Government programs cannot stop the decline in housing prices. The latest evidence of this comes from a study of first-time homebuyers who took advantage of an $8,000 tax credit available between 2009 and September 2010.
According to a new study, housing prices in 110 of 157 studied cities have dropped more than the value of the $8,000 tax credit since June 2010. Home prices in six of the 157 cities increased.
In short, not only did the $26 billion program fail to stabilize housing prices, but those who took advantage of the program have seen the value of their houses drop by more than the value of the tax credit that they received. Nationwide, the average price of a home has dropped by about $15,000 since 2009. Of course, the housing market is really a collection of individual local markets, not a national market. The fact that houses are cheap in Detroit does no good to a potential homebuyer in New York.
As with other proposed housing “fixes,” such as the several attempts to structure the Housing Affordable Refinance Program, the net result of government intervention has been more to increase and then dampen the expectations of homeowners with problem mortgages than to have any real effect on the housing market.
Meanwhile, portions of the housing industry focus their efforts on preserving Fannie Mae and Freddie Mac, the two mortgage finance giants whose actions contributed so much to the housing crash and whose failure has cost taxpayers over $150 billion and counting. Even former Obama advisors oppose efforts to create “new” versions of the two.
Similarly, attempts to restore the conforming loan limit (the maximum size mortgage that Fannie and Freddie can buy, package, and sell to investors) from $625,000 back to $729,750 will have little effect on fixing housing, despite claims to the contrary. The reduction to $625,000 affected only about 1.3 percent of loans handled by Fannie, Freddie and the Federal Housing Administration.
This is far too small a proportion of the market to have any real effect on housing prices. However, the lower conforming loan limit will help to restore the creation of privately produced mortgage-backed securities, a necessary step to a housing finance system without government subsidies that distort the market.
Meanwhile, both Fannie and Freddie will need $14 billion more from taxpayers after their third quarter financial results were unveiled. Fannie asked for another $7.8 billion, while Freddie asked for another $6 billion. Together, the two have absorbed about $169 billion so far, with at least another $50 billion in additional subsidies likely to be needed through 2014.
Government programs are not going to solve the housing crisis. Instead, they will either delay efforts to establish a new housing finance system or benefit only a few select homebuyers. The only way that the housing market will recover is enabling buyers and sellers to have a clear idea about the number of homes that are likely to come on the market and letting it set prices based on demand. This is not a process that can be sped up by government intervention, no matter how well intentioned.