Proposal Du Jour
I literally got 4 words into James Wilcox’s Op-Ed piece in today’s New York Times before finding something objectionable.
That would be the word “make” — as in, “A Way to Make People Buy Homes Again.”
To paraphrase a certain character from the movie Jerry McGuire, “James, you lost me at “make.'”
2010 Home Buyer Tax Credit
Of course, the last time the government did something to “make” people buy homes was the 2010 tax credit.
How did that work out?
If you’re not in the housing market, let me describe what the graph of housing sales that year looked like: a wave cresting in June . . . followed by a crash. See, “Twin Cities Closed Sales, 2005 – 2011” (above).
Ask any Realtors if they’d like to live through a repeat of 2010.
Different This Time?
So, what exactly is Wilcox proposing?
A downpayment protection plan that “would provide a sensible and affordable way to restore confidence.”
Homebuyers could purchase protection from the government for a one-time fee, say 1 percent of the house purchase price, or $2,000 on a house selling for $200,000. The fee could vary with the risk of house price declines in each area. The plan would be open to all buyers.
At the end of three years, the government would automatically mail checks to protected homeowners if average house prices in their area were lower than when they purchased their homes.
So, what’s wrong with Wilcox’s plan?
Just two things:
First, it would create yet another government program aimed at supporting home prices.
If that actually worked, the housing market would be in great shape: there are literally trillions in government guaranties backing various home mortgages at the moment.
In fact, something like 90%-plus of all home mortgages are currently government-originated, insured, or not so indirectly financed.
Devil in the Details
The other problem with downpayment insurance has to do with actually administering it, starting with setting the fee to participate in the program.
According to Wilcox, “the fee could vary with the risk of house price declines in each area.”*
And exactly which crystal ball possesses that information?
No less than Fed Chairman Ben Bernanke, as late as 2006, pooh-poohed the idea of a significant, national housing downturn.
If you think anticipating the overall market’s direction is tough, try forecasting over 200 local housing markets.
Magical Assumptions and Confused Thinking
The real problem with Wilcox’s confused proposal is that it’s not clear whether it’s an insurance policy, a guaranty or simply another potential government handout — or a combination of all three (my read).
Plus the fact that it requires a new government agency to administer.
Aside from that, I like his idea . . .
P.S.: Multiple choice test — guess Wilcox’s profession:
Sorry, I’ll try to make the next one harder.
*Wilcox’s blithe assumptions recall one of my favorite economist jokes:
Three people are stranded on a small island. One is a physicist, one is a circus strongman, and one is an economist. After a few days of surviving on fruit, they discover a cache of canned food, and they have to decide how to open it. The physicist says to the strongman “Why don’t you climb that tree, and smash the cans down on the rocks, and burst them open?”
The strongman says, “No, that would spatter the stuff all over. I can open the cans with my teeth!”
The economist says “First, we must assume that we have a can opener.”