The real answer to this problem are cram downs by bankruptcy judges. They know who can afford to own a home, who can't and who was a speculator.

Being cynical one might say that the 2005 Bankruptcy law was initiated to createe a whole new debtor class. If that were their idea that this new bankruptcy law would backstop their greed and incompetence, they surely misunderestimated the greed of their colleagues.

When your only source of information is the MSM and lobbyists (is there a difference ?) your perspective becomes substantially misguided.

Maybe congressmen and voters own houses already?

I think Erik L makes a good point in that Congress people are listening to their constiuents who want support on the value of their houses. I heard Barney Frank say that he believes that there has to be what he calls "disinflation" in the value of houses and condos, but he wants to establish a floor.

Well, a lot of moderately wealthy upper middle class folks just recently bought houses in the $500K and up categories, and they really, really don't want their housing values going down.

Those are the kinds of people that Congress cares about.

(That's different from the actual upper classes, for whom policy is set, not merely influenced.)

I heard Frank this morning on NPR. I must say, I was surprised at how much the interviewer was grilling him. He dismissed the moral hazard question saying "the damage to the economy" was the more important issue.

Once again, we have to defeat the business cycle and what better way than to "help millions of Americans stay in their homes."

The idea that the gov't is going facilitate the loss cutting of the mortgage holders and thereby absorb whatever further losses there are from declining home prices sorta turns my stomach.

Two ideas that get very little play are:

- Many Americans would benefit from lower RE prices
- Recessions are (or should be) part of life

While we're at it, why is home ownership such an unalloyed good? That kind of reasoning is so 1999. For Gen-Xers like myself, there are no jobs, only gigs. We aren't loyal to our employers, nor are they to us. That makes home ownership a significant obstacle to carrying out the episodic job change, one that makes the renter's premium well nigh worth it.

Omri:

Renter's premium? Clearly you live nowhere near a market like, say New York City! I pay less than 30% in rent of what my mortgage would be if I owned by 2BR apartment. Even back in 2004 it was less than 50%. It's a renter's discount, and that's before you even get into the ridiculous maintenance fees which equate to "throwing your money away" on rent. For a unit such as mine they would be approaching $1000 on TOP of what my mortgage would be.

People I know who purchased homes during this time did so knowing they were taking on an enormous INCREASE in obligation, including the mortgage tax write-off. The thought was that RE can never go down, so why not? We shall see whether that remains tru in NYC or whether fundamental economics are actually allowed to take hold.

First off, I want to thank Dr. Baker for stating so succinctly what seems to be the obvious – that our government is very determined to do whatever they can to keep housing prices at their current, highly-inflated levels. In effect, the amount of taxpayer money that can be thrown at this situation appears to be limitless.

I guess that I am really somewhat intrigued by the comment provided by Omri, who offers up the Gen-Xer view of the world. In my mind, Omri’s statement seems to indicate to me that perhaps younger people who haven’t seriously looked at buying a house or condominium may not realize how badly the housing price run-up might affect them down the road. As a result, this may be part of the reason for why there doesn’t appear to be much of an outcry about the run-up in housing prices.

In actuality, I think that it’s safe to say that the recent rise in housing prices has lead to a premium for individuals who have purchased housing in the past few years, with renters actually enjoying a lower monthly payment on an equivalent housing basis. Dr. Baker has attempted to indicate this discrepancy between the current costs of owning and renting in a couple of his recent web postings. Also, Erik has indicated this situation in his comment about the costs of renting versus buying in NYC.

For now, non-homeowners such as myself have not been that adversely affected by the housing bubble, as rents generally have not risen by anywhere near the pace that housing prices have risen. However, if our government is able to successfully intervene to the extent that they can stem the fall in housing prices back to their long-term trend, non-homeowners are probably going to be up the proverbial creek without a paddle. I say this because renting and owning are essentially substitutes and, as such, changes in rents and housing prices have generally tracked each other over time. Thus, if housing prices remain high, my primary fear is that rents will rise to catch up with the substantial increase in housing prices that we’ve seen over the past decade. My hope had been that the current gap between the two would be stemmed more through a drop in housing prices, and, less so, through an increase in rents.

While I believe that the rapid run-up in housing prices has been great for the majority of American households, I think this unprecedented increase in prices has created quite a challenge to any new individuals and/or families who will be entering the housing market for the first time in coming years. It really seems like a new paradigm -- where people are simply going to have to be willing to allocate more of their income to housing, and less to other things such as consumer goods and savings.

Why Is Congress So Anxious to Make Homeownership Unaffordable?

That's not quite right. The real question is "Why Is Congress So Anxious to KEEP Houses Unaffordable?" Houses are already unaffordable.

For some reason Bill Gross thinks we need to stop declines in housing prices right now.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+March+2008.htm

[i]Yet we may have passed the point of no return for "clearing" markets. Home price declines of 20% are in fact much more of a shock to the American economy than the popping of the Internet bubble and NASDAQ 5000, because the amount of homeowner leverage is so much greater. A 20% negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes "upside down" – incentivizing them to let their gardens grow weeds instead of lettuce. The decline needs to be stopped quickly in order to avert additional crises.[/i]

So all you first time buyers out there, tough sh*t.

Erik, you're right that right now the market has turned the renter's premium into a discount, but even if it hadn't, we are still in a situation where home ownership is not that great a deal for the individual, nor a good deal for the common good, since people need to have an easier time switching jobs.

The government can try to prop up prices but in reality they can't unless they allow people to make option-arm type mortgage payments (zero down, IO, non-amortizing). The reason the bubble burst was because even with the creative financing, "affordability products" and lack of prudent underwriting homeowners hit the wall of affordability. The only way to get over that wall would be to give people money to pay their mortgage. And while I suspect some in congress, in an election year, would love to do just that, there just is no money to do it.

FB,

quite right - I should have said "keep" houses unaffordable.

However, if our government is able to successfully intervene to the extent that they can stem the fall in housing prices back to their long-term trend, non-homeowners are probably going to be up the proverbial creek without a paddle. I say this because renting and owning are essentially substitutes and, as such, changes in rents and housing prices have generally tracked each other over time

It is correct that home prices and rent track each other. But given the amount of inventory out there, the only way rents are going to rise is if wages do.

People would love to charge more rent if they could, but they can only get what the market will bare. For rent to go up, we must experience substantial enough inflation so that wages ensure that we only spend the same amount of our income on rent.

So when Frank talks about a price floor, he means that he wants us to have inflation -- 1970s style inflation. This would be a great boon (and essentially a bail out for homeowners for two reasons). First, wages have risen so that they now make enough to pay off the mortgage. Second, must homeowners have so little equity that they are not hurt by the fact that their house --- while still the same price in nominal dollars --- is worth so much less because the dollar is worth less.

Of course, inflation is screw us in a bunch of different areas. But they don't care. Frank is just another soldier in the US's War on Savers.

Yep, it's pretty clear that inflation is the intended (?) remedy. I would hate to be on the cusp of retirement in the next decade or so...