Why Congress' Housing Fix Won't Help Steve and Laura
The Washington pols who are pushing housing legislation should meet my friends Steve and Laura. They are a 30-something couple with a two-year old daughter, and they have been waiting for years to buy a house.
Even though they both work, they currently live in a modest apartment because that is all they can afford. During the boom, they didn't let a real estate agent talk them into buying a house that was beyond their means. They didn't roll the dice on a no-downpayment, low-rate balloon mortgage. They ignored all the hype about buying now because prices will keep going up. Instead, they saved, and they worried about whether they could ever afford the proverbial American dream.
While they were doing the right thing, they were priced out of the housing market. Now, the real estate bubble has burst, and prices are coming down. Finally, you might think, Steve and Laura's prudence is paying off. They are going to get their chance.
There is just one problem: in the name of preventing foreclosures, Congress has forgotten all about Steve and Laura. It is using the tax code to manipulate prices, and to pick and choose winners and losers in the post-bubble world. Some of the legislation it is scrambling to pass would keep starter house prices artificially high and actually make it harder for Laura and Steve to buy their first house.
The bill approved today by the Senate would give tax breaks to people who buy foreclosed houses, which would only raise the price of those homes. Nice for the bankers who own them. Not so good for the folks who want to buy them.
The version approved yesterday by House Ways & Means Committee uses a tax credit to provide interest free loans to low-income homebuyers. Isn't that what got us in trouble in the first place?
In some ways, the Ways & Means measure is fighting with itself. On one hand, it includes provisions intended to help first-time homebuyers. On the other, it tries to prop up home values to protect current owners. To the degree it succeeds, the Steves and Lauras of the world could still come out losers.
Take, for example, a provision that will allow state and local governments to sell as much as $10 billion in new tax-exempt mortgage revenue bonds. The Ways & Means bill says states can use the money to either make loans to first-time homebuyers or to refinance subprime loans. Traditionally, these bonds have been used to provide low-interest loans to new buyers. But to the degree local governments use the money to help homeowners refinance underwater loans, they will be holding up home values and making life tougher for new buyers.
Instead of using the tax code to manipulate asset values of homes, I suspect the best thing that Congress could do for Steve and Laura is…nothing. House prices will fall a bit more, eventually new buyers like them will get back in the market, and everything will be fine.