More on Housing

Arnold Kling makes a good point in TCS daily today about the housing problem. He argues that we need to get back to more realistic multiples of income to determine housing affordability. He criticizes the idea of Option ARMs (where the first rate in the loan is set artificially low to reset at some determined point - or periodically- in the future AND where the buyer has a very low down payment). The combination of that "innovation" creates two problems. First, it assumes a continuous increase in value of the home, which would allow the borrower to catch up to the size of the financing. But second, it also allows a borrower to get into the loan with very little commitment to the loan or the house. Kling talks about his house purchase where he put down 20% of the purchase price. That may be a bit old fashioned but 0% may also be a bit out of the bounds of reasonableness. He also talks about multiples of income as a determinant of eligibility. In recent years some mortgage people have suggested that home buyers could get into a house with projected payments north of 40% of their income. That is absurd.

Kling, who is a pretty good economist, suggests that to take the froth out of the market by getting the people that got suckered into the frothy market a $10,000 tax credit to move on. (I am not sure why he chose $10,000 or a tax credit.) He says the credit should be paid for by confiscating the "Rolexes and Lexuses" of mortgage brokers who got their buyers into this mess. His suggestion for the tax credit and its financing are presumably tongue in cheek - but the notion of getting the valuation of housing back into more normal guidelines is much more reasonable.

In the New Yorker, James Suroweicki (the author of The Wisdom of Crowds), makes another good point. He suggests "Unfortunately, it’s(the Administration's plan using a freeze) also an example of the limits of such intervention. Although the plan will provide real relief for at least some homeowners, it’s more like a Band-Aid than like the major surgery that some of the hype makes out. That’s because at this point interest-rate resets are just a small part of the mortgage-market problem. Postponing rate resets doesn’t change the fact that too many people spent far too much borrowed money on houses with prices that were far too high, and that they are now stuck in homes that they can’t really afford and can’t sell."