Housing Bailout Can't Help Overpriced Housing Markets

Economist Dean Baker who warned of the housing bubble before the burst has some advice:

According to data from the Census Bureau's American Community Survey, in Los Angeles, the median home sold for $585,000 in 2006. By contrast the survey showed that the median rent was $1,006 per month.

To make a comparison, let’s assume that a home that sells for 75 percent of the median house price, or $440,000 is comparable to the median rental unit. If we assume that the homeowner gets a 30-year fixed rate mortgage, then they will pay $2,750 a month on their mortgage. If we assume property taxes are equal to 1 percent of the home’s value and that maintenance and insurance are another 1 percent, then our moderate income homeowner will have to pay $3,480 per month for their home.

This is more than three times as much as they would have to pay to rent a comparable unit. Even if we assume that the price is shaved by 30 percent as a result of the decline in house prices to date and the wonders of our bailout program, the monthly cost would still be $2,440, more than twice as much as the cost of renting a comparable unit. The excess housing costs would come to more than $17,000 a year. What a great way to help moderate income families!

Oh, but I forgot about the equity. Well, since house prices are declining, and unless the government imposes bans on new construction prices will continue to decline, our homeowner will still be underwater by about $120,000 in four years, the typical period of ownership tenure for low and moderate income homebuyers. And that is before we deduct 6 percent realtor fees and other costs associated with selling. We would find comparable numbers for other bubble inflated markets like New York, Boston, and Washington D.C.

There are places like Detroit and Cleveland in which house prices are not at bubble inflated levels. In such markets, these plans would make sense. But in most of the areas where plunging house prices are leading to waves of defaults and foreclosures, these sorts of bailouts would just end up giving money to bankers and mortgage holders who are losing their shirts. They do not end up helping homeowners.

We got into this disaster because people in policy making positions refused to do simple arithmetic and therefore could not recognize the housing bubble. We better get these people to do a little arithmetic now, before they hand hundreds of billions of taxpayer dollars to the banks that fueled this disaster. There are better alternatives that help homeowners without giving tax dollars to the banks.

Dean Baker understands the cure to overpriced real estate is lower housing prices.