Government aid will make housing problems worse

By Freedom New Mexico

No one can now deny the obvious: The housing bubble, especially in high-priced real estate markets, has popped.

New home sales are projected to fall nationwide to 805,000 this year, down 23 percent from 1.05 million last year, the National Association of Realtors has reported. If that happens, it would be the worst year since 1997 — and sales are expected to drop a further 6.6 percent in 2008 from this year’s forecast, according to the Realtors group.

Reuters News reported U.S. home construction starts fell in September to their lowest level in more than 14 years.

Only the Northeast showed construction gains in September with activity rising by 45.4 percent in that region. Construction starts fell by 10.1 percent in the West, 11.7 percent in the South and 28.4 percent in the Midwest, Reuters reported.

Analysts disagree over how long this might last, but most suggest the housing doldrums will be around for two or more years as bad loans work their way out of the system.

Although West Coast markets are worse off than other parts of the country, this is a nationwide phenomenon.

Prices soared over the past few years, with subprime loans — variable-rate and low-money-down loans made to people who could not qualify under traditional lending criteria — keeping the boom going.

Real estate agents, mortgage brokers, lenders, homebuilders and homesellers were happy enough to keep the market going (as were big investors in the mortgage-backed securities and agencies that rated their creditworthiness), but prices couldn’t keep going up by double digits forever.

Many of these unqualified buyers could not make their payments, many subprime lenders have gone under, and the increased number of foreclosures is depressing prices and leaving builders with unsold inventories.

Prices sink as demand falls, and as new potential buyers cannot qualify for the loans necessary to pay the prices sought by sellers.

Pop goes the bubble.

In calmer terms, the market is self-correcting. That’s how markets are supposed to work. The biggest problems occur when governments protect buyers and sellers from the consequences of their decisions.

When government softens the blow of a market correction, it creates what is known as “moral hazard.”

Investors will then make riskier investments under the assumption that the government will bail them out.

President Bush has vowed not to bail out lenders as this housing problem unfolds. He promised only a limited federal role, and he emphasized that a “federal bailout of lenders would only encourage a recurrence of the problem.”

But then he and his advisers floated a plan that would, in essence, bail out homeowners who made bad investment decisions. The president is supporting a bill that would let the Federal Housing Administration “help people stay in their home.”

The plan would help those homeowners with risky loans, who meet certain criteria, to refinance into more affordable fixed-rate loans that would be insured by the FHA, something it does not do now for currently delinquent borrowers.

The president justified his proposal this way: Variable rates have “led some homeowners to take out loans larger than they could afford based on overly optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan or misled by irresponsible lenders.”

That is true, but it’s not an excuse for government to intervene, even just with insurance support. People have to be responsible for their own choices. The only role of government in such matters is to enforce laws against fraud.

The goal then is to let the market adjust and keep the federal government out of it. There will be plenty of economic pain to accompany the falling prices, but any attempt to cushion the blow will only delay the day of reckoning and assure that the pain is more widely felt.