Honesty, No More Subsidies

President Obama’s plan to change federal lending rules so people who are under water in their mortgages can refinance will make a political point about Republican intransigence on his jobs package but won’t sway many voters.

The truth: the housing market will not rebound until the banks get their backlog of foreclosed properties off the books.

This rules-tinkering will only affect a minority of under-water homeowners, so this won’t gin up a still-deflating market. Interest rates weren’t particularly high at the top of the bubble, and a reduction in rate now won’t fix many people’s problem. Polls show Americans opposed to government bailouts of those who bought homes they could not afford. Many people refinanced and went on lavish spending sprees. (I recall asking one friend, rhetorically, where all the money went from the refinancing craze. He laughed and pointed at his new recreational vehicle.) Las Vegas is ground zero for the housing bust because it was ground zero for conspicuous consumption. How many Americans want to bail that out?

These easy finance programs created this mess — and yet the administration is offering more of the same. American voters want someone to tell them the truth rather than offer painless and bogus fixes, which might explain surprising poll numbers in the G.O.P. primary (i.e., support for an inexperienced businessman who loves to say direct things).

The truth: the housing market will not rebound until the banks get their backlog of foreclosed properties off the books. That won’t happen until people are working again and have the income to support the mortgage.

I’ve purchased foreclosed homes in another hard-hit area, California’s Central Valley, and have talked with neighbors. We laugh at the absurd prices people paid for these same homes a few years ago. Regardless of their politics, people know that the terms were too easy. They talk about the “shadow inventory” — the backlog of foreclosures expected to flood the market and reduce prices further. They know that the best solution, however painful, is to get these cheap houses sold so that the market can stabilize.

They know that it’s pointless to delay the day of reckoning and that new programs can’t fix problems caused by old ones.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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