Apparently not, given the discussion of plans to have the government buy up or guarantee large amounts of home mortgages. I hate to be picky, but you cannot -- repeat CANNOT-- have a serious analysis of these proposals without discussing the housing bubble. The reason is simple. In bubble inflated markets, the ratio of house prices to rents is still very high. This means two things. First, homeowners are likely to pay far more in ownership costs than they would to rent a comparable unit. This is real simple, you can figure it out for yourself with a calculator, or even a pencil and paper. Assume that the ratio of the sale price to annual rent is 20 to 1. Now, let's assume that we get our homeowner a 6 percent 30-year fixed rate mortgage. With the equity payment, the mortgage payment will be about 6.85 percent of the sale price. Now add in 1.0 percentage points for property taxes, a conservative estimate. Throw in another 1 percentage point for insurance and maintenance costs (also conservative) and we get total ownership costs of 8.85 percent of the sale price. [Yes, I am ignoring the mortgage interest tax deduction, the vast majority of these folks will not itemize -- it doesn't pay.] By contrast, rent is just 5.0 percent of the sales price. Then means that our congressional heroes of moderate-income homeowners will have them paying 75 percent more (8.85 percent/ 5.0 percent = 1.77) each year in housing costs than if they were to rent the same unit. Those additional housing costs come at the expense of money available for health care and quality child care. In many of the bubble markets, houses actually sell for more than 20 times annual rent. CEPR just did a short paper on this one with the Low Income Housing Coalition. The second reason why a high sale price to rent ratio is important is that it is not likely to persist, just as stocks don't maintain very high price to earnings ratios forever. Prices in the bubble-inflated markets are falling rapidly. This means that our congressional heroes of moderate-income homeowners are getting them into houses in which they will almost certainly never have any equity. So there you have it, huge excess housing costs and zero equity at the end of the day. That is what happens in bubble markets like San Diego, Miami, New York and Washington. In the non-bubble markets, places like Detroit, Cleveland, Atlanta and many other parts of the country facing high foreclosure rates, these mortgage buyout plans may make more sense. (Of course, my preferred solution is still own to rent. Give homeowners facing foreclosure the right to stay on as long-term renters. This both provides housing security and gives banks a real incentive to negotiate terms that allow them to remain as homeowners. And it costs taxpayers nothing.) Anyhow, it is impossible to have a serious discussion of the merits of these plans without discussing the housing bubble and the extent to which prices are still inflated in various markets. It was incredible incompetence that led so many economists to miss the bubble as it was inflating. If they and the housing experts who listen to them still don't see the housing bubble, they need to find a new line of work.
--Dean Baker