Tuesday, October 27, 2009
You Know, I Believe I'm Beginning To Get Riled
Also, Tim from HSH asked what the cost of the credit would be. There are several tiers of cost. The first is the direct funds expended, and that will be in the tens of billions of dollars. The second is involved in the fact that the purchase credit is inducing some people to buy homes when they shouldn't, which factor is aggravated by FHA accepting the credit as a downpayment. As soon as the credit ends and Fed MBS purchases stop, mortgage rates will rise. Then we'll have the following situation: We'll have brought forward poor quality demand. Those buyers who were marginally qualified and needed the tax credit to purchase will have bought houses on which they will be underwater. Needless to say, that will cause further defaults and sales at further losses. Almost all of those sales will be handled by the GSEs, which means that the taxpayers will end up with the losses. And that's where most the costs lie. I will post with more detail on the credit card issues and the expected real cost of the home purchase tax credit. End update.
I've been watching this video over and over again this evening. It is about the only thing that accurately conveys my feelings:
So they want to extend the housing credit, do they? And create a new bracket which will give money to people who are "move up" buyers earning up to $250,000 annually? Because, hell, everyone knows that Granny must go, but buying houses for people with incomes solidly in the top five percent of all US households is a crucial and progressive element of the US economy. I mean, hells bells, there's nothing so American as giving money to the top five percent to buy property from the top one percent.
This is the stuff of which revolutions are made. I cannot hope to find the words to accurately describe this insanity (Bloomberg article):
The deal would reduce the size of the tax credit to 10 percent of the sale’s price, capped at $7,290, the people said. The credit would be available on home purchases that are under contract by April 30, and borrowers would have 60 days more to close the sale.Listen, if we have to pay people 1% of the purchase price to buy an $800,000 home when they've got say, a $200,000 household income, we have a serious problem with insane high earners. If anyone thinks this is really going to make a difference to most people who want to "step-up", that person has rocks in his or her head.
The demand for new homes and condominiums may increase by “more than two times because you’re allowing step-up buyers into the equation,” said Andrew Parmentier, a managing partner at Height Analytics, a research firm in Washington. “ You just opened up a whole new pool of people who can buy into those empty homes and empty condos that were built out.”
The income eligibility for first-time homebuyers would remain the same at $75,000 for individuals and $150,000 for couples. The income criteria for step-up buyers would be $125,000 for individuals and $250,000 for couples.
I would like to daintily point out certain facts itemized (in a very ladylike fashion) in my last post. In 2008 the lower limit for the top 5% of households was $180,000. It is nice to see our Congress Weasels trying to take care of the welfare of the top 5% of households by income, with money we don't have. It is even nicer to contemplate what this "step-up" credit will really be used for - buying a new, cheaper home and walking away from the old one. This is the "pay them to default" tax credit. I also find it wonderful to contemplate that Congress is just so darned set and determined to balance the budget that they are proposing to raise taxes on health insurance next year. But knowing that the union guy earning 40K is tossing some revenue in the bucket so the 200K guy can buy his seventh house is gonna make that feel little ouchie feel sooooo much better.
All of this money is just being thrown away. Note that this is of course a bipartisan deal, shepherded carefully along by prominent Congress Weasels Dodd and Isakson. It is even nicer to understand that this is supposedly being tacked on to the unemployment extension, so that the other Congress Critters can be induced to vote for it, in case their Critter consciences raise difficulties. They are not all weasels, you know.
I can only imagine the scene on the floor when this bipartisan move toward a brighter tomorrow is coming up for a vote. Why, they'll have to detach the Weasels from the pages (creating a giant sucking sound that will reverberate through our nation's capital ), drag Craig out from the men's cloakroom (he spends a lot of time in there practicing his tap-dancing), remove the banker lobbyists from their posteriors (please, please, remember those breath-mints!), rip Barney Frank away from his latest consultation on foreclosure avoidance with the the GSEs, get Rangel to hold those mortgage apps for low-cost refis on his numerous primary residences (he's done very well with those so far), extract Dodd and Conrad from their meeting with the FBI regarding VIP loans, and interrupt Reid's very, very important calls on some very, very important business. But we can all feel great about the fact that Isakson has nothing whatsoever to do with Georgia real estate, and will absolutely, positively not gain anything personally from this sort of thing. It's not like his business is, you know, real estate, or as if he ever had anything personally to do with the sea of defaults around the Atlanta area. As he assures us in his own words, he is a completely disinterested expert:
Isakson has pushed hard for a tax credit for homebuyers since January 2008 because he knows that it will work. In the mid-1970s, America faced a similar housing crisis when a period of easy credit and loose underwriting flooded the market with new construction. Interest rates rose, the economy slowed and America was left with a three-year supply of vacant homes. Congress responded by passing a $2,000 tax credit for anyone purchasing a new home for their principal residence. Isakson, who was in the real estate industry in Atlanta at the time, says the results were clear and swift as home values stabilized, housing inventory dropped and the market recovered.Sniff. It's great to have these people looking out for us, and to know that there is not one iota of self-dealing in this proposal. I'm also just really touched and awed at the very high standards of professional journalism which prevent newspapers from ever mentioning any possible conflicts of interest involved in such proposals.
Isakson spent more than three decades in the real estate business, beginning his business career in 1967 when he opened the first Cobb County, Ga., office of a small, family-owned real estate business, Northside Realty. Isakson later served as president of Northside for 20 years, presiding over the company’s growth into the largest independent residential real estate brokerage company in the Southeast and one of the largest in America.
Anyway, if you were perchance wondering why economists not paid by NAR pretty much uniformly agree that the housing tax credits are a totally useless economic stimulus on a par with trying to wake up in the mornings by lacing your coffee with Valium, but yet somehow this message never penetrates through to the weasel warrens of Congressional power, you might want to read about one of the very earliest US cases that went to the Supreme Court, Fletcher v. Peck. Dear readers, this is as Georgian as peanuts. Remember when those started showing up in everything? When will you learn?
Night of the Living Undead Realtors and Property Developers is a pretty scary film, now playing in a Congress near you! A free people can not long tolerate such insults, so think it over and call your Congress Weasel. I'm sending mine a link to this video along with a gentle suggestion that I suspect that this legislation is injurious to the public interest, a hint that perhaps a bit more attention to the fate of common folk might be warranted, a respectful reference to the fate of the Fletcher v. Peck legislature, and a Patton quote:
All right now, you sons of bitches, you know how I feel.
One wonders how all this is going to end.
You have really done well to put that bit out. Keep it up.
As for the rest of it, you need to see it's all about fairness. Why should first-time home buyers get all the bene'ies? Why should the unemployed get all the bene'ies? Employed people making six figures vote too!
I wholeheartedly agree.
If you have a 200K income, the max you can afford is a 600K house (unless you're putting down way more than 20%).
That said, as far as the details of the possible extension go, why decrease the amount below $8K? Why include borrowers in the higher income brackets?
You got to admit it was pretty sneaky (or clever) to include it in the unemployment bill...lawmakers never cease to amaze me with their tactics.
Reports have already suggested that the 1st round of the tax credit has tallied about $10 billion in tax revenue.
Is this program so effective that we're ready to let it go even longer, jacking up the final price tag?
I had originally proposed extending it (if at all) just as long as the Fed's MBS purchase program is going. That at least makes sense to me.
You're right that the real factor affecting prices are the MBS purchases, which are driving down mortgage rates and having a powerful effect on affordability.
Calculated Risk has written a lot about the economic futility of this tax credit. The problem we have is household formation. People buying are just moving from one occupancy to another; since rents are related to home prices, we're not really doing anything with this credit but spending money we don't have.
Extending this credit further is going to have a negative effect on the economy.
The "step-up" provision - affecting homeowners who want to buy another house and have been in their own houses for five years - is either going to be a straight giveaway or a method to help an underwater homeowner get into a new cheaper house and default on the old.
And although your recent post on refis is correct in noting that the lower mortgage rates are not really doing much for beleaguered homeowners, the point is that they are helping the economy by giving many homeowners a few hundred dollars extra each month, which will help some homeowners who would have defaulted, and definitely stimulates PCE.
You can make an economic case for the MBS purchases. It is lowering the impact of the mortgage debt load on the economy.
But there's no real economic benefit to the purchase tax credit - it seems to be a baldfaced handout of money to banks (who are basically getting paid to foreclose) and realtors.
I don't doubt that that the home purchase tax credit will prove to be a net negative to the economy. It is certainly going to cost a lot more than the face value of the credits. For one thing, those using the credit as a downpayment for FHA loans are basically underwater immediately, and since FHA manual underwriting goes up over 50% DTIs, we expect to see the FHA require massive public funding in the future.
For another thing, the debt will be with us forever - we are borrowing money to do this, and while borrowing money is cheap now, in a few years the cost is going to rise sharply.
Finally, we are not really changing home prices over a longer horizon. As soon as the credit ends, the pricing effect ends. It is true we are inducing more people to buy in the near term, but it is likely we are doing so by pulling marginal purchasers into the market who will then default at very high rates. Because the vast majority of these sales that are financed are financed through the GSEs, we are shifting current defaults from private creditors to the public funds in a few years.
There are realtor and broker comments all over the web about routinely getting borrowers financed through FHA at 50-60% DTIs. This is going to be very costly in a few years, and federal funds will be used to cover the deficiencies.
Home prices are due to decline significantly as soon as the MBS purchases stop. Freddie dropped its refi purchases, and we saw the effect on mortgage rates quite quickly. Private purchasers will only take paper with this type of risk and this type of yield if it is government guaranteed, which in effect turns the paper into high yield T-Bills.
The MSM and the government are out of touch with the anger out there -- anger that exists on both ends of the spectrum. Why should liberals support a president that signs a deal with big pharma to show "restraint" on price increases? A president that hires as his Treasury Secretary the man in charge of making Goldman whole on their AIG CDS swaps, saving them $5b to give away in bonuses? Why should conservatives support a party that authors a nefarious give-away to realtors (housing tax credit)? Or one that was more than willing to make Goldman Sachs the principal beneficiary of government largesse?
The problem with populist rage is that, when it finally bubbles over, it typically expresses itself in a way that is not pretty (much less constructive). IMO, that is the ultimate outcome to this travesty.
this and everything else since this mess began
"You Know, I Believe I'm Beginning To Get Riled"
You need to take a chill pill!
Wait though. The government will no doubt be offering "cash for chill pill" technology in the not-so-distant future. The measures will be sponsored by congressmen with 20+ years in the pharmaceutical industry.
I wish I could say for sure that I was joking.