The Wall Street Journal’s Review and Outlook reports that Congress is quietly moving to increase the FHA’s maximum loan amount to $729,750 from $625,500.
The Federal Reserve has announced it is considering restarting its mortgage bond buying, a strategy of artificially inflating housing prices it first attempted beginning in early 2009.
The White House has announced a new initiative to modify GSE mortgages (with rate and term refinances) for underwater homeowers that would otherwise not be eligible to refinance, and is reportedly again considering the idea that some sort of principal forgiveness for underwater borrowers should be part of the overall program to heal the residential real estate markets.
What does all this say about the general state of domestic politico-economic affairs?
First, that all government programs eventually resolve to benefit the majority.
This is really a timeless principle, not unique to current domestic politico-economic affairs, but is worth noting here. Increasing the FHA’s loan limits means that the actual beneficiaries of the FHA have become the vast middle portion of the population, no matter to whom the program might have first been directed. The FHA was initially designed to fill the gap for the poor and disadvantaged that wished to buy homes, a market that was chronically underserved by the private mortgage markets. It was the original and only subprime mortgage lender for a number of years; when subprime mortgage mania hit private lenders, the FHA almost withered away to nothing, carrying only about 6% of the residential mortgage market just before the bust. Its onerous documentation requirements made it more costly to initiate a mortgage with the FHA than with private lenders, besotted as they were with the idea of turning American slums to gold. Now the FHA is roaring back. Private lenders have all but abandoned the idea of low-down payment loans to inner-city borrowers, yet the FHA still only requires 3.5% of the purchase price for a down payment, and until recently, that could be paid by a sham charitable transaction. In its resurgent form it enjoys a remarkable 24% of the total mortgage origination market, and its borrowers are no longer only the poor and dispossessed of the inner city. They are increasingly middle class folks living in the suburbs that either don’t have a down payment, or have wisely decided that having any skin in the residential real estate game is a fool’s errand. Thus the need for the increased loan limits. The median loan value is far higher now, and so the maximum loan value requires appropriate adjustment. Another government program begun to benefit the poor and dispossessed has devolved to serve the great middle.
Second, the Fed is out of ideas and ammunition (not that it ever really had any of either) so far as housing, etc., is concerned.
That the Fed is considering buying more mortgage bonds, even as residential mortgage rates creep towards zero on a real basis, and even as the housing market could hardly be said to have recovered because of the Fed’s first round of mortgage bond purchases, is a tacit admission that its cupboard of ideas is bare. The Fed knows monetary policy can’t change real outcomes–money never buys anything, only goods and services buy things; money is just a medium through which the exchange is facilitated–but the Fed feels politically driven to appear to be doing something, so it tries the same thing again, hoping no one notices its fecklessness and stupidity.
Housing prices would continue their resumption of steep real declines in the face of massively oversupplied demand if the Fed did nothing, and the Fed is terrified of declining prices in any realm (except perhaps oil and other commodities). The Fed thinks declining prices cause declining demand, but they have causation backwards. Declining prices are caused by declining demand, after which falling prices mute demand as purchases are delayed, especially in markets for quasi-financial products like residential real estate. But at some point, prices and demand bottom out. The Fed is afraid the housing market will behave irrationally longer than the economy can remain solvent, but there is nothing at all irrational about the march downward in prices and demand for housing. If anything, the price and demand reductions are rational adjustments to a market gone previously mad because of the Fed’s tinkerings.
The mortgage bond buying is also a back-door attempt at staving off a second round of financial contretemps. Declining housing prices mean that mortgage values are also declining, no matter how falsely their amounts are tallied on the books of banks that own them. Nothing the Fed does will matter. The demand for houses, no matter how many chopper loads of money are dropped at its feet, is not apt to grow again anytime soon, perhaps ever (i.e., through another presidential cycle), because the housing market still has a huge supply overhang from excess production during the boom years. To actually inflate housing prices–not just slow their decline–would take so much money that there would be a run on the ink and pixel markets necessary for its creation. There is no way out of the housing hole except time and realized losses. Even were the economy to begin robustly growing, housing would remain a drag because it was so irrationally exuberant for so long that the hangover will linger for years to come.
Third, the White House is willing to try anything to look as if it is doing something. It too, however, is tilting at windmills.
When in the course of the last half-century or so has any politician admitted to the impotence of the federal government in the face of forces beyond its control? Exactly. Never. The federal government can no more solve the housing market’s problems as it can be a net creator of jobs. Every penny the federal government uses to solve a problem comes from either a hoped-for stream of future revenues, or from the wealth created by some private party that solved a problem well enough that someone wished to pay them for the trouble.
The housing market boom and then bust is the product of much deeper geopolitical currents than a measly few modified mortgages might be able to change. It reflects the declining capacity for domestic economic growth resulting from a number of factors: stringent and costly environmental regulations relative to competitors in the developing world; unskilled and semi-skilled labor rates and regulations above the level that would make doing such work economically viable in the US; the aging and decline of the majority domestic population, making them simultaneously more costly to care for and less profitable with which to economically engage; the rise of lower cost competitors for product markets in which American producers were once dominant.
The housing market boom arose, at least in part, due to the need for America’s trading partners to find profitable ways to redeploy the surfeit of dollars they received from America’s trade deficits, and the trade deficits arose because goods were cheaper to buy from overseas than they were to make domestically. They were cheaper mainly because, by moving production overseas, capitalists were able to exploit both the workers and the environment again, as they had been able to do in the early days of Western and Japanese capitalism. Domestic production more or less required a full accounting of the costs of production, whereas Chinese, et al, peasants worked for mere dollars a day, and didn’t complain of the sooty air they were expected to breath.
All in all, to refocus on housing is an act of desperation. Housing is a symptom, not a problem. In so far as real problems will go unrecognized and unresolved because of a renewed focus on housing, it is more of a political, rather than economic, strategy.