It seems the housing market is destined to be the target of yet another administration’s clumsy tinkering. In another quiet-part-out-loud incident at the White House recently, the president was asked whether he would declare a national emergency in order to act on housing affordability. Trump responded that he doesn’t want house prices to go down because home valuations are such a large part of the “net worth” of homeowners, especially those in “their later years.”
The exchange is worth watching. Note the collectivist premises underlying both the reporter’s question and the president’s answer. Note also the content of that answer, which admits to a public policy of higher housing prices for existing homeowners despite the contradictory wish of affordability for everyone else. Trump followed several days later with more economic nonsense:
[I want to] protect the people that, for the first time in their lives, feel good about themselves. They feel like, you know, that they’re wealthy people.
Existing housing, people that own their homes, we’re going to keep them wealthy. We’re going to keep those prices up. We’re not going to destroy the value of their homes so that somebody who didn’t work very hard can buy a home.
These observations comport with many of the ideas being offered recently by the current administration to supposedly address housing affordability. But what precisely are these ideas addressing? The answer is that they are simply a continuation of the socialist schemes trotted out by prior administrations, none of which are remotely about returning housing to a free-market context and, by extension, none of which have a hope in hell of alleviating the affordability issue.
$200 Billion MBS Purchases and Other Dumb Ideas
The latest housing market caper—no doubt whispered into Donald’s ear by the intellectually bereft Bill Pulte—is to have Fannie Mae and Freddie Mac buy $200 billion worth of mortgage-backed securities (“MBS”), thus injecting liquidity into the mortgage market and driving rates down. It’s hard to imagine this proposal coming from anyone with a working understanding of capital markets.
For starters, Fannie and Freddie don’t have $200 billion in cash. The liquidity needed to purchase the MBS would have to come from further money printing and/or increased indebtedness on the part of the federal government and its agencies. These are inflationary measures.
Also, buying MBS is a technical process the logistics of which the current administration apparently fails to grasp. To wit, Fannie and Freddie are required to hedge any MBS purchases retained on their balance sheet. Thus, buying MBS is likely to be hedged by shorting treasuries. While this doesn’t mean the intended effect on mortgage rates disappears, it does mean that the impact of the corresponding hedge is displaced into other parts of the financial system.
In this particular case, MBS and mortgage spreads would decrease while treasury yields increase. The country would accelerate its debt service death spiral in order to decrease mortgage rates by—maybe—a couple dozen basis points and drive up home prices even further than today’s already pathological valuations.
Another stroke of policy brilliance is to allow the release of 401k balances without penalty to make down payments on homes. While people’s money should be their own and the premise of a penalty for using your money as you see fit is absurd, this specific targeting of home purchases will have the effect of depleting the meager savings of the young working class while pushing them towards housing that is too expensive.
Mortgage portability is another idea recently coughed up by the aforementioned Bill Pulte. Imposed by the federal government in lieu of a direct lender-borrower agreement, it would allow existing mortgages to be transferred to new home purchases. In the lending community, this is pure nonsense. The concept of changing the nature of a loan’s security on a whim would never fly, and this is precisely why asset-backed loan portability is largely non-existent in capital markets today.
A few weeks ago, the 50-year mortgage idea was trotted out by the aging president and Pulte. Alongside the announcement, the following image was posted:
Intended as a favorable comparison, Trump misses the gist entirely. Few presidents have done greater or more lasting harm to the American people than Franklin Roosevelt, and fewer still have done so with such naked moral corruption. Only Woodrow Wilson, Lyndon Johnson, George W. Bush, Barack Obama, and possibly Trump himself rival FDR in the destructive effects of their legacies.
The 50-year mortgage has now been withdrawn, after being roundly ridiculed as the unserious gimmick that it is.
The Fallacy
All of the aforementioned bad ideas rest on a flawed assumption—that housing is a financial investment. It isn’t, and never was. Housing is an asset that is essentially a consumption good. It is consumed each day by living in the house and all that entails. The community within which the home exists—and close relationships have been formed—can’t lightly be swapped out for another.
Further, significant expense is incurred in maintenance, property taxes, insurance, and capital expenditures that forestall physical depreciation.
From a simple numerical perspective, the idea of growing one’s wealth through home price appreciation is absurd. To access such increases, one must sell the home and simultaneously buy another. But, all else equal, the price of the home being acquired has also gone up to the same degree, so there is no net benefit. There is in fact a net negative in the form of transaction costs—commissions, moving, and other related expenses.
Taking home equity loans is even worse. Accessing liquidity from home equity in this manner does absolutely nothing to increase homeownership wealth. Once the home equity facility is drawn, the owner becomes a borrower. Any cash he has borrowed is offset by the corresponding loan liability. That loan immediately begins accruing interest—usually at a high rate—further undercutting any supposed financial benefit.
There is one notable instance where home equity can be used to achieve financial ends deemed desirable by the owner. That is a downsizing of the variety undertaken by seniors, often shortly after their children have grown up and moved out. And therein lies the rub. When housing is viewed as an investment by a cohort of politically-vociferous Americans, a policy of monetary debasement and asset inflation by the administration will follow in order to appease that cohort. The president admitted as much in the White House.
Who pays the price? Everyone else.
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