Wednesday, February 18, 2009

Obama's housing plan

Literally the day after signing a $787 billion stimulus bill President Obama is now calling for a $75 billion bailout for homeowners. I don't know how much longer we can afford this guy:
President Obama pledged on Wednesday to help as many as 9 million American homeowners refinance their mortgages or avert foreclosure, an initiative he said would shore up distressed housing prices, stabilize neighborhoods and slow a downward spiral that he said was “unraveling homeownership, the middle class, and the American Dream itself.”

The plan, more ambitious than many housing analysts had expected, was unveiled by Mr. Obama in a high school gymnasium here, in a community that is among the nation’s hardest hit by the foreclosure crisis.
The article makes a lot more sense if you take out "help" and substitute "take money from taxpayers and redistribute to" and replace "ambitious" with "expensive". So essentially people that bought homes they couldn't afford are now going to have their mortgages paid for by the rest of us who acted prudently. Outstanding.

Who cares if you can afford it?

Further, I have no idea why shoring up housing prices should be a public policy goal. After all, if the price of houses declines it means that millions of more people can afford them. Indeed, with the recent declines in housing prices there have been increasing signs of first time home buyers jumping into the market. Similarly, builders are reducing output which means less supply, which combined with new demand from the cheaper prices will help stabilize the housing sector. Hey, markets work!

The declining housing market isn't unraveling the middle class. In fact, it's actually enabling more people to buy homes and move into the middle class. It's simply punishing those people who got greedy and thought that they could make a bundle by buying real estate. I can't fault them too much though given that the government was busy encouraging people to buy via Freddie and Fannie and measures such as the mortgage interest deduction (even though there is a good case that if anything we may want to promote renting).

And the American Dream unraveling? From what I can tell the American Dream these days is getting a bailout from the government.

Update: Barry Ritholz has some charts suggesting that this is a poor time to push for stabilization with the housing market likely still having a ways to go yet in its decline.

Update: Oh dear, it's even worse than I thought:
The three key elements of the proposal include a program to refinance 4 million to 5 million homeowners with little equity in their homes into cheaper mortgages; a $75 billion program to keep 3 million to 4 million homeowners out of foreclosure; and a doubling of the government's commitment to Fannie Mae and Freddie Mac to $400 billion.
So it's not $75 billion, it's $275 billion. Oh, and you'll recall that Fannie and Freddie actually helped make the housing crisis worse, so of course they are being given more money.

It's hard to believe some of the stuff you read these days.

Update: In the interest of being fair and balanced I should point out the following from Harvard econ professor -- and I believe free-market guy -- Ed Glaeser:
To give Fannie and Freddie more resources, the government is infusing them with $200 billion. This may seem like throwing good money after bad, but few economists, even ardent libertarians, are willing to let them go belly-up. The cash infusion was necessary.