This is my column for this week from the Arizona Republic (permanent link).
Obama’s housing rescue plan won’t rescue housing, but it will delay the eventual recovery of the real estate market
President Barrack Obama came to Mesa Wednesday to announce his new housing initiative. The location made for good political theater, given that metropolitan Phoenix is one of the hardest-hit real estate markets.
The president promises millions of refinanced or renegotiated mortgages, at a price tag of $275 billion. The putative beneficiaries are homeowners, who may be able to negotiate their monthly payments down to less than 30% of their monthly incomes. But it is the lenders who will cash in, if the Obama plan works.
How’s that? Obama is hoping to shove a floor under still-declining home prices. Lenders will take a hit on millions of reformulated mortgages, but the hope is that this will save them even more money, in the long run, by stemming the rising tide of foreclosures.
In other words, the Obama plan is a price-support scheme. The market argues right now that homes are overpriced — which in turn suggests that the available supply of homes substantially exceeds existing demand.
That’s important. Prices for premium-quality homes are very low, and interest rates are still hovering at historic lows. Mortgage money is easily available to owner-occupants, and Fannie Mae just loosened its standards for rental-home investors. Even so, the number of homes being offered for sale at current prices still exceeds the number of buyers willing to pay those prices.
In reality, prices need to continue to drop until demand matches or eclipses supply. It wouldn’t hurt to convert some housing to other uses, or simply to tear it down altogether.
But forcing an arbitrary floor under prices is unlikely to have happy consequences. Despite his rhetoric, Obama’s plan can only reward our economy’s wasteful grasshoppers, at the expense of its thrifty ants. A price-support will serve to delay recovery, since it will do nothing to solve the supply and demand problem. And, as the worst of all foreseeable consequences, a price-support plus the $8,000 tax credit from last week’s stimulus bill could fuel new building — adding even more supply to an already over-built real estate market.
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