Thursday, June 19, 2008

There are better ways to help the financially distressed.

With regard to Martin Feldstein's Op-Ed, "A Home Price Firewall", the biggest thing to note is that, aside from issues like how quickly they drop, in the long run the dropping of home prices does far more good than harm, and the lower the better. Is it possible to go too low? You wouldn't like to be able to buy a beautiful home in the suburbs for $1,000? For $1? You can't go too low. Those who own homes still get to live in them. Those who don't, get to buy them for a lot less, and can be far more financially secure.

Sure, speculators would lose, as would some others, like an elderly couple selling a large home to buy a smaller less expensive one for retirement. If before their old home was worth $500,000 and the new one $200,000, they would get to pocket a $300,000 difference. If instead housing prices dropped by 50%, so would the amount of the difference that they get to pocket. Now, the old house is worth $250,000 and the new one $100,000, so they only get to pocket a $150,000 difference.

But there would be far more gainers than losers over the long run. I have a working article that I think covers well the home price issue as well as the general epidemic of financial distress, "Let's Cut the Ammunition to the Housing Arms Race Permanently".

Regarding the issue of stopping "prices from overshooting on the way down in the same way they did on the way up.". I think it's better to err in the direction of prices going too low, than not going low enough. The real median home prices is still almost 80% higher than it was in 1970, according to National Association of Realtors data.

Certainly, we should give more aid to those in financial distress, whether they are homeowners or not, but higher priorities should be things like universal health insurance, universal free preschool, and far more college aid, so students graduate with far less student debt, which is strangling a generation and inhibiting the young from taking risks and innovating, as well as starting families.

Finally, as Mark Thoma mentions, there's the issue of default. Feldstein's would make these government loans full-recourse, but they could still be discharged in bankruptcy. Given today's epidemic of financial distress, and that these loans are for large amounts (20% of the value of a home), many would be discharged in bankruptcy.

And, it would be horrible to go further down the Republican-lead path of making debts non-dischargeable in bankruptcy. The bankruptcy laws were enacted by our founding fathers to end lifetime indentured servitude, yet in the 2005 BAPCPA law even fully private student loans were made non-dischargeable in bankruptcy (with extremely rare exceptions). These are loans without the protections of government student loans like payments limited to 15% of disposable income or less, and low capped interest rates. The New York Times has an excellent article on this.