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And Here`s A Free Zippo Lighter!
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December 05, 2008, 04:13 PM
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The Treasury Department, you know, the guys with the deep circles under their eyes and recycling bins full of empty Red Bull cans, has come up with yet another plan to save the world by giving away other people`s money: subsidizing new mortgages. The idea is that if you buy a house now, the government will chip in so that your 30 year fixed mortgage will only be 4.5%.

See, home prices got too high, causing a worldwide economic crisis, so the obvious solution is to make them high again! It`s kind of like if you are a manic-depressive pyromaniac and if during your latest manic phrase you made a bonfire out of all your money just to see the pretty flames burn high into the night. And now you are feeling really depressed, what with being broke and all, so the government is going to give you some more money to set fire to, plus a Zippo lighter, so you can feel happy again for awhile.

Henry George is rolling over in his grave — investing in land (which is what "housing" is — you have a very large consumer durable sitting on land), investing in land is not like investing in a manufacturing plant. As the real estate agents have been trying their best to make clear to us forever: land, they ain`t making anymore of it. Investing more money in, say, nuclear power gets us more nuclear power. Investing more money in land doesn`t get us anymore land.

Still, you can see the Carnival in Rio logic to this idea. After all, the U.S. government has plenty of money, at least in that Housing Bubble Era definition of "has" — "can currently borrow lots of money." Everybody in the world is parking their money in U.S. Treasury bills right now because that seems like the safest place at the moment, what with the U.S. having the most ICBMS and carrier groups and what not.

Dr. Housing Bubble, however, asks what happens afterwards?

Well, interest rates eventually will be set by market forces. Mortgage rates are already at historical lows. So let us take a look at a poor sap that buys a home with a 4.5% 30 year fixed rate. In a few years when we have to face the repercussions of the squandering of our entire wealth in pathetic bailouts, rates will undoubtedly be higher since we are going to need to attract more capital to the U.S. since we are flat broke. So in the future, let us say rates go back to 6.5% the price of the home will need to reflect that. We are essentially screwing people once again and kicking the can down the road. This is patently insane. Let us examine a $300,000 home purchase at 4.5% with 20% down.At 4.5%, your monthly payment would only be about $1,220. Not bad!
But what happens when mortgage interest rates go back up to 6.5% and the government stops subsidizing new buyers? Well, then a $1,220 monthly payment for a 30 year fixed mortgage at 6.5% with 20% down only works for a $241,000 house. So, you are now $1,000 from being underwater, minus whatever small amounts of equity you`ve built up by paying back principle during the first few years on the loan (with a fixed rate loan, you`re mostly paying interest at first). If interest rates go to 9% like I paid for awhile in the late 1980s, then you`re really underwater, but, on the other hand, you have a really nice interest rate compared to what you could get now. So, you can`t afford to sell your house to move to get one of Obama`s new jobs building magnetic levitation commuter trolleys powered by the inexhaustible force of self-congratulation or whatever it is Obama`s working up down in his basement Inventorium. (He does have a whole sheaf of amazing blueprints, right?)

Anyway, the obvious "solution" to the problems inherent in the plan is to make this incredibly expensive temporary mortgage-subsidization stimulus program permanent. It will be your lifelong right as an American citizen, or even as somebody who recently wandered in through the desert, to buy a house with a 30 year fixed mortgage with a 4.5% interest rate.

Or, maybe, the value of the dollar gets inflated away and you wind up paying off the mortgage early by just dropping a wheelbarrow full of greenbacks off at the bank and then walk a way whistling a happy tune. Who knows? All we can say is that life will likely be full of interest in the years to come.

The alternative is to let the price of houses fall to the point where the market finds uses for the houses. Remember, the Housing Bubble basically happened in four states — California, Nevada, Arizona, and Florida — with ridiculous excesses of construction in the far exurbs. And who wants to live in a place that`s terribly expensive to air condition in summer and with a 100 mile commute to work?

Nobody, right?

Well, how about people who aren`t there in summer and don`t need to commute when they are there in the winter because they are retired or semi-retired: snowbirds, Baby Boom snowbirds.

A whole bunch of well-to-do Baby Boomers are starting to slow down at work and think that with the kids out of school and away from the nest, another winter in Chicago doesn`t sound so appealing. A winter home in one of the four Sand States where there is so much surplus housing might not be a bad idea. The Phoenix exurbs are a rotten place to live from May to October, but they are pretty nice just when the Chicago suburbs are at their worst.

Of course, their 401ks have taken a beating, so the original plan of retiring at 60 to that new golf development in Hawaii isn`t going to happen, but shifting to consulting in Chicago in the warm months and spending the winters in a Sand State exurban nowheresville house sounds appealing enough, if the price falls far enough, such as, say, from $400k to $150k.

But, if the government decides to subsidize another Housing Bubble to try to keep the price of Sand State exurban houses at $300k, the snowbirds won`t get into the market.