David R. Henderson  

"I Don't Care"

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That's the message President Obama is sending to those who have saved their money and waited on the sidelines to buy a house. One intended effect of his mortgage bailout plan is to support housing prices and the unintended effect of this is to make it harder for those who want to buy homes. I pointed this out to Fox News reporter Gary Gentile. Here's the relevant passage:

While the plan may help many who most need assistance, there may be some unforeseen consequences, warned David R. Henderson, a research fellow at the conservative Hoover Institution at Stanford University.
Bailing out homeowners who would otherwise be forced to find more affordable housing could hurt people who are ready to buy homes at rock-bottom prices, he said.
"All those people who have been saving their money, waiting on the sidelines, are being penalized," Henderson said. "The government is taking away this opportunity."

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CATEGORIES: Political Economy



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COMMENTS (19 to date)
dearieme writes:

"there may be some unforeseen consequences"; very droll.

Maniel writes:

David,

There are people who believe that government solves problems; there are others who believe that government creates most of the problems (I fall in the latter group). Normally, most of the problems that government creates revolve around the small ambitions of elected representatives - and their bridges to nowhere. Now and then we suffer from delusional schemes that put young soldiers and our international political capital at risk - such as invading Iraq. But on rare occasions, we are led by "true believers" who would have government "step in" to save us. I think this is what we are now seeing.

The problem is, of course, that they don't know how to save us. These days we are addicted to debt. Even a knowledgeable economist like you has been known to use the term "homeowner" to describe someone who has a mortgage but no equity in "his" home. Once government has exhausted its credit from attempting to restore everyone and everything to how it was (or seemed to be), the stage will be set for a slow, painful recovery. Your potential buyers on the sidelines, with their (inflation-adjusted) savings intact, will then be able to move forward.

Mike Rulle writes:

It is remarkable how the framing of issues can create such one sided thinking. Why the Government thinks it should be favoring "sellers/owners" over "buyers" is mysterious. Except, as Henry Hazlett pointed out 60 years ago, they probably do not even think that is what they are doing. They just see the "first effect".
This thought discipline of also thinking of the "second effect" is very powerful. It captures 90% of the power of the argument to counter these sophistries. This is not really taught in our schools and is never discussed in the public forum. Santelli's Howard Beale moment was just such an expression. This must be the basis for any "Conservative/Libertarian style resurgence. It is as easy to identify with as "first effect" thinking and can be converted into political soundbites. Having the virture of being more correct is also helpful.

Instead, the dominant media theme is we are supposed to be "compassionate" toward deadbeats and quasi deadbeats, but not compassionate toward those who save, were responsible, and may now have an opportunity to buy low. Why don't they count in the modern calculus? Because pseudo-thinkers like David Brooks specialize in "nuanced" gobbldeygook. He adds a pseudo-realism to the argument and his latest column epitomizes such nonsense. Newsweek's Meacham and Evans have also done a good job in the confounding/conflation game. Brooks creates a remarkable non-sequitur argument about "the interconnectedness of the whole"---whatever that is---as if that eco-babble proves the need to bail out failed borrowers. Doesn't his "interconnectedness of the whole" have anything positive to say about not "foreclosing" on prospective buyers' opportunities? Why only not foreclose on current owners? Why are they so special? Brooks hypothesizes some "construct" of the whole, and then states we must provide price support for current owners to save the whole from itself.

No we do not. We need to support price discovery for houses, mortgages and many other things, not randomly pick some group of citizens out for special treatment based on some magical thinking about the "interconnectedness of the whole".

Bob Murphy writes:

Good point David. Incidentally, are you referring just to the price effect--i.e. the gain to sellers is perfectly offset by the loss to buyers--are are you also talking about the availability of mortgage financing? Because if I'm a bank, I'm going to be a lot more cautious in giving out mortgages if the government is going to give me a "haircut" in 5 years on them.

Roger Cuddy writes:

It's actually very simple to understand. Consider People who have shown restraint, control and forethought in how much house they may afford and when best to purchase it. These individuals and families are not very likely to vote for someone just because the politician stayed out their lives and they were allowed to do so.They would regard the political as just doing what is right, commonsense and nothing special.

People who were unable, unwilling or just inpatient and bought a house beyond their means are very likely to vote for whoever 'saves' them.

Sadly, we the people have allowed our country to deteriorate to the point that such policies can take place.

Methinks writes:

Obama's plan is to prop up home prices. But will that be the outcome?

House prices rose because houses had a strong bid. House prices declined because that strong bid disappeared. Since a very large reason for the strength of the bid was lax lending standards that have now evaporated, where is this strong bid for housing required for propping up prices going to come from? Yes, Obama intends to prop up home prices with his paltry bribes for people with upside down mortgages to continue to pay, but when they actually sell the home it will be for the market price and that market price will be what the next guy can or is willing to pay for it. Lending standards are tougher while unemployment is likely to climb and incomes are unlikely to grow (if not decline) in the near future. So, where's the bid?

Unless someone can point out the error in my thinking, I believe the only way government can prop up nominal price is by creating inflation. But, then the savers' savings will be less valuable and fewer people will be buying homes - exactly the opposite of what politicians want. Again, no bid. Politicians love home buyers because they tend to vote for incumbents. Unfortunately, when government inserts itself into the natural process in the real estate market, it ends up achieving exactly the opposite of intentionion over the long run. So much for central planning.

silvermine writes:

Please continue to talk about this. I love that so many people are talking about how unfair it is for people who can afford their mortgages to pay for other people's mortgages, but I'm actually surprised at how few people consider the 30% who don't even have a mortgage.

Think of it this way:
1) Everyone with a mortgage gets a tax deduction. Renters do not. Therefore, people who irresponsibly got too much house *paid in less* than renters.
2) The speculation priced us out of the market. We waited.
3) The legislature and president just decided to spend money to pay for some mortgages... but not for my rent! (Am I *less* out of a house if I have to pay rent and can't because I lost a job?)
4) The money will either come from levying higher taxes on me or by depleting my savings through inflation, making it that much less likely I can afford a house.
5) They prop up the prices of homes, pricing me further and further out of the market.

I paid more taxes. My savings will be destroyed. I still have to pay my rent. I'm even further and further away from ever possibly being able to afford a home.

Personally, I do not want a handout. I will pay my rent. I just moved to a house with a lower rent, in fact. Why can't people who don't pay their mortgages just move to a house they can afford? They're not on the street -- they buy a cheaper house or (*gasp*!) they have to stoop to renting.

Seriously -- spread the word about the renters. It may sink in a little better.

El Presidente writes:

David,

It takes more gas, time, and rubber to drive from Point A to Point B if you zig-zag from one side of the highway to the other the whole way there. Attempting to straighten out our course a little bit isn't saying "I don't care". It's saying that we do care enough to minimize the negative impacts of an unforeseen (thought not unforeseeable) collapse. Being able to buy a house cheap doesn't do me any good if I lose my job the following week.

This is an effort to identify a goal and to persuade people to employ rational rather than adaptive expectations so that we might achieve it more quickly and with less wasted effort. I know, I know; that makes government evil. Your moral crusade for the welfare of those with modest means is quite remarkable, if only because it is a little difficult to believe. I'd like to see more of it though, then maybe I'd accept it more readily. I would much prefer that we used our principles for the benefit of people than used people for the benefit of our principles.

David R. Henderson writes:

Dear Bob Murphy,
Thanks. You asked:
Incidentally, are you referring just to the price effect--i.e. the gain to sellers is perfectly offset by the loss to buyers--are are you also talking about the availability of mortgage financing? Because if I'm a bank, I'm going to be a lot more cautious in giving out mortgages if the government is going to give me a "haircut" in 5 years on them.
My answer: I made both points to the Fox News guy but the one you used was the first one, the "price effect" one.
Best,
David

quadrupole writes:

Silvermine,

Not to disagree with your basic point (that renters are even more screwed than responsible home owners), but I feel I should correct you on mortgage interest deductions.

The mortgage interest deduction is not a special perk for home owners, it's a tool to level the playing field between home owners and landlords. Your landlord already gets to deduct the interest on the mortgage for the house or apartment you are renting, to not allow home owners to do likewise would be to bias the market towards renting.

The *actual* tax advantage of home ownership over renting is that you are not taxed on the imputed income of your home ownership.

Think of the comparison this way. Imagine owning a home as is done today, vs owning an LLC that owns the home and rents it to you.

Today if you own the home, you can deduct the mortgage interest and taxes. If you rented from an LLC you owned that owned the home, you could also deduct interest and taxes.

But if the market rent for your home is $1000, if you *owned* the home you would not have to pay taxes on the imputed income of that rent, whereas if you payed rent to an LLC you owned that owned that home, you would have to pay taxes on the $1000 in rent that flowed through to your LLC.

So it's really the imputed income for the use of the home that is the true tipping of the playing field towards homeowners, not mortgage interest deductions.

Please note, I'm not actually arguing for taxing the imputed income of home ownership here... just pointing it out.

Dave writes:

silvermine,

I am pretty sure that the mortgage interest deduction is priced in. At least, basic economic theory predicts it is, and looking at buy vs rent prices it also seems they are about equal after the deduction. Because the higher your income, the higher your marginal tax rate and thus the more valuable the deduction, it does distort the market a bit in favor of higher-income people buying and lower-income people renting.

I think the only people who really won big-time with the mortgage interest deduction were the ones who owned houses when the deduction was created: they got a jump in value.

quadrupole,

I am confused by your argument. I'll be the first to admit I don't know much about real estate taxation, but I would assume that a landlord basically has revenue from rent payments, expenses from capital expense, interest, property tax, and maintenance, income is the difference, and tax is paid on the income. Given the little I know, interest doesn't seem any different from depreciation or maintenance costs, so I can't see why it would need to be singled out to create this supposed leveling.

I can't follow the comparison with an LLC because I don't know how the LLC's income would be taxed and how capital costs are figured in.

explainerguy writes:

"Why the Government thinks it should be favoring sellers/owners over buyers is mysterious."

There's nothing economically mysterious about this at all. The reason is because a huge proportion of government spending in the United States is predicated on the value of our homes being stable and rising.

Evidence the TARP II's shipping billions to the states. A collapse in the price of homes = less property tax revenue for states and local governments.

So it is not at all surprising to find the US Government with an incentive to favor homeowners over non-homeowners because non-homeowners are tax pikers.

John Costello writes:

People who have savings in banks should get them out and invest in something that will hold its value once the government starts stagflating the economy. If I had money to invest I would put it in General Mils or other food companies (people have to eat.) Those of you not old enough to remember the 60s and the "Guns and Butter" inflation and what followed with Ford and Carter will not remember that it was not worthwhile to save at all since you lost value on your savings constantly. With luck Obama will only destroy about 40 pr 50 [percent of America's savings as he prints his way through this debacle. With luck.

Reservation Observer writes:

Maniel:

Anybody who wants to know whether "government" solves problems, or just creates them, need look no farther than the average Indian reservation. On Indian reservations, the federal and tribal governments control pretty much *everything* that happens there. Want to know how well that is working? Just ask any Indian who lives on one.

Sure, a few Indian tribes who happen to be lucky enough to have reservations near urban areas have successful casinos - and most of those are actually managed by non-Indian corporations. But Navajo and Pine Ridge and others located in similar places? Not so much.

fretless writes:

I belive that the *intent* of the bail-outs/'stimulus' is to inflate the currency enough to bring housing prices up to their pre-crash levels, thereby solving the "insolvancy" problem of people who are upside-down on their loans at the expense of anyone who has managed to save any money, ever intends to spend money, or ever intends to earn money in the future.

happyfeet writes:

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Ella writes:

I am one of those savers who was waiting until prices got affordable and I had enough in the bank to buy wisely. I'm just glad someone is brining this up. It's been kind of a bummer for my home-owning dreams lately.

Doesn't look like I'll be picking out a new couch and paint swatches anytime soon.

carmela writes:

Thank you. This is how I feel. Why relatives my age were leaving their dirt cheap apartments in the homes of other relatives (decent 2 bedrooms in two family houses) to buy a mortgage on a crappy home (that's my beef - they don't own the g-d things - they own mortgages) because they gotta get in the game! I said, you don't have to, save more and wait. They couldn't understand why I didn't buy. I said I am waiting for the next RE downturn like in 1990 when most of my conservative friends bought(all of us raised by depression/ww2 parents) and when things will be more accurately priced. Those same conservative friends are still in those homes which have appreciated to 3x what they bought them for - they didn't "trade up" to some McMansion they could afford, but knew the electric bill and heating it would be sky high, and higher taxes...they are smart. So, their houses are small by todays standards, but they own more of it than the others who moved to McMansions.

My young relatives said why don't I get a super duper this and that mortgage and "own." I said because while I had enough for the super duper mortgage, it was as much as my rent, but I couldn't afford the maintainence! And if I am laid off as I was twice in the last 5 years, I would be totally F'd. And you know when the S hits the fan, I will need a new roof or a new furnace. Noooooo.

Meanwhile, my relatives can not afford a new stove after one was burnt out in an electrical storm surge and I have bought them grocery store gift cards to feed their families. I did it for the kids. Their house is a dump, but they "own."

So I wait, thinking two years from now, I will have enough "need a new roof money" and a sizeable enough DOWN PAYMENT (remember those?) to get my own place, start a new life in a new city and.....that doesn't look likely now.

Thanks for listening and letting me write this here.

Chester White writes:

"It is remarkable how the framing of issues can create such one sided thinking. Why the Government thinks it should be favoring "sellers/owners" over "buyers" is mysterious. Except, as Henry Hazlett pointed out 60 years ago, they probably do not even think that is what they are doing. They just see the "first effect".
This thought discipline of also thinking of the "second effect" is very powerful."

This is the baseline key to the difference between liberals and conservatives.

Liberals see someone suffering (or supposedly suffering) and say "We must relieve that man's suffering in any way possible."

That is your "first order." It applies in all circumstances, even if the sufferer brought the suffering on himself by his stupid behavior.

Libs cannot think beyond the first-order effect. They don't perceive moral hazard, they don't see how others NOT suffering at that moment will be affected, or how the system will be perturbed.

It's the thought process of a 13-year old girl, and while 13-year old girls have their charms, I don't want a slew of them running my business or my country.

If you are a small business owner and are forced to lay people off, LAY OFF OBAMA VOTERS FIRST.

If these idiots want economic warfare, let's give it to them good and hard.

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