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by Thomas M. Sipos, managing editor.  [May 10, 2007]





[]  If home prices are too high for your budget, don't feel bad. You can still enjoy the vicarious thrill of paying for a stranger's house, thanks to pending state legislation.

Maybe you've wanted to buy a house for many years now, but you've seen prices skyrocket. Especially in California. You might have gotten a zero-down, subprime mortgage, but mortgages must be repaid.

And although you're on a tight budget, you're a responsible person. You don't want to buy property only to default on the loan, much less declare bankruptcy. You're an ant, not a grasshopper.  You work hard and save for tomorrow. You don't borrow money you can't repay.

Buy House Poor

Instead, you've waited for prices to come down. Everyone said they would. All that easy mortgage money was driving up home prices to artificial levels. The houses weren't worth all that. Bad loans were distorting the market. A market correction was inevitable. It's not like current homeowners have any right to complain when reality hits.

And reality has hit. On April 2, 2007, the Associated Press reported: "More than two dozen subprime lenders have shut down in recent months and others are scrambling to stay in business as a spike in defaults caused by borrowers unable to make payments has rocked the mortgage industry. Now, as lenders tighten credit standards, the housing market will likely see further declines in price and output, senior economist David Shulman wrote in the quarterly [UCLA] Anderson Report."

Did he say "further declines in price"? That means houses will become more affordable -- good news for responsible lower- and middle-income people who don't borrow more than they can repay. Nice to see the market works for them too.

Here's more good news. Alex Spillius reports in the London Telegraph (April 6, 2007): "The mortgage crisis in America has deepened so much that family homes can now be bought for less than £15,200 -- the price of a new car. A four-bedroom home near the original Motown recording studio in Detroit recently sold for £3,700 ($7,000), less than most used cars. A boarded-up bungalow fetched £685, and a three-bedroom house listed for £276,000 attracted just £69,000. … Up to 1.5 million Americans could lose their homes in the next two years, while repossessions rose by 42 per cent in 2006."

In other words, up to 1.5 million homes will suddenly become available to new home-buyers at sharply reduced prices. Since when is affordable housing a bad thing?



Of course, there are losers. Among them are irresponsible mortgage lenders who threw money at irresponsible home buyers. Wealthy homeowners not in default will also see their artificially inflated home prices fall to true market levels. (Easy come, easy go.) But the winners will be the responsible lower- and middle-income people who've waited patiently for the free market to provide affordable housing.

Yet just as the ants are about to reap the rewards of their patience and thrift, state governments are stepping in to bail out the grasshoppers -- with the ants' tax money -- and keep home prices artificially high. Gilbert Le Gras reports for Reuters (March 27, 2007): "A growing number of state housing agencies are developing or considering issuing bonds to assist subprime mortgage holders to refinance their obligations at fixed rates."

That is, they will issue taxpayer-subsidized loans to people already proven to be a bad risk. Le Gras cites Ohio, Maryland, Rhode Island, Massachusetts and Virginia as states that already have or are developing mortgage refinancing programs. Colorado, Washington, Wisconsin and California are considering such programs.

The political pressure comes from homeowners in risk of default and from those in no such danger but who would like to keep their home prices artificially high. Helping the first group is welfare for the irresponsible. Helping the second is welfare for the rich, because market interventions to keep home prices high benefit those who "have" houses at the expense of those who "have-not" houses.

Think about it. The free market was all set to make houses more affordable for greater numbers of responsible lower- and middle-income people. Instead, government will distort the market to keep prices artificially high for the rich and irresponsible.

So if you can't afford a house, don't blame the free market.

Copyright © 2007 by

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