Here’s a Clue for Wall Street and Washington both.
The secret to home price affordability is not a tricked-out mortgage under which I only pay interest. It’s not a 100% mortgage under which I own nothing. It really has nothing to do with the availability of a secondary mortgage market.
The secret to home price affordability is an affordable price.
I have been amazed at the response of politicians and the press to the recent fall in home values. They’re looking to bail-out everyone — the companies that made the loans, the people that took the loans. They absolutely refuse to consider that it’s the availability of ridiculous credit on silly terms which has caused the Housing Bubble, and that it is not in the best interest of home buyers to see those conditions continue.
What is in the best interests of home buyers is a market where someone with an average income can get a real mortgage that lasts 15-30 years, has no pre-payment penalty, and has level payments.
Let’s say you and I want to buy the same home. Your bid is based on a
30-year conventional mortgage with 20% down. My bid is based on a no
money down, interest only loan. Who can bid more?
There is a place for those fancy-schmancy instruments. What used to be
called a "balloon note" is perfectly reasonable for a real estate
professional who can pay off that loan when it’s due if they can’t move
the property in time. Such instruments are for people who know what
they’re doing, and who have the money to back their play.
They’re not for ordinary people.
Because these loans have been used by ordinary people throughout this
decade, home prices have become completely unaffordable to anyone
unwilling to play the game. Conservative home buyers were consistently
outbid by hosers, with government subsidies, so that they either bought
a cracker box or got into the game themselves.
Now we’re paying the price for this nonsense. If the home market is
ever to attain a reasonable equilibrium we need to insist on some
things:
- No more interest-only loans, except to qualified investors with capital to pay them.
- No more no-money-down loans, again you prove you don’t need it.
- No more untraceable mortgage securities. If someone buys your loan you have a right to know who they are and how to reach them.
- No more press reports encouraging speculation.
- No one gets bailed out if their total net worth is over, say, $100,000. Make it like banking insurance.
There needs to be a lot of pain in this market. (Picture from Seeking Alpha.) The amount of capital
available to home buyers needs to go down. The number of people who can
qualify for a home loan needs to go down. The prices of homes need to
go down.
This is all in the best interest of home buyers, both first time and
last time. We have turned home buying into a Las Vegas casino game, and
fundamental reform is needed to make sure the game never starts up
again.
Every other proposal is bunk.
