When Government Gives You a Free Subsidized Lunch . . . Take It!
“America’s housing system was at the centre of the last crisis. It has still not been properly reformed.”
—The Economist, “Nightmare on Main Street: the Horror Underlying America’s Housing Market“; August 20th -26th 2016.
If you don’t want something (else) keeping you up at night, skip The Economist’s Jeremiad on the state of the U.S. housing market — specifically, the government’s role financing and insuring mortgages.
Unfortunately, the magazine is almost certainly correct about three things:
One. Fannie Mae and Freddie Mac, the quasi-nationalized, perpetually-in-conservatorship behemoths that dominate U.S. housing finance, are woefully undercapitalized — and therefore at risk if there’s another downturn.
Which means that taxpayers are at risk.
Two. Mortgages are too cheap, because rates don’t reflect the risk of default.
Three. There’s zero political will or even ability to make the system safer, because that will: a) require raising billions of dollars now (vs. at some future date, undoubtedly in response to a financial crisis); and b) result in higher mortgage rates, never popular politically, and a dubious move when the economy’s strength is (still) in doubt.
Subsidized Mortgages
What are consumers cum taxpayers to make of all of this?
My 2¢: if you’re going to be on the hook when the music stops — and you are — you might as well partake of too-easy money while it’s available.
Just make sure you’ve got the cash flow to service the debt, and watch what you pay (as millions of home Buyers discovered a decade ago, leverage is deadly when asset prices — read, home prices — fall).
P.S.: Unlike The Economist, I see the housing market as much less vulnerable than a decade ago.
That’s because the multi-trillion dollar securitization-and-derivatives machine ginned up by Wall Street — fueled by ever more dubious mortgages — has largely been unplugged.
See also, “Number of the Week: $600 TRILLION.“
