Bloomberg.com has been leading its website all day with another crony capitalist-type piece titled U.S. Housing Industry Stymied by Government. The housing and mortgage industries want more goodies. The article bemoans the tightening of lending standards. The first expert it trots out is one of their favorite statists:
“It’s very important for a robust recovery that we get the right credit standards,” said Joseph Stiglitz, a Nobel-prize winning economist and professor at Columbia University in New York. “Giving out unsupportable mortgages was a disaster, and now the danger is overreacting and making the standards excessively high.”
They even went to the Cato Institute for comments:
“The government is working at cross-purposes,” said Doug Bandow, a senior fellow at the Cato Institute, a libertarian policy-research center in Washington. “There’s been a desperate attempt to reinflate housing by throwing money at the problem. The worst time to tighten lending is after doing that.”
It may be a sign of progress that Bloomberg puts a spokesman it identifies as libertarian as the second person quoted. I actually wonder if Mr. Bandow was quoted in context; he might have been saying that the government is floundering with a ”split personality” behavior, and he might well not approve of D. C.’s role in the whole mess. (Bandow also comments elsewhere in the article.)
One of the unintentionally funny parts of the lengthy article is found here:
“We screen out about 30 percent of the people who call looking for a mortgage, usually because of their credit scores,” said Michael D’Alonzo, president of Creative Mortgage Group in Maple Glen, Pennsylvania, and head of the National Association of Mortgage Brokers in Plano, Texas. “A lot of people don’t even try, because they’ve heard horror stories of how hard it is to get a loan.”
Creative Mortgage Group! How 2005 . . .
The article is an almost unending ad for big government. It quotes Mark Zandi, a well-known economist:
“Some of the government’s efforts to stimulate the housing market have been more successful than others, but it’s hard to imagine what would have happened if it had done nothing,” said Zandi, based in West Chester, Pennsylvania.
It would be hard to make this stuff up if you come from a free-market point of view. What of course is hard to believe is how government helped caused the housing mess in the first place. Maybe the market would have cleared more quickly had it intervened less after the crash? (Note that housing stocks peaked in 2005, and by summer 2007, over a year before the stock market crashed and Fannie and Freddie failed, housing was already in a depression. Any government that really wanted to “help” had lots of time to do so pre-emergency.)
Perhaps the worst thing about this article comes in the concluding paragraph:
“Clearly the market was too easy during the housing boom,” said David Berson, the former chief economist of Fannie Mae who now holds that position for PMI Group Inc. (PMI) in Walnut Creek, California. “It is almost certainly too tight now.”
OK, he’s entitled to his views.
Only, in this lengthy article, one manages to find no actual data that lending standards are indeed too tight. The article just presents “experts” that assert it a lot. I did find a mention that FHA is making mortgages with 3.5% down. Not so tight, it would appear.
No need to vent too much. Everyone knows the sort of opinion one would find at The Daily Capitalist. Housing is as basic a need beyond nutritional sustenance as there is. The free market is well able to provide housing appropriate to people’s ability to afford it given that almost everyone wants a roof over his or her head.
From a market perspective, I wonder just a bit if this article, which has been running as the lead for hours, may signify that housing is in real trouble again. I hope not, but it might not hurt to consider that this article is not a news item and real economic and financial news of interest to investors is happening all the time. Why is Bloomberg pushing it on its readership? It’s just another small sign that, along with such arcana as the outperformance of gold versus copper in the past 3 and 6 months, gradually making me dubious about the strength of the “recovery”.
These clowns need to decide if the goal of the housing market is to provide affordable housing to everyone, or if the goal is to be a ratchet that can only go up and never back down…
Last year I had a discussion about the debt level in Switzerland and, I, being a person who thinks that one should save first and buy later, was confronted with the fact that the government debt here is only in the range of about 40% of gdp. Well, I kind of had to admit that Switzerland is really in a reasonable position in regard to the government’s debt level (although some additional problems might arise at this juncture due to the idea by the Swiss National Bank to fight the currency appreciation of the Swiss Franc by buying lots of EUROs).
My gut feeling told me that something does not seem right with this assumption of the good situation of our debt level, although I definitely agree that on the basis of international comparison, Switzerland is really in a comfortable position in this regard. Still, when I checked about the debt level of the public, I saw the problem of debt, as the public is in debt for over 200% of gdp. And yes, you guessed right, it is housing.
Many years ago the banks were able to influence the government in the area of tax policies that resulted in tax laws giving an advantage to having a rather large loan on the home as interest can be deducted from the taxable income but the supposed value of perceived rent you would receive on your home, is counted as income. So, if you own a place outright you will have to pay income on the perceived rent you would earn if you rented out your own home. Even if you do not earn even one $ of real income, the tax authorities will consider this theoretical rent as income.
I was looking at this situation from different angles with the following conclusions:
1. The present tax law has the effect of subsidizing the financial industry in Switzerland in that it promotes keeping much to high loan levels on properties.
2. The high level of loans on properties produces higher prices; IMHO it is not the high prices of property that force you to take large loans on a home, rather the other way around in that the tax laws encourage high loans with the result being higher prices for property.
3. We are able to maintain rather low tax rates and low interest rates due, at least in part, of a tax model that is very attractive to international companies and rich individuals which keeps our unemployment rate rather low as well.
So, why do I bring up this comment in reply to the above post. In my opinion, the Swiss model is successful as long as the larger economic powers allow it to perform in this way. Once things turn sour and governments are forced to ensure that no taxes escape their reach, they will trample onto Switzerland to gain political mileage in their own country. Advantages of today may suddenly turn into disadvantages and, again my gut feeling says, too much debt whether it is government debt or debt accumulated by the private sector can turn a difficult situation into an unmanageable one.
Some 30 years ago, my father sold off an apartment due to the death of my brother and the buyer turned up and paid the whole amount in cash. My father repeated that story often with the words that this man who bought it is a REAL man because he did not fiddle with debt. This had a lasting impression on me and, with the exception of a short episode when I was in the early twenties, I never ever went into debt not even for property.
I just want to add here that the articles made on this sites are very informative and I love to read each one of them.
Thanks,gentlemen, for both comments.
Linus- the detail in this comment of yours is of great value. Thanks for taking the time to contribute it. It’s a brief post of its own. Good work and very sound thinking IMHO.
Keith- yes, one wonders . . .