First, let's start with the fact any reader of Fund My Mutual Fund will know this day was coming. From the moment the $8000 first time home buyer handout was announced we said there would be another one because by the time November 2009 came around the economy would still be putrid and more handouts would ensue. In fact originally the $8000 first time home buyer handout was going to be $15,000 until it was reduced at the very last moment before it went into the stimulus plan - if anything *that* was the only surprise here.
Since then we've been espousing this tax credit would be extended to everyone with the potential for the full $15,000 on the next go around. This has now been floated as a trial balloon in the New York Times this morning; housing stocks are surging.
- Democratic Congressional leaders are working with the White House to extend an expiring $8,000 tax credit for first-time home buyers, and aides said Wednesday that they were considering making it available to current homeowners who purchase a new residence.
- Extending and possibly expanding the popular home-buyers credit, which is due to expire after November, is high among options for further stimulating the economy and creating jobs, Congressional aides said.
- Mr. Zandi said that expanding the availability of the credit to more home buyers through August would cost perhaps $30 billion.
- Keeping the home-buyers credit and broadening it has been a priority for real estate agents and the home builders lobbies (and what is good for lobbyists, is what is good for all of us)
This is a win for banks, real estate agents, home builders, buyers, sellers, lobbyists... everyone wins here. Except for those under the age of 30 I suppose, who eventually will foot the bill for this and every other debt laden bomb we are layering on them, their children, and grandchildren. But no worries - generational arbitrage is what the United States is now about.
Not as we said with Cash for Clunkers... there are many ill fated effects from these programs. Aside from simply pushing demand from the future into the now, that program actually HURTS the lower tranches of our society. Why? Because it would drive used car prices up as we take 750,000 cars that would be in that market and make them evaporate. On your first day in Economic class in High School (what's that? most high schools don't bother with such courses because having people understand finance would be dangerous to our leaders? good point) - you would learn that where supply and demand cross, you have price. If supply of an item drops, while demand holds constant, then prices must go up. Hence our prediction was that used car prices would go up... which of course is the dirty little secret of Cash for Clunkers.
And what did we see in a news story yesterday?
- Used vehicle prices shot to an all-time high last month, spurred by falling inventories, according to a closely watched barometer of the second-hand car business.
So as the politicians have said, Cash for Clunkers was a rousing success. Unless you are in the lower third of this country... now you have to find even more money for transportation.
Why am I mixing cars and houses? Because the parallels are identical. When new cars could not sell throughout the 2000s we went to rebates, particularly after 9/11. That created a surge in buying. Then you trained the consumer that she needed big rebates to get into the showroom. So what came next? 0.0% financing. That created a surge in buying. Then you trained the consumer that she needed big rebates and cheap financing to get into the showroom. So what happens to some of the car companies who have to sell products with gimmicks? They go under government control so as to not go bankrupt... yet you still have a consumer who has now been trained in under a decade to only jump when easy credit and rebates are flowing in all directions. Now after a decade of such actions its reached the point the companies cannot offer terms good enough to bring in the buyers at levels of the old - so who steps in? The government - and Cash for Clunkers is born.
That should sound familiar with our housing market - in fact its the exact same parallel. Just replace Chrysler and General Motors with Fannie Mae and Freddie Mac. Replace Cash for Clunkers with first time $8000 tax credit (soon to be more!). Replace 0.0% financing with historically low interest rates, option ARM loans, interest only loans, and now FHA roll the closing cost into the principal loans! Do you see any difference? None - we have our 2nd market where the consumer is now trained to be addicted to cheap financing, and rebates. This is what America has come to - our 2 largest expenditures in life... auto, and housing - fully subsidizing by cheap credit and handouts. Those handouts used to come from private industry until they found they could no longer squeeze blood from stone. So now the government has stepped in as they have unlimited pocketbook. They can do cheap financing and rebates til the cows come home - because they have a printing press. And they don't give a damn if they lose money day and night. In fact they are doing programs where they know they will lose money - because it's all about the subsidized American economy and kicking the can down the road.
In fact another story in today's New York Times:
- In the year since the government stepped in to rescue the collapsing mortgage giants Fannie Mae and Freddie Mac, the agencies have taken $96 billion from the Treasury, and may still need more.
- That was the somber assessment delivered Thursday by the federal agency charged with overseeing the government-controlled Fannie and Freddie, which have lost a combined $165 billion since July 2007 as their bets on the housing market went bad.
- Their books are still bleeding red as foreclosures rise and homeowners — even the highest-quality borrowers — fall behind on their mortgage payments.
- ... as unemployment nears 10 percent (grossly understated) and homeowners struggle to persuade lenders to refinance their mortgages, delinquency rates are rising.
Do you see how it works, we lose on BOTH ENDS of the transaction just so we can claim the US economy is doing awesome. We take our hits on the front end as we subsidize via future taxpayers handouts and federal reserve money printing to drive down mortgage rates. We then get hit a second time on the back end (another bill onto future taxpayers) through losses on bad mortgages. Do you see how circular it is? But in the middle we have... prosperity. And better economic numbers. And recovery. And we continue doing this... in fact doing it bigger, and bigger. As long you don't look under the shells in the shell game, you smile and high 5 and say everything is working great.
Now let's delve further... the government is happy with what they are doing in housing. Remember the used car example? What did all this subsidization using money we don't have but borrow from the Chinese/Japanese which our future generations will pay for do? It raised the prices of used cars. Which sort of stinks for those in the used car market - but I suppose good for those who have a used car to sell. But you can't really borrow against your car? Wait a second - that's not true. [Jul 24, 2009: Wells Fargo Offers Car ATM Option] In easy money America our banks even let us do cash out financing on our cars - an asset that depreciates no less... we're that addicted to cheap money. We're just that pathetic. But in the housing market - the government action is doing the same thing as the used car market. It is not allowing prices to go where they would in a non subsidized system. So home prices are still elevated from where they should be due to a trillion plus of Federal Reserve mortgage backed securities buying (which drives down interest rates), and then tens of billions of subsidies from the federal government. But in the government's eyes this is a good thing. Why? Because each dollar higher we drive up home prices through subsidization is a day closer we get to the return of the house ATM. If we, as a collective, can steal from future generations to subsidize today's people, and get home prices back up via ANY means possible - then we can borrow against our homes and start this daisy chain all over again.
At that point our politicians will jostle for a TV camera as they did 6 weeks ago and declare it was a success - just as they did with Cash for Clunkers. I am telling you this so you comprehend what success means in America now.
Now let us take a quick look at what a difference a $15,000 government handout could do versus $8000. We now have many states that allow the $8000 to be used as the down payment - heck even the closing cost. So as a renter in America you need not have put a penny towards your home - we are just that generous as a country (don't mind all the losses we outlined above). If you use an FHA loan which only requires 3.5% down ... that means in many states you can walk into a home with a value of up to $228,000 without a single dollar coming from your own pocket. That is quite amazing considering the median value of a home in America is far below that level now - effectively you can now buy up to about 65-70% of all housing stock in America without a dollar out of your pocket - just use a FHA loan and $8000 from your fellow citizen to cover the down payment. But it could get a lot better! Far better.
If we are lucky enough to get a $15,000 home handout rather than $8000, combined with a 3.5% FHA loan, we will now let Americans walk into homes up to $428,000 without having to front even 1 penny from their own pocket. I would assume this means over 90% of all housing stock in America would then require no money from what we used to call renters. And as we know, the #1 indicator of foreclosure and/or walkaway from homes is no skin in the game. [Jul 6, 2009: WSJ - No Money Down or Negative Equity Top Source of Foreclosures]
Certainly this all work out in the end. [Sep 6, 2009: And So the Next Crisis Begins - FHA Loans Default in Increasing Numbers - 2% Threshold Threatened] I now look forward to success in the housing market... as a stock market speculator you have to be giddy. On the backs of our future generations we can buy almost any stock, as the government will beg, borrow, and steal to make sure we have prosperity today. Just remember the cash for clunker example (since the ill effects are far more easier to see in the auto market) as housing figures are better than expected in the coming 12 months on the backs of our youth's (born and unborn) piggy banks. As they like to say in government....