In other words, up to 1.5 million homes will suddenly become available to new home-buyers at sharply reduced prices. Since when is affordable housing a bad thing?
Of course, there are losers. Among them are irresponsible mortgage lenders who threw money at irresponsible home buyers. Wealthy homeowners not in default will also see their artificially inflated home prices fall to true market levels. (Easy come, easy go.) But the winners will be the responsible lower- and middle-income people who've waited patiently for the free market to provide affordable housing.
Yet just as the ants are about to reap the rewards of their patience and thrift, state governments are stepping in to bail out the grasshoppers—with the ants' tax money—and keep home prices artificially high. Gilbert Le Gras reports for Reuters (March 27, 2007): "A growing number of state housing agencies are developing or considering issuing bonds to assist subprime mortgage holders to refinance their obligations at fixed rates." That is, they will issue taxpayer-subsidized loans to people already proven to be a bad risk. Le Gras cites Ohio, Maryland, Rhode Island, Massachusetts and Virginia as states that already have or are developing mortgage refinancing programs. Colorado, Washington, Wisconsin and California are considering such programs.
The political pressure comes from homeowners at risk of default and from those in no such danger but who would like to keep their home prices artificially high. Helping the first group is welfare for the irresponsible. Helping the second is welfare for the rich, because market interventions to keep home prices high benefit those who "have" houses at the expense of those who "have-not" houses.
Think about it. The free market was all set to make houses more affordable for greater numbers of responsible lower and middle income people. Instead, government will distort the market to keep prices artificially high for the rich and irresponsible.
So if you can't afford a house, don't blame the free market.
Article comments
1 - Doug Hunter
Excellent article and a well laid out argument. The same goes for children, healthcare, and many other areas. Unfortunately the bleeding hearts usually win out and end up rewarding the foolish for their misdeeds and sticking the responsible with the bill.
2 - Dave Nalle
Interesting thoughts, but I think going to a British paper to pick up prices for houses in the US might confuse some people, since they (god knows why) chose to use Detroit of all places as their example. Housing prices in downtown Detroit aren't exactly comparable with the rest of the country. Though I guess the burned out cars and dead bodies on the front lawn might be considered a plus.
Dave
3 - Clavos
Housing prices in downtown Detroit aren't exactly comparable with the rest of the country.
I'll say they're not.
Teardowns in Miami neighborhoods still range from a minimum of $80K in a depressed neighborhood, to $2M in a posh one.
4 - STM
You should think yourselves lucky. Can't you claim the interest repayments on a mortgage as a tax deduction in America even if it's not an investment property? No such luxury here - it's the full whack in an inflated market or nothing.
5 - Clavos
Not only on your residence, Stan, but also on your lake cabin or beach house, if you're lucky enough to have one.
If it contains berths, a toilet, and cooking facilities, also a boat -- boats count as second (or first) homes as above, too.
Until my wife was paralyzed, we lived on ours for years, and rented out the house.
6 - Dave Nalle
Ah, I remember that sweet deduction for my boat...
Hardly offset the ridiculous slip fees and maintenance costs, though.
Dave
7 - STM
Hah, bloody yanks ... that's nothing. I used to be able to claim my surfboards, wetsuits, boardshorts, surf-type clothing, roofracks, surf trips, car (station wagon, for carrying boards) and suntan lotion as a tax deduction.
Beat that one, boys ...
8 - Dr Dreadful
I used to be able to claim my surfboards, wetsuits, boardshorts, surf-type clothing, roofracks, surf trips, car (station wagon, for carrying boards) and suntan lotion as a tax deduction.
Ah, Australia. A country that knows its priorities.
9 - STM
Mate, you can even claim beer as a tax deduction for business purposes if you keep your receipts. Good luck with that one though after 10 schooners.
I'm lucky if I can find $20 for the cabfare (and you can claim that too if you remember to ask the driver for a receipt. I never remembered, as it was hard enough trying to remember my address most of the time).
10 - Louis
very provocative topic. The issue of poverty in a place called America is little understood. So, the rich become richer and the rest of us become poorer. Does globalization have anything to do with this new reality? [Edited]
11 - Dr Dreadful
But you said "used to"... Howard again?
12 - STM
Yes, little Johnny ... the world's only garden-gnome Prime Minister and great friend of the Aussie battler.
13 - Dr Dreadful
934-hour work weeks... no tax writeoffs unless you have "Pty" after your name... if I didn't know any better, I'd say it's almost as if Mr
BothaHoward doesn't want what's best for you. Only what's best for his share portfolio.John Howard. As Australian as Mom's apple pie.
14 - Jordan R
you are inncorrect. Fannie Mae/ Freddie Mac have much stricter guidlines than the subprime market. If a gov't agency bonds these loans you it will not be based on stated income and will be basically a quick-fix for all the 2/28 loans (subprime ARM's set to adjust)which are huge money makers outside of stated income and high LTV loans... which the gov't will NOT take. Hearing this makes me think this will be the BEST mortgage securities to buy since they will be gov't approved and at very high rates of return. The gov't is trying combat a crash in the housing market and contain a ripple effect from sub-prime fallout. It's amazing you can find a conspiracy theory in that.
15 - Baritone
It should be noted that not all people who have or are in danger of losing their homes are irresponsible. Some may not be too smart, but not necessarily irresponsible.
Predatory lenders, usually in the guise of independent mortgage brokers, have lured people into purchase, refinance or home equity mortgages having ultra low interest rates at the onset. But the rates of many of these loans rise quickly, usually much faster than the average borrower's income making it difficult or even impossible for them to make the constantly increasing payments.
Adding to the problem are the loans made at 100% - even up to 125% of market value. With many residential markets stagnating, even regressing in some areas, homes encumbered with such debt are not increasing in value, leaving the borrower's in a deficit situation, even after several years.
It should be noted here that mortgage brokers and loan originators make their money up front. They walk out of the closing with their checks in hand. If the borrower hits the wall a year or two down the road, it is no skin off their teeth.
Should these borrowers have been smarter? Certainly. But unscrupulous lenders know that a large number of people fail to read the fine print, or if they do, haven't the wherewithall to understand the legalese in which loan documents are written. There is also a good deal of bait and switching - that is pitching a loan to borrowers at certain terms, but changing those terms in paper work being signed at closing. This is done by major, national lenders. The only choices are to either sign on the dotted line or get up and walk out of the closing. A lot of people are afraid to do that, intimidated by the process.
Some people are predatory bastards. Some people are gullible fools. A match made in heaven.
Baritone
16 - David
Well, it's an interesting argument, but it omits some key points, like predatory lending practices. And the fact that failing to bail out people with homes simply means we get to bail out homeless people. Or the fact that if we allow enough people to become homeless (because it is, after all, their own fault) we run the risk of more serious problems, and then we get to pay to rebuilt all the burned-out buildings. One way or another, the money will go away - at least this way we won't have to kill too many people in the process....
17 - Thomas M. Sipos
David: "it's an interesting argument, but it omits some key points, like predatory lending practices."
Predatory lending? You mean people are being forced to accept loans against their will?
David: "And the fact that failing to bail out people with homes simply means we get to bail out homeless people."
Losing a house doesn't automatically make you homeless. It may mean that you become a renter.
I've never owned a house, so I have no sympathy for people irresponisble enough to buy houses they can't afford. Now they'll have to move into a one-bedroom--which is what I live in. Well, boo-hoo!
We are talking about welfare for the irresponisble. I'm sure I could have gotten one of those "predatory" loans and lived in a house for a few years, then lost the house and moved back into a one-bedroom, but I didn't want to default on a mortgage.
Instead, I've been looking forward to a housing crash. I might be able to pick up a bargain, once prices reach their true market rates.
18 - Dave Nalle
Predatory lending? You mean people are being forced to accept loans against their will?
He does have a point here. Banks working with the builders come at first-time buyers who are pretty clueless and offer them loans with balloon payments or variable rates or way beyond their means to really pay, with nothing down just to get them into the contract. These people have no idea what they're getting into and find themselves over their head remarkably quickly.
Losing a house doesn't automatically make you homeless. It may mean that you become a renter.
And may be a hell of a lot better off than you were with one of those rapacious loans. Losing your house doesn't take away your job or your income.
We are talking about welfare for the irresponisble.
It's more a case of welfare for the ignorant, who are at least marginally more deserving than those who are knowledgable and still irresponsible. A lot of these buyers are from minority backgrounds and may be the first person in the history of their family to ever buy a house. They've got no experience and no one to look to for advice. They're ripe for the picking.
Instead, I've been looking forward to a housing crash. I might be able to pick up a bargain, once prices reach their true market rates.
I think we're looking at a slump and readjustment more than a crash, except in a few select areas where there was a genuine bubble.
Dave
19 - Rob
I live in a very inflated housing market (Boston, MA). The problem I see with this argument is that most of the neighborhoods where these "grasshoppers" bought houses are not the places where the "ants" would consider living. (If we are thinking about low income / low eduction areas where these lenders target.) Therefore, home prices for the ant won't really be impacted by more foreclosures. (More foreclosures in these neighborhoods could lead to more instability and crime and take more tax money to fix.)
20 - Baritone
Sipos has the pure capitalist view of things, and is apparently in league (in spirit at least) with the predatory lenders ready to jump into the fray to snatch up the detritus of foreclosure. He says:
I've never owned a house, so I have no sympathy for people irresponisble enough to buy houses they can't afford.
While it seems that my part in this discussion went unnoticed, I would reiterate that the lenders in question are very good at convincing people that they in fact can afford these loans through a number of tactics, most of which are meant to both dazzle and confuse potential borrowers. Many loan originators and mortgage brokers represent a natural evolution of snake oil salesmen.
Practically from day one we are told that the "American Dream" is to own a home. There are those who will pursue that dream come hell or high water. Again, is it smart? Offtimes, no. But generally these are not people who intend to buy, then lose a home. Why do the lenders pursue these people? I suppose because they can.
In my community a number of builders have been putting up comparatively huge homes for cheap. They advertise on billboards: New Homes. 3000 square feet. $119900. They are building large, ugly vinyl village boxes of 3000, 4000, even 5000 square feet, all for less than $200000.
In my opinion these houses are junk. Mostly young people are lured into purchasing these homes entranced by all the space, the walk-in closets, the garden baths, often secured by adjustable rate mortgages whose fast rising payments will have them out in the street in no time. The area is strewn with dozens of these large, grotesque sub-divisions with house after house sitting empty while the builders continue to construct more of these gargantuan hulks on the next street over. The resale value of these homes is in the toilet. People can't fathom why after 5 years or more they have no equity, that their home is worth less now than when they purchased it. That's not the way it's supposed to work.
As many of these builders, the larger ones at least, have their own mortgage arm, they finance the transactions with the same predatory tactics noted above.
I don't absolve people of taking responsibility for their own well being. If, across the board, people were wiser; if they took it upon themselves to become knowledgable about home buying, about the caveats of obtaining mortgages, a lot of these foreclosures might be avoided. But as long as there are uninformed, eager buyers out there, there will always be those who are poised and willing to part these gullible folks from their money, and ultimately with their homes and their credit ratings.
21 - Dave Nalle
The problem I see with this argument is that most of the neighborhoods where these "grasshoppers" bought houses are not the places where the "ants" would consider living.
Ah, but you're forgetting that there are always more grasshoppers waiting to be sucked into the entry-level housing market.
Dave
22 - er
i buy a house for my dather o i co-sing she move out an a got to pay the hoese i cont afort the payment no more what can i do to the house o take that payment out of me
23 - Lumpy
Rule of thumb. If someone needs u to cosign their loan that's a sign they are the one person whose loan you should never cosign on.
ER your best bet is to sue your daughter for breach of contract.