December 4, 2008

And here's a free Zippo lighter!

The Treasury Department, you know, the guys with the deep circles under their eyes and recycling bins full of empty Red Bull cans, has come up with yet another plan to save the world by giving away other people's money: subsidizing new mortgages. The idea is that if you buy a house now, the government will chip in so that your 30 year fixed mortgage will only be 4.5%.

See, home prices got too high, causing a worldwide economic crisis, so the obvious solution is to make them high again! It's kind of like if you are a manic-depressive pyromaniac and if during your latest manic phrase you made a bonfire out of all your money just to see the pretty flames burn high into the night. And now you are feeling really depressed, what with being broke and all, so the government is going to give you some more money to set fire to, plus a Zippo lighter, so you can feel happy again for awhile.

Henry George is rolling over in his grave -- investing in land (which is what "housing" is -- you have a very large consumer durable sitting on land), investing in land is not like investing in a manufacturing plant. As the real estate agents have been trying their best to make clear to us forever: land, they ain't making anymore of it. Investing more money in, say, nuclear power gets us more nuclear power. Investing more money in land doesn't get us anymore land.

Still, you can see the Carnaval in Rio logic to this idea. After all, the U.S. government has plenty of money, at least in that Housing Bubble Era definition of "has" -- "can currently borrow lots of money." Everybody in the world is parking their money in U.S. Treasury bills right now because that seems like the safest place at the moment, what with the U.S. having the most ICBMS and carrier groups and what not.

Dr. Housing Bubble, however, asks what happens afterwards?
Well, interest rates eventually will be set by market forces. Mortgage rates are already at historical lows. So let us take a look at a poor sap that buys a home with a 4.5% 30 year fixed rate. In a few years when we have to face the repercussions of the squandering of our entire wealth in pathetic bailouts, rates will undoubtedly be higher since we are going to need to attract more capital to the U.S. since we are flat broke. So in the future, let us say rates go back to 6.5% the price of the home will need to reflect that. We are essentially screwing people once again and kicking the can down the road. This is patently insane. Let us examine a $300,000 home purchase at 4.5% with 20% down.At 4.5%, your monthly payment would only be about $1,220. Not bad!

But what happens when mortgage interest rates go back up to 6.5% and the government stops subsidizing new buyers? Well, then a $1,220 monthly payment for a 30 year fixed mortgage at 6.5% with 20% down only works for a $241,000 house. So, you are now $1,000 from being underwater, minus whatever small amounts of equity you've built up by paying back principle during the first few years on the loan (with a fixed rate loan, you're mostly paying interest at first). If interest rates go to 9% like I paid for awhile in the late 1980s, then you're really underwater, but, on the other hand, you have a really nice interest rate compared to what you could get now. So, you can't afford to sell your house to move to get one of Obama's new jobs building magnetic levitation commuter trolleys powered by the inexhaustible force of self-congratulation or whatever it is Obama's working up down in his basement Inventorium. (He does have a whole sheaf of amazing blueprints, right?)

Anyway, the obvious "solution" to the problems inherent in the plan is to make this incredibly expensive temporary mortgage-subsidization stimulus program permanent. It will be your lifelong right as an American citizen, or even as somebody who recently wandered in through the desert, to buy a house with a 30 year fixed mortgage with a 4.5% interest rate.

Or, maybe, the value of the dollar gets inflated away and you wind up paying off the mortgage early by just dropping a wheelbarrow full of greenbacks off at the bank and then walk a way whistling a happy tune. Who knows? All we can say is that life will likely be full of interest in the years to come.

The alternative is to let the price of houses fall to the point where the market finds uses for the houses. Remember, the Housing Bubble basically happened in four states -- California, Nevada, Arizona, and Florida -- with ridiculous excesses of construction in the far exurbs. And who wants to live in a place that's terribly expensive to air condition in summer and with a 100 mile commute to work?

Nobody, right?

Well, how about people who aren't there in summer and don't need to commute when they are there in the winter because they are retired or semi-retired: snowbirds, Baby Boom snowbirds.

A whole bunch of well-to-do Baby Boomers are starting to slow down at work and think that with the kids out of school and away from the nest, another winter in Chicago doesn't sound so appealing. A winter home in one of the four Sand States where there is so much surplus housing might not be a bad idea. The Phoenix exurbs are a rotten place to live from May to October, but they are pretty nice just when the Chicago suburbs are at their worst.

Of course, their 401ks have taken a beating, so the original plan of retiring at 60 to that new golf development in Hawaii isn't going to happen, but shifting to consulting in Chicago in the warm months and spending the winters in a Sand State exurban nowheresville house sounds appealing enough, if the price falls far enough, such as, say, from $400k to $150k.

But, if the government decides to subsidize another Housing Bubble to try to keep the price of Sand State exurban houses at $300k, the snowbirds won't get into the market.

My published articles are archived at iSteve.com -- Steve Sailer

25 comments:

headache said...

"building magnetic levitation commuter trolleys"

Siemens/ThyssenKrupp developed a working magnetic levitation train about 20 years ago. They built a 10 km test ring for politicians so they can have a day off and show their green creds. Many studies were made: lev. train to connect major German airports, levtrain between Berlin and Hamburg, levtrain to ferry goods over the Alps, levtrain for the soccer World Cup etc. But nothing has been built in Germany so far. Usually the socialists and Greens were protesting, funny enough. Maybe the train was too fast for them. But maybe they were representing the railroad union and they worried the levtrain would destroy their long-range high-speed train business which is their cash cow. The Greens generally oppose all technological developments. They have this retro thing when it comes to tech, but are of course very progressive when it comes to lifestyles.

Only China built a section. Last I heard they are copying the tech. Looks like this is their ploy: Buy some European tech and get the greedy European execs all exited so they will erect a factory in China, then copy the product and kick the Euros out. Later market the same thing at 10% of the European price tag.

Anyway, after about 20 years the Germans have still not got those trolleys. Now I realise all this time we were waiting for the mulatto prince to show us the way.

eh said...

Let's not be so cynical here Steve, OK? Or too analytical, for that matter. We're trying to recover from a crisis, and we need all hands on deck. I for one believe that future generations will be more than happy to hand over a part of their incomes to Chinese and Arab bondholders so that John or Jane Public can be enticed to buy a house today.

Anonymous said...

Best bailout plan evar:

http://www.bloomberg.com/apps/news?pid=20601009&sid=awxh8.ryvSjg&refer=bonds

(The Treasury Dept creates unsecuritized 'treasuries' to finance the various bailouts, the Fed buys them with funny munny)

mnuez said...

Follow the money.

Allowing house prices to drop to the level an honest market would put them at benefits...poor shmucks who are still renting. Artificially raising the "worth" of homes however benefits (at least in the short term)...everybody else, particularly truly wealthy people who have hundreds of millions of dollars "worth" of Real Estate.

The fight was over before it started.*

mnuez


*unless of course The Powers That Be recognize that in the long term this added "worth" is actually worthless because nobody will buy homes at the over-inflated rates when the banks (and eventually the government) aren't willing to finance them any more.

SKT said...

If you don't live your house full time in Arizona, Texas, Florida, etc. it'll be overrun with tarantulas, lizards, etc. when you get there for the winter. No Sir, I'll take the snow shovel over that.

Henry Canaday said...

I think the idea of the "Hubbard Loans" at 4.5% is that they would be recourse loans, that is, if you can't or don't want to pay the mortgage, the government not only takes your house, but comes after you for the rest of the debt with the full strength of the IRS. So anyone who takes one of these loans would have to intend to live in the house for 30 years, or make sure the loan is paid off. They would thus be looking at their income and life plans, and not concerning themselves about whether they were under or above water on the investment value of the housing asset.

I agree the idea would be lousy under normal circumstances for a host of reasons. Propping up above-market prices is almost always bad policy. The proposal would get the government into the direct housing loan business, with all the potential for further mischief there. And how successful is the IRS anyway in collecting back taxes and unpaid student loans?

But apparently some serious people think the banks and the economy are so vulnerable to further falls in housing prices that this kind of extreme scheme is worth considering.

Anonymous said...

Folks, I have a question. How probable is it that the federal government will default on its debt in the next 5 to 10 years? What will be the consequences?

The Wikipedia says that in 2003 16% of federal tax revenue went to interest payments on the debt. Obviously, the Iraq war, the current bailouts and Obama's future social spending would substantially increase that percentage. At some point interest payments have to become unsupportable. The feds can probably borrow more money to pay the interest, but how long is that going to last?

One way to avert default (though not economic disaster) would be to drastically devalue the dollar. If the dollar's value goes down by a factor of 20 within a year, the debt would no longer be a problem. How likely is the government to do this?

If instead of a devaluation it does a traditional default (missing interest payments), what would be the step-by-step real-world consequences?

The debt problem will have to be resolved in some way, and yet I haven't seen much speculation on how exactly that will be done.

headache said...

Those aircraft carriers and ICBM's. Mmm, I was always so impressed with those things but I guess they cost lost of money. Why would the rest of the world finance uncle Sam to have those things pointed at them?

Anonymous said...

This crisis was not unexpected. I remember seeing a guy on TV at the end of 2002 talking about the future Fannie/Freddie/subprime disaster. Lots of people have talked about it since. Given the fact that this crisis, just like the bursting of the tech bubble in 2000, was expected to happen, it is interesting to think about its timing. The real crap hit its proverbial fan in the first week of October 2008. Of all the months and years when the inevitable might have started, it started in the October of an election year. If Obama (or the people behind him) were to choose for themselves when this inevitable crisis should have started, what month and year would they have chosen? Right, October 2008.

Mind you, I'm not picturing Obama as some sort of a mastermind in this. In games of this magnitude he would seem to me like a garden-variety pawn. The powers that be were invested in his success. Perhaps they think that the situation will improve by 2012, making the AA guy a hero. See, they made sure that the visible stock-market-falling, people-getting-laid-off part of the crisis started on Bush's watch. So if things improve a little by 2012, who's going to be the hero? And things don't even have to improve to their pre-crisis levels. The economy wasn't better in 1936 or 1940 than it was in 1928. But it was better than in 1932, and that was what counted for FDR's landslides.

Φ said...

Alternatively, become a slumlord.

Seriously, the guy who holds a 4.5% mortgage can rent out the house when he moves. Because he can deduct all expenses plus depreciation (something that an owner-occupier can't do), he can make the rent very competitive with a mortgage payment at 6.5%. He can then become a renter himself at his new residence in mag-lev-town.

Anyway, that's Φ's plan for riding out the housing bust.

headache said...

Last Anon had the timing thing right. I had the same impression. It was too coincidental. I was reading about this crisis for the last 4 years. And then 3 weeks before “Messiah” becomes prez it hits. Obama was so cool all through the election. Because he knew. This bust is artificial and I suspect the recovery will be quicker and faster than the media are letting on. Then they will begin praising Obama. Obama is going to become just as insufferable as that other media freak show "Mandela".

Anonymous said...

I too am interested in the question Anonymous poses above regarding a US government default. Are there any articles describing how this would play-out?

daveg said...

Belive it or not there are credit defaults for US debt.

See here.

They are relatively new and there is a big question whether the seller of such instruments could ever pay under the conditions where the US government is defaulting, but they exist and are bought and sold regularly.

testing99 said...

Headache -- reality check. Social spending far outstrips military spending, including the Iraq War. Heritage has the ugly details, charts and graphs going back decades, and including the Bush Administration budgets.

Social spending accounts for nearly ALL of the budget, and defense including Iraq costs about only 4% of GDP, at historic Clinton lows. By contrast Reagan spent around 6-7% of GDP.

As for Aircraft carriers and the like, freedom of the seas is provided by the US military. China, which is entirely dependent on exports, relies on the freedom of the seas. Otherwise no one is going to be buying cheap shoes because it will be impossible to ship them. Or anything else.

People laughed at the idea of piracy as a threat, yet Somalia's pirates are launching raids deep into the blue water, more than 200 miles offshore. It's their major industry and Gulf-European shipping including oil tankers are being hijacked (the pirates obviously have people observing shipping through the Gulf region). This makes the Suez canal useless (you must transit off Somalia to get there) and Cape Horn preferred.

China and India have a problem with Indonesian pirates, after pretty much threatening to have their navies take over Indonesian waters the Straights of Malacca have been calmed somewhat but piracy remains a major issue for Singapore, Shanghai, Kuala Lumpur, and other regions in and around SE Asia.

Point being that the US Navy assures the deep waters are relatively safe, and the US defense shield has kept first the USSR and now various Third World bandit-kings away from European, Asian, and ME shipping.

Without a dominant military force, weak and ineffective nations will find themselves choked off by piracy's heavy tax on shipping goods.

This is why the world generally wants a strong US Navy at the least -- because they benefit.

Anonymous said...

The Treasury Department, you know, the guys with the deep circles under their eyes and recycling bins full of empty Red Bull cans, has come up with yet another plan to save the world by giving away other people's money: subsidizing new mortgages.

Treat the symptom, not the disease...who'd a thunk it?

-Patrik

none of the above said...

Since our debt is denominated in dollars, which are defined, ultimately, by the US Treasury Dept., I don't think there's ever a time when we will default. On the other hand, if our creditors come to believe that massive inflation is in the future, they will stop buying those securities unless their expected inflation is priced in. At some point, that could pinch us in serious ways, maybe even push us toward massive inflation. (There's a feedback loop here....)

The scariest thing, to me, is that we're so plainly doing something unsustainable. There's no way we can keep borrowing money to finance current consuption forever. The well has a bottom. When we find it, I don't think we're going to enjoy what comes next.

rob said...

Point being that the US Navy assures the deep waters are relatively safe, and the US defense shield has kept first the USSR and now various Third World bandit-kings away from European, Asian, and ME shipping.

Damn crazy 99, you were soooo close the Muslim speedboat invasion again. But you didn't quite get there. Too bad too. I was hoping you'd go to ground again.

James Raider said...

Steve,

How about something really different or we'll just end up in the same place again just down the road ....

TAKE BACK CONROL OF MONEY

The American economy rests on the back of the American worker and consumer. Taxpayers own the government and currency is only a tool enabling commerce.

Take charge of currency which you Don't Have Now. Get it working for you, not against you.

http://pacificgatepost.blogspot.com/2008/12/revising-government-relationship-to.html

Once this is done, the other problems will resolve naturally, including home owners making their payments on mortgages.

Anonymous said...

Without a dominant military force, weak and ineffective nations will find themselves choked off by piracy's heavy tax on shipping goods.

And so the down side to the US is...?

Yes, it might be in the US interest to solve this problem, and we probably could if there was motivation to do so.

But, why has the call to correct this problem been so tepid?

Well, one the Israel first types don't see it as a high priority. Two, we are already overextended taking on obligations that the Israel first crowd has pushed us into. And three, it would be difficult to take this on without harming innocents, which the PC crowd makes difficult.

So, testing99 you are your ilk are to blame on at least 2 or the 3 reasons we don't do anything.

Now, in another life I might have cared as well, but if the gulf gets overrun by pirates the truth is I could not care less. I like high priced gas as it keeps the prols off the road.

They mid-east locals will solve the problem given enough time.

Anonymous said...

"The debt problem will have to be resolved in some way, and yet I haven't seen much speculation on how exactly that will be done."

It doesn't hurt that the government can refinance its debt right now at 50-year low rates.

- Fred

Born Again Democrat said...

Nice post, Steve. What about the possibility of converting those overbig houses in exurbia into multi-unit apartments, as happened with all the inner city mansions of yesteryear?

tommy shanks said...

>>As the real estate agents have been trying their best to make clear to us forever: land, they ain't making anymore of it.

This is one of those truisms that seems clever, but is actually not true. Sure, the earth's surface isn't getting any larger, but humans are creating more habitable areas.

The California and Arizona desert exurbs wouldn't exist without air-conditioning and cheap auto transportation. In the Middle Ages, the English drained the fens and the French drained swamps to create more arable land.

And in extreme cases, new land has been created -- e.g., the World Trade Center site was built in part on fill dumped in the Hudson River.

non de guerre said...

"I like high priced gas as it keeps the prols off the road."

Who is this anonymous assh*le?

Lucius Vorenus said...

Patrik: Treat the symptom, not the disease...who'd a thunk it?

John Maynard Keynes [or maybe T Alan Goldsborough] called it "pushing on a string".

It took Arthur Laffer & Ronald Reagan to prove that the clever thing to do was to PULL on the string.

It's a shame that Dubya and McAmnesty and the so-called "House Republicans" couldn't have made that argument cogently and persuasively in this most recent campaign [which of course would have probably required that they believed in the argument in the first place - which they didn't].

But as people sense in their musings here about whether the USA might [oh it will, trust me, it will] default on its debt, our  demographic  doom is already sealed.

rast said...

Belive it or not there are credit defaults for US debt. They are relatively new and there is a big question whether the seller of such instruments could ever pay under the conditions where the US government is defaulting, but they exist and are bought and sold regularly.

Well, daveg, if the seller can't pay, the US gov't will just bail him out!