance will win. My resolve is based on strength of ideas. Unfortunately, politicians are supported by power to be used as freely and stupidly as possible. Eventually, they’ll win because everyone with sense will go insane.

I’m not quite at insane, so today, this:

The Senate on Thursday passed a bipartisan package of tax breaks and other steps designed to help businesses and homeowners weather the housing crisis.

The measure passed by an impressive 84-12 vote, but even supporters of it acknowledge it’s tilted too much in favor of businesses like home builders and does little to help borrowers at risk of losing their homes.

The plan combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes.

And what about those of us who, while stupid enough to buy in the bubble, were smart enough to finance at a fixed-rate on a loan properly proportioned to our income? We get nothing? Mind you, I don’t want anything because I’m not interested in sending money to the Treasury so that it can then be returned to me masked as a constituent service. I’m already paying indirectly for the mistakes of others, as everyone is and must in a free market. I’m content with that because I know it works. This is just part of the process. But why should I also pay directly for the mistakes of others?

Specifically, the last thing homebuilders need right now are tax breaks that will inevitably encourage more speculation. There is an existing inventory of homes that may be purchased. Perhaps those aren’t the homes people want. I don’t claim to know, nor do I need to know. But expecting willing buyers to find a willing builder to produce the correct new home in the correct location without incentive from the government is the only reasonable position. A tax break just covers up the risk of speculation and the reality of failure. Dumb.

That’s not to say the proposed $7,000 tax break for buying a foreclosed home is any better. That incentivizes buyers into a foreclosed home over a non-foreclosed home. If they prefer the foreclosed home over a non-foreclosed home, they’ll be willing to negotiate a price without the incentive. If they prefer the non-foreclosed home over a foreclosed home, the incentive may skew their decision away. Sure, the owner(s) of the non-foreclosed home could lower their price by $7,000, but that just demonstrates the perversion Congress is imposing on them to benefit another party. It’s the same game of picking winners and losers outside of the marketplace.

Remember, though, that the actual marketplace is not a zero-sum game. Both parties gain from their transaction, or they wouldn’t enter into it. If they would agree without an external incentive, the incentive is unnecessary. If they would not agree without an incentive, the incentive skews the market away from its optimal point. Buyers have a required range of acceptable terms and sellers have a required range of acceptable terms. If the two do not overlap, that is not a failure of the market. The market is working as expected.

The housing market needs to stabilize. Unfortunately for me it will stabilize below what I owe. However, I want that to happen sooner rather than later because that is better for me, as it would be for any homeowner, whatever their equity status. More information is better than less information. But the market will not stabilize correctly, or as quickly, as long as Congress forgets that its job description does not include “Do something”.

Consumers make different, rational choices

Thanks for studying the obvious:

One of the lures of the outer suburbs is more house — maybe even one with a big yard — for less money. But a new study shows that the savings are illusory: The costs of longer commutes are so high that they can outweigh the cheaper mortgage payments.

When Danielle and I bought our house last summer, we specifically considered the impact of living in an outer suburb because we’re intelligent. First, the difference in price was significantly more than the $40,000 to $50,000 listed in the article. Second, the economic impact does not have to include getting in my automobile. Public transportation is still an option for me, and I considered in our decision. Of course, I could also change jobs to live closer to home if they commute becomes burdensome. That’s three factors. How many more could I name if I tried?

The Washington Post story includes this:

Moving closer to their jobs is out, Hannah said, because “there is no way we could move into an equivalent three-bedroom house for the same amount,” she said. “We don’t want to downsize and give up a yard, for instance.”

That suggests a willingness to pay the associated cost of having a large house and yard on a specific budget, namely, higher commuting costs (economic and lifestyle). Bottom line: Buyers aren’t stupid. Don’t bombard us with studies implying that we might be.

Home ownership is the sucks

A month after I turned 18, I ventured off to college. That time was my first experience living somewhere in which I paid the rent. Yes, it was a college dorm, but I still had to pay for it. I didn’t love the combination of a concrete overhang, a wooden loft, and midnight fire alarms. The freedom, though was outstanding. For fourteen years I never moved beyond paying rent to a landlord. I rationalized having a landlord as a fact of stress-free life. Sure, the landlord could raise the rent at the end of every lease, but I never experienced any huge increases. And when something went wrong? One phone call usually kicked the machine into action and the problem went away. And it never cost anything. Ahhh, utopia.

Twelve days ago Danielle and I moved into our new house. And when I say new, I mean new, not just “new to us”. The builder finished in February, and until we moved in, no one had lived in that house. We didn’t pick the specific options because we bought it from an investor/seller (which, aside from the obvious aspect that I’m involved, is another sign that the market must be a bubble), so the house is basic in most ways. The seller puts some effort into the kitchen, which is nice, but most other features are four walls and a ceiling. I’m happy with that because I don’t want any sort of molding. It’s simple, with plenty of room for personalization. Which leads me to Sunday and yesterday and today.

Aside from a necessary custom installation of two new cable outlets, because the investor/seller didn’t deem an outlet in the living room a necessary investment expense, the house is as structurally intact as it was twelve days ago. And then I washed paint from my feet after Danielle and I completed work on our office. (More on the office later…) I joined Danielle, my brother, and my sister-in-law in the dining room before we heading out on trip 4,203 to Home Depot since we bought the house. The moment is blurry in my mind now, but my brother said something to the effect of “That’s probably not a good thing.” He spoke of this:

What the hell? Fourteen years of renting and the worst that ever happened was a clogged sink. Barely into Day 11 of home ownership and there is water coming through the ceiling? The pall of Bitter Time&#153 descended. This. Was. Not. Happening. I imagined flailing from invested to destitute within mere hours thanks to re-plumbing the house and fixing drywall. And I imagined sleeping in the dining room when the bed inevitably fell from the third floor. I immediately began referring to Danielle as Shelley and myself as Tom.

Yesterday, the builder sent someone to investigate. He wasn’t a plumber, but he worked to determine the problem. This is how he had to investigate:

I really had wanted a skylight in the house, but twenty feet higher, in the ceiling of the master bedroom. The skylight in the dining room? Not really a good feature for resale, I suspect. Fortunately, our roof didn’t cave in and all of this is still covered under the one year warranty, but still. Eleven days? Remind me again why owning is better than the renting? I guess the best investment portfolio, given today’s real estate market, should include Home Depot and Lowe’s.

And maybe Benjamin Moore, who seems to be getting richer one quart (and two gallons) at a time, but that’s a whole other entry.