More Stupid Housing Policy on the Way?

Great news! My house goes on the market today — at the same price the house next door sold as a foreclosure a few years ago.

Okay — it’s mostly good news insofar as I don’t have to drive back to Ann Arbor every weekend and instead can start enjoying the beauty of west Michigan.

But being in the housing market at its bleakest moment does mean I’m following news closely. Like this story, suggesting the Administration may bring back the housing tax credit.

The Obama administration has not decided whether it should resurrect a popular tax credit for first-time homebuyers, Housing and Urban Development Secretary Shaun Donovan said on Sunday.”It’s too early to say whether the tax credit will be revived,” Donovan said in an interview on CNN’s “State of the Union” program. He said the administration would “do everything we can” to stabilize the shaky U.S. housing market.

Now, policy wonks of all political persuasions have agreed since last year that it was always a stupid policy (and note, this is from  before it was extended to more buyers).

“It’s terrible policy,” says Mark Calabria of the libertarian Cato Institute.

“It’s awful policy,” says Andrew Jakabovics, associate director for housing and economics at the liberal Center for American Progress. “It’s incredibly expensive. It’s not well targeted.”

Home sales have risen dramatically in the past year, but most economists don’t attribute the increase to the tax credit. August single-family-home sales in Southern Nevada, for instance, hit 3,229, up more than 25 percent from a year earlier.

But economists attribute most of the rising sales to the plunge in prices, not the tax credit. The median sale price of single-family homes was off more than 35 percent from a year earlier.

“A heck of a lot of people would have bought the house anyway,” says Ted Gayer, an economist at the Brookings Institution.

According to an estimate by the National Association of Realtors, of the 2 million new homebuyers since the credit was instituted, 350,000 say they would not have bought a house without the tax break.

“We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,” Jakabovics says.

The tax break, due to expire at the end of November, is on track to cost $15 billion, twice what Congress had planned. In other words, it will cost $43,000 for every new homebuyer who would not have bought a house without the tax break.

Unlike Cash for Clunkers, there was no societal benefit tied to the credit (however ineffective C4C was at saving gas). Moreover, the benefit was small enough — given the cost of a house — that it wasn’t helping all that many marginal buyers get into a new home.

More importantly, as Calculated Risk notes (and has been noting, for over a year), the credit doesn’t affect the underlying problem in the housing market: too few households and therefore too much supply.

The problem in housing is there is too much supply (at the current price). Incentivizing people to buy existing homes just shuffles households around — it does NOT reduce the overall supply unless the buyer is moving out of their parent’s basement. I doubt that happened very often. Note: It is important to remember that rental units are part of the overall supply, so moving people from a rental unit to homeownership doesn’t help.

And if the tax credit leads to more new home sales — that ADDS to the excess supply. And that makes the situation WORSE.

It would be far better for housing and the economy to announce “There will be no further housing tax credits.”

But, a tax credit is a Republican policy championed by former realtor Johnny Isakson (R-GA) which means it has the plus — in DC terms — of being hopey-changey bipartisan and of being celebrated as a tax cut for market behavior in DC’s twisted sense of morality. And so, we consider re-upping the tax credit.

And while HUD Secretary Shaun Donovan says the Administration would “do anything we can” to prop up the housing market, they seem to be ignoring the underlying causes of the problem. Joe Nocera has a great piece talking about how all players in the housing market right now have reason to be really cautious. But for most, the issue still comes back to oversupply and therefore prices that will fall for some time.

The second reason is that, Mr. Yun notwithstanding, most people simply do not believe that housing prices are even close to hitting bottom. “In the Bay Area, a house that was worth $300,000 a decade ago became a million-dollar home,” said Greg Fielding, a real estate broker and blogger. “Now it is listed at $800,000.” That price, he suggested, was still unrealistically high. The seller, meanwhile, doesn’t want to face the fact that his or her home is too richly priced, and won’t sell at a more realistic price — which may well be below his or her mortgage debt.

There is also an immense amount of inventory that has yet to hit the market but will, sooner or later. People in the real estate business have taken to calling this “the shadow inventory.” It consists of homes for which the owners have stopped paying the mortgage but the banks haven’t foreclosed on yet, foreclosed properties that have not yet been put up for sale, homes with modified mortgages that the owners still can’t afford and will soon default on and so on.

Mr. Barnes describes the shadow inventory as akin to “ranks of Napoleonic infantry, rows deep, hidden in the fog.” This inventory, estimated by Rick Sharga of RealtyTrac to be between three million and four million homes, is almost certain to drag down home prices for the foreseeable future. “The disinterest of buyers, in an interest-rate environment that may be the lowest ever, is striking,” Mr. Barnes said. But, he added, it makes perfect sense. Since 2007, housing prices have been in a deflationary spiral, and nobody can say when it will end. “It doesn’t matter if interest rates go down to 2 percent,” Mr. Barnes said — buyers won’t reappear in big numbers until they can see the light at the end of the tunnel.

The Administration has not yet, however, considered the most obvious “do everything we can” to affect this bleak scenario: stop the shrinkage in the number of households. If, rather than declaring victory over giving the banks more power to unwind foreclosures over time (thus creating the Napoleonic army of shadow inventory Barnes refers to), the Administration had done what was needed to actually keep people in homes, this downward spiral would be slowed, at least.

The downward spiral in housing is not going to be arrested until we’re able to keep the people who want to stay in their houses in them. But thus far I see no sign of a policy solution that will do that.

  1. BoxTurtle says:

    I’d be looking at selling my house (I finally got off the unemployment line and got a real job), as the job is a 70 mile commute. But if I were to sell my house into the current market, I’d probably have to auction it and take what I can get. Better to increase my carbon footprint.

    I’m lucky, I suppose, as I downsized my house last time I moved and got at least some of my money out of real estate.

    Boxturtle (It would be good to be a BUYER in todays market)

    • emptywheel says:

      Yeah, being a buyer will be nice, particularly with the practically free mortgage rates. But I’m in no rush to get in–better to let the prices fall a bit before I buy.

      Sorry about your drive. Do you have Audible books?

      • BoxTurtle says:

        No, pandora on my droid. Having to sit on my butt for an hour after work listening to my favorite music commercial free is a hardship, but I’m adjusting. :-)

        Boxturtle (Unsolicited plug for pandora: It’s wonderful, try it)

    • eCAHNomics says:

      It would be good to be a BUYER in todays market

      One of the interesting aspects of the disastrous July existing home sales report was that 30% of purchasers paid all cash. Vulture economics, wherein rich scoop up more of the nation’s resources at rock bottom prices. Hard to imagine that isn’t a deliberate part of the plan.

      • BoxTurtle says:

        I don’t think there was a plan. This even caught the MOTU’s off guard, they had to go running for a government bailout.

        Boxturtle (Naturally, they’re recovering from this MUCH better than we are. Go figgur)

        • eCAHNomics says:

          Plan/No Plan. You could argue either side. As near as I can tell, choosing the “fundamental” economics principles that the PTB have chosen to follow, lead automatically to the outcomes that we have seen. That is the sense in which there IS a plan. In the sense of a detailed plan, not at all.

      • Kassandra says:

        Yeah, and they’re probably all Chinese or Saudi Companies….maybe not, but where else are they going to spend their trade defict and oil dollars if not in buying up America?

        Nonetheless what is wrong with the picture of the right, like Beck, pitching “family values” when families can’t even stay in their homes?

      • Mary says:

        The only thing that doesnt depress the snot out of me about that very true statement is that I think some of them are young money, used to quick bouncebacks and they didnt necessarily get rock bottom and they arent necessarily going to get the quick easy payback they were planning on getting.

        @11 – didnt follow your link, but the two stories I saw on this both managed to omit any mention of torture and any mention of his role as one of the Bush Six in the onholdbutnotditchedyet Spanish investigation. Amazing – especially considering that McClatchey just did a story within the last few weeks on the pending litigation abroad involving our torture policy czars. And @12 – I think it’s unfair to say they didnt care – after all, there are lots of rumours about them uncharacteristically hitting their knees and screaming “thank you lord” in the hallways and humming the Hallelujah chorus and skipping after they got the warnings. /s

        Re: the post – its a particularly large oversupply when there are no jobs for those who might otherwise have an interest in single family housing.

  2. bgrothus says:

    I thought I heard this morning that the admin is going to set up a program to help people with mortgages that are under water.

    • BoxTurtle says:

      I thought I heard this morning that the admin is going to set up a program to help people bankers with mortgages that are under water

      Fixed it for ya!

      Boxturtle (Was I the first to spot the error?)

    • emptywheel says:

      They are working on something. Last I heard, though, it still has a bit of fiscal troll to it, helping only those who didn’t buy a house that was overvalued thanks to the mortgage industry.

      • cregan says:

        I completely agree with your post. The housing market is so big, I don’t think even the government can do anything medium run. They can help the desperate person here and there, but the housing is bigger than even the US Government.

        Generally, it’s going to have to take its course, hit the bottom, and then come back up.

        • EarthquakeWeather says:

          This is true. My head continually explodes when I hear realtards and lawmakers and banksters suggesting that all we need to pull the economy out of a depression is for people to start buying overpriced real estate again. “Why can’t we just party like it’s 2005 again?” Uh, because you can’t have a sustainable long-term economic policy on moving from bubble to bubble to bubble, which is what we’ve had for 20 years. At some point this country is going to have to make something again.

    • dustbunny44 says:

      What would they call it? “HAMP2 – this time we mean it.”

      Apparently all horror movies have sequels.

  3. b2020 says:

    Since 2003 or so I had to perform a broken record routine with my inlaws: “[My] wages are flat and have been for 30 years, nobody can afford the houses they buy, and I am neither willing nor able to buy into a ‘market’ divorced from reality with a three-decade mortgage price tag.”

    That is still true. If there are first-time homebuyers out there, they must be paid substantially more than I am. I know it sucks for those that have a house, but it sucks for those that don’t, too. As Atrios rightly points out, forcing the banks to lay bare their bondholders’ losses through cramdown was what was required. That will never happen. Neither will a recovery of the housing market, unless the Gilded Age one percent of wealth embarks on a quest to purchase every single property in the US.

  4. fatster says:


    Heritage picks up former Cheney aide

    “David Addington, a former aide to former Vice President Dick Cheney, is taking over a top job at the conservative Heritage Foundation in Washington D.C., the think tank is announcing today.”


  5. fatster says:

    O/T 2.

    Watchdog Report: Bush Aides Didn’t Care About Threat To Emails

    “According to a new report by Citizens for Responsibility and Ethics in Washington, Vice President Cheney and others ignored warnings that, with no viable archive system in place, emails could be lost as the White House switched to the Microsoft Exchange email system in 2002. White House Counsel Harriet Miers even rejected a 2005 plan to restore the emails, according to the report.

    “The 54-page report reads like an IT horror story, with staffers manually saving each email through Outlook and using four different tools to search for emails to answer a subpoena in the Valerie Plame leak investigation.”


    • eCAHNomics says:

      Something doesn’t smell right about that story. Seems like a hoked up excuse after the fact.

  6. Hoofin says:

    I just don’t see why they won’t let everyone with a mortgage refinance at 3.75%. That’s what borrowing costs the government, “matching the duration”, and the property isn’t leaving America, so what is the harm?

  7. klynn says:

    The only “credit” program I would consider would be a credit that was totally intended to “green” the energy use on a house.

    Then, I would tie that credit to an EEMs mortgage, Energy Efficient Mortgage, which is calculated on the monthly energy savings on a house.

    Otherwise, forget it.

    And if someone needs the tax credit in order to buy a house, then it is not wise to buy at this time.

  8. dp19019 says:

    Western Michigan? You’ll find some friends (and a few fans) @ Harbor Country Progress in Union Pier.

  9. bobschacht says:

    Thanks, EW, for covering the over-supply aspect of the housing situation.

    A huge undercover story in the housing situation is people who make a business of buying distressed properties and flipping them, or holding them in expectation of an eventual market rebound, or turning them into rentals. We hear mostly about the housing market, but I suspect commercial real estate also has an oversupply situation. In both commercial and residential real estate, the vultures are exploring the bottom. “Mark-to-market” is being resisted both by bankers, and by unfortunate home-owners such as our esteemed leader, but the housing market cannot recover until valuations respond to the over-supply.

    The silver lining in this is that lower Middle Class workers are going to find a lot more affordable housing. The Catch-22 is that with unemployment so high, lower Middle Class workers are too worried about their job futures to be committing to buying a house. I foresee a tremendous short-term increase in rentals until the unemployment rate comes down– and I mean really good quality rentals that have been in short supply until now.

    Bob in AZ

  10. timr says:

    When I was retired in 1998 I moved to Traverse City Mi where I bought a brand new tri level for $74K. When we left Mi for Texas in 2003 we sold the house for $171K. Now that was a housing bubble because to my way of thinking my house was worth maybe 100K, no more. Sure we had 1 acre of land and very extensive landscaping, but still. Now we have been in Texas for 6 years, bought a new house for $121K. Which we have just had an offer on out of the blue for $169K.(our house is not for sale, yet someone wants to buy it, it is a very solid offer) Like Wow. Are we looking at a new housing bubble?

  11. mzchief says:

    I think you’re right on.

    OT #1– Our local building codes keep us enthralled to Big Oil which owns Big Power. These have to change to allow real eco-architecture to replace the energy-intensive, wasteful and waste-producing stick buildings for residential.

    OT #2– The BloomBox is pretty hot. Yeah, we could make it here, make it at affordable rates for “Mass Market” and do it now if we remove the Vampire Squid/Hedger-Corporati from the equation. Case-in-point is the breath “litmus” stick for early cancer detector that I’ve been waiting to see in this fabulous “free market place” since I heard about it in 1992.

  12. karmi says:

    Democrat policies are always a disaster, and they still get away with creating news ones all the time. Some of their disasters take decades – e.g. Social Security – before reaching ‘maturity‘ whilst others are immediate – e.g. their recent economic polices. The Cash for Clunkers disaster took about a year to ‘mature‘ … Democrats seeking to payback their union supporters have now caused a shortage of used cars, which also causes the price for one to skyrocket.

    My favorite disaster today, is the reemergence of the bedbug problem here in America (which isn’t going to help a home sell), thanks to the 1996 Clinton EPA ban on effective bedbug pesticides. The stuff used today just knocks the bedbugs out for up to a couple weeks, and then they’re back to breeding and biting…biting humans.

    • bmaz says:

      Well, if Republicans would quit fucking everything up, maybe the Democrats would not have to enact such momentous policies to make corrections. See, mindless rhetoric runs both ways……

  13. TheCallUp says:

    We face a similar situation. Prices in our area — unlike the hardest hit areas in the country — have remained generally somewhat stable. This area didn’t experience the 30%/annual appreciation you found in Florida and the W. Coast during the bubble. So on our block prices continued to inch up (just barely).

    Well now that we’re planning on selling, the house across the street — I learn — got listed months ago for like $40k below what would have previously been considered the going market value, and it’s still sitting there.

    That came as a huge shock to us. And now the house next door just went on sale for about $15k less than what I anticipated.

    Looks like we’re not going to get anything close to what we thought.

    The good news, however, is that prices are also down in the generally more expensive area that we are expecting to move to, so hopefully it will end up being a wash. And with these unbelievable low rates, I think our monthly payments will end up remaining the same despite the fact we’ll be living in an area more to our liking.

  14. BMcGarth says:

    Look,it’s fairly evident now,it’s almost all for the benefit of the Corporations,any policy decisions made by the Obama WH…..just remember who the anchors are in the WH….Rahm,Rubin & Summers.

  15. barne says:

    The FBI warned in 2004 that this was a looming mortgage fraud crisis (see CNN below). The FBI was brave; it stepped up. At that point, it was up to government and the press to protect us from this hurricane of financial destruction.

    From 2004.

    “From Terry Frieden
    CNN Washington Bureau
    Friday, September 17, 2004 Posted: 5:44 PM EDT (2144 GMT)

    WASHINGTON (CNN) — Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an “epidemic” of financial crimes which, if not curtailed, could become “the next S&L crisis.”

    • BoxTurtle says:

      What would you rather we based it upon, gold or other commodities?

      Boxturtle (Obviously, we can’t use cars anymore)

  16. Mauimom says:

    I feel for ya, Marcy.

    We’ve been trying to get out of Hawaii for some time; need to sell house to do so. [Stupid, stupid, stupid: never should have sold DC house & purchased here.]

    There’s nothing going on here, unless you’re a $2+ million property — which we ain’t.

    While folks snicker derisively, “oh, it must be SO TOUGH to be ‘trapped’ in Paradise,” it really is awful here, and the prospect of it being years before we can escape is depressing.

    • TheCallUp says:

      Do you think your house could pull in enough in rent to cover your mortgage payments?

      If so perhaps you could rent it out for the time being, move back to the continent, until hopefully prices rebound somewhat in Hawaii.

      • Mauimom says:

        Fortunately, we don’t actually have any mortgage payments. Bought the place outright with the proceeds from the sale of our DC house. [Whew!]

        But we need proceeds from the sale of this house to get someplace back on Mainland, since, last I heard, folks weren’t too anxious to rent to someone with FOUR large dogs [chow chows].

        And the value of the house here has nose-dived, so we’ll definitely be acquiring something substantially smaller if we ever manage to get back to DC. Just call it “gun-to-your-head down-sizing.”

        But thanks for the suggestion. We’re considering all options!!

        • bobschacht says:

          Do you have to actually live in the DC metro area? That’s a pretty expensive housing market, even in present circumstances. How about Western Maryland?

          Bob in AZ

          • Mauimom says:

            Our kids [recent college grads, both jobless at this point] are relocating here, and 30 years’ worth of friends are here. But MD suburbs — further & further out, perhaps — are a possibility.

            Just don’t give me no Virginia [sorry, LoudonLib].

    • EarthquakeWeather says:

      Just curious why Hawaii is so bad for you. Is it the high cost of living there or is it something else?

      • Mauimom says:

        Lack of intelligent life.

        [CT excepted — but he’s over on the Big Island. Not quite close enough for coffee or a book club.]

  17. wavpeac says:

    Until we have serious finance reform, the housing market is going to stay depressed. People have had their credit ruined. Housing prices were padded not just from false valuations but also from the fees. The two issues have worked in conjunction. If a loan had fees, they valued the house to cover the fees, which in many cases just fed into the higher prices. it would be impossible to distinguish without a market analysis of these loans. The big banks continue their devious practices. Those with sterling credit ratings can get a decent loan. Those loans are not as profitable as the sub prime loans were. These banks are doing everything they can to hang on to these fee based practices.

    Until this issue is resolved we are stuck in this pattern. The tide of foreclosures must stop and Obama must get himself willing to face the truth of what happened. That he was fooled by these banks, that they engaged in illegal behavior and that he used tax payer money to save them and “enable” them. That these practices have been emboldened and continue today. That these banks can make more money by foreclosing and tripling fees that they can if people pay a simple interest rate. Until this goes away and until these lenders are held accountable the foreclosures will glut the market and the underlying scam continues.

    We need money back in our pockets. We need to be free from paying the outrageous fees that keep us stuck. We need our credit repaired after tangling with the credit card companies and these sub prime lenders. I had a 750 credit rating before my “nightmare” with Homecomings and now GMAC. Many people are paralyzed and unable to get a loan for anything. Not only is the banking industry being more careful, it’s also true that very few of us (between medical crises and high deductible insurance plans) are credit worthy enough to keep the economy rolling.

    If we could just force the banks to wipe out the fees and go back to making money from interest and services…it would right the system. But, they would get nothing in return. Our only chance was when they needed Obama’s help. That’s the only point at which we had leverage.

    If Obama doesn’t do something soon to hold them accountable for their illegal behavior, force them to pay back what they stole, punitive damages, the economy will stay at a stand still. By holding them accountable, new banks, new lenders would spring up, people would be able to repair their credit and pay interest on the homes without the crazy fees. This chunk of the economy would be significant. Then all that padded value would be stripped from the assets, a valid bottom line would emerge. And only THEN will the housing market begin to mend.

    It’s all about the truth. Until Obama faces the truth…we are all stuck in a lie.

  18. Ann in AZ says:

    The downward spiral in housing is not going to be arrested until we’re able to keep the people who want to stay in their houses in them. But thus far I see no sign of a policy solution that will do that.

    So basically, it all comes back to jobs, jobs, jobs! Unemployment (including the lack of compensation for unemployment!) has meant that the middle class had to condense, meaning that many have been living with family, with friends, taken in borders or roommates in order to survive. This is what happens when you set out to crush the middle class–you remove a large portion of your customers, clients, and you make the remainder leery of spending for fear that they will be next to have a choice between living with relatives or living under a bridge.

    Personally, I won’t see a sign of a policy solution until some administration or other decides to crack down on big banks to keep them from raiding the Treasury and give the middle class its purchasing power back again.

  19. ADC14 says:

    e-mail me your address so I can send you a tee shirt. I’ve given up on Obama doing the right thing for homeowners. Reducing principal is really the only thing that makes sense and he is adamantly opposed to anything that would do that (cram down, etc). He either doesn’t get it or doesn’t give a damn. BTW, the propaganda appears to be working. Several friends of mine who are in no danger of losing their homes, blame the housing crisis on poor people “buying more house than they could afford.” Of course, Wall St. duplicity and unemployment have nothing to do with it. Sheesh!
    [email protected]

  20. bobschacht says:

    Another consequence of the Housing crisis: Perhaps you’ve seen those nifty ads on TV about reverse mortgages? It would make sense for a lot of older Americans who have been paying mortgages for decades. But reverse mortgages depend on accumulated equity– much of which has evaporated. I haven’t seen any stats yet on the extent of this problem, but I’ll bet its non-trivial.

    Bob in AZ