Putting the ‘home’ into homeopathy

The decline in home values is hurting millions of Americans. After all, many had built up a great deal of equity in their homes by the time values had reached their peaks. Now the rates are resetting on many homeowners’ ARMs and the monthly payments are increasing to the point of unaffordability. In the meantime, their equity has evaporated and they are underwater with their mortgages. The only option left if they can’t afford to service their debt is a short sale or foreclosure.

The obvious course of action is to reverse the direction of the trend in home values, right? Wrong! Declining home values are not the disease, they’re the symptom, so turning them around is not the cure. Or as Alan Reynolds, a senior fellow with the Cato Institute and the author of Income and Wealth put it, “Falling home prices are not the problem, they’re the solution.” The cure for home values is some homeopathic medicine—that is, the feds keeping their hands off the housing market and letting homes return to their intrinsic values.

President Barack Obama disagrees. Earlier this month while remarking on the mortgage crisis, the President said:

In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to continue to deepen—a crisis which is unraveling home ownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit.

His solution is the Homeowner Affordability and Stability Plan. His plan has four key elements:

  1. financing help for four- to five-million homeowners who receive their mortgages through Fannie Mae or Freddie Mac
  2. new incentives for lenders to modify the terms of sub-prime loans at risk of default and foreclosure
  3. steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages
  4. additional reforms designed to help families stay in their homes

Few would refute that this plan will cost much more than $75-billion Obama has dedicated to it. Responsible taxpayers who chose not to buy homes they could not afford will subsidize others who couldn’t resist jumping onto the home-as-the-breadwinner bandwagon. Those of us who resisted the lure of “creative financing” knew that home prices could not continue rising forever. Instead we will bail out the countless HELOC abusers who have cashed out their homes under Obama’s plan.

Professor Robert Shiller is an economist from Yale who saw the burst of the housing bubble coming at least two years before the market hit its peak. He performed a study of historical home values that clearly illustrated where the housing market is headed:

The chart shows the Case-Shiller home price index from 1890 to 2012
Case–Shiller home price index data, 1890–2012

All Obama’s plan will do is postpone the inevitable…and cost America a price tag that will reach into trillions of dollars if Americans don’t put a stop to it. Anyone who has studied economics knows that all markets return to a state of equilibrium. No matter how much of our treasury we throw at the declining housing market, we will not be able to prevent a drop of another twenty percent in median home values and much more than that in some hyper-inflated regions.

The cure to the housing market is some homeopathic medicine. The idea of homeopathy is to treat disease with a dose of medicine that would produce in a healthy person symptoms similar to those of the disease. In the case of our diseased housing market, the medicine is lower home values. Lower home values would make home ownership more affordable to average Americans. It would make for healthier mortgages. And it would loosen up the credit market because home loans would be much less risky to lenders.