From the Wall Street Journal:
August 22, 2007; Page A14
By HOLMAN W. JENKINS, JR.
Bailout has been a busy word in the last two weeks. But lending so solvent institutions won’t go under for lack of short-term liquidity is very different than bailing out insolvent institutions from their bad decisions. In any case, we’ve made peace with a financial system that lives a little closer to the edge on liquidity than it would if there weren’t a Federal Reserve. Whether the alternative would be a more stable world, with as much growth, is uncertain. But there’s no doubt that the system has been conditioned to expect a general subsidy to risktaking by way of the Fed’s willingness to provide cheap money in an emergency.
Everybody talks about moral hazard. A wisp of memory came to mind last week. Then-Fannie Mae chief Franklin Raines visited The Journal years ago and entertained himself by mocking editorial writers who assume that establishing that a policy is economically inefficient is enough to establish that it’s unwise.
He yukked it up quite a bit, in fact, noting that voters are perfectly entitled to assert values other than those of the market, namely that homeownership is a social blessing and should be encouraged with subsidies. And so we’ve done with tax subsidies, lending subsidies and a concerted set of policies by Bill Clinton’s HUD to move low-income people out of rental units and into homes they own. His goal, which was achieved, was to lift the homeownership rate from 64.2% to 67.5% of households.
But a home financed by a mortgage is not just an asset. It’s also a liability. We owe thanks to Carolina Katz Reid, then a graduate student at University of Washington, for a 2004 study of what she dubbed the “low income homeownership boom.” She considered a simple question — “whether or not low-income households benefit from owning a home.” Her discoveries are bracing:
Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36% returned to renting in two years, and 53% in five years. Suggesting their sojourn among the homeowning was not a happy one, few returned to homeownership in later years.
Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30% — less than if their money had been invested in Treasury bills. This meager capital gain was about half that enjoyed by middle-income homeowners.
A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job. Ms. Reid’s counterintuitive discovery was that higher-income households were “twice as likely to move long distance if they’re unemployed.”
Almost needless to add, the great squarer of circles for middle-income homeowners, the mortgage-interest deduction, won’t turn a house into a paying proposition for those with little income to shelter.
Bottom line: Homeownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families.
And yet subprime lending wouldn’t be a business without a flow of customers, and politicians and a vast array of interest groups flog the notion that owning a home is the American dream for anyone who can squeeze sideways through the door. Now this curse is being repaid with interest, and by an inherently unpredictable route — don’t buy any “news analysis” that says that because subprime lenders were known to be making risky or fraudulent loans, last week’s credit meltdown in unrelated markets from here to Tokyo should have been foreseen
For the sake of people trying to climb into the middle class, let’s hope that one lesson will be a rethinking of policies designed to saddle them with money pits. The Democratic presidential contenders are currently outbidding each other in ways to help “homeowners” (a dubious term in the present instance) avoid foreclosure. What might really benefit these citizens is being freed to return to renting, where some real bargains will likely be had in the months and years ahead.