Government and the Housing Market in 2010
By most measures, the national housing market appears to have stabilized. If not for government intervention, however, it’s unlikely that this would be the case. Summarized Yale economist and housing market guru Robert Shiller: “ ’The rebound in the housing market since April seems to be related to these efforts’ ” that include a homebuyer tax credit and Federal Reserve purchases of mortgage-backed securities designed to hold down borrowing costs.” This begs the question: when government support dries up, what will happen to housing prices?
Government intervention programs in the housing market are numerous. Mr. Shiller mentioned the first time homebuyer tax credit and the $1.25 Billion in Fed MBS purchases. Acronyms abound, with the HAMP modification program and the HREF refinancing program. There was TARP, which directed cash to struggling banks so that they might step up mortgage lending. There is an ongoing initiative aimed at encouraging principal reductions and deeds-in-lieu of foreclosure, where appropriate. There is the government conservatorship that still encases Fannie and Freddie. There is the FHA, which now now insures more than 1/3 of new mortgages. There are the discretionary funds awarded to states to fund experimental relief efforts. And of course there is the mortgage interest tax deduction, which was in place well before the housing crisis, but is worth pointing out nonetheless.
There are a few key threats to all of these programs. The first is one of financing: they are expensive to operate, and it’s unlikely that they will pay for themselves, despite the government’s insistence. The second issue is efficacy. The modification program, for example, has helped only a handful of eligible borrowers, and hurt many more by simply delaying foreclosure. Meanwhile, new evidence suggests that the interest tax deduction does nothing to spur home ownership. Finally, there is the issue of whether these programs are even producing outcomes which are desirable. “I don’t see anything being gained by holding housing prices higher than the market rate. It is difficult to see why the government would want to pursue policies that would encourage people to pay too much for homes,” Dean Baker recently told reporters. In short, it looks like time is running out.
The Fed has essentially stopped purchasing MBS, although it is currently debating whether to resume doing so. The homebuyers tax credit was renewed once, but is unlikely to be renewed again when it expires in May. The modification program is still alive, though generally acknowledged as a failure, and it could be completely closed soon. High default rates already threaten the solvency of the FHA, and despite premium increases, it may have no choice but to cut back on lending. Fannie and Freddie are safe until 2011 (according to Treasury Secretary Tim Geithner) although Congress has already indicated that they will be abolished. As for the mortgage interest tax deduction, the housing crisis revealed how counter-productive it was, and it could be one of the first things to go when the federal government gets serious about fiscal responsibility
So there you have it. The government clearly wants you to buy a house now! It will subsidize the purchase, facilitate the financing process, keep borrowing costs reasonable, and help you make payments if you get into trouble. Why wait, right? On the other hand, when the government pulls the plug, the bottom could fall out of the housing market. In which case, that FHA loan and $8.000 tax credit might start to look like a booby prize.





