Remember Gresham’s law? It’s the one that says bad money drives out the good money. Well, it also applies to lending.
During the home price boom, bad money lending— subprime mortgages and no-down-payment adjustable-rate mortgages— displaced conventional 30-year mortgages. The popularity of these Gresham’s law mortgages, in turn, contributed to the price bubble.
Now our friends in Washington want to save the economy by making certain Gresham’s law for home mortgages continues, but in a different way. One of the provisions in the proposed economic stimulus package is a temporary increase in the maximum size of mortgage that Fannie Mae or Freddie Mac can buy. The current maximum size is $417,000. The proposed maximum size is as much as 75 percent larger: $730,000.
The idea behind the increase is simple. Let government-backed institutions provide a better flow of mortgage funding for hazardous bubbly areas— the areas with recent price spikes— such as California and much of the Northeast.
Unfortunately, every dollar of mortgage money that goes into these areas will be a dollar of mortgage money that isn’t available for other areas— such as Michigan, Minnesota, Tennessee and Texas— where home prices are much lower and haven’t appreciated much over the last five years. Financing one maximum mortgage in California may mean that three, four or five less expensive homes won’t get financed elsewhere.
So low-cost, low-appreciation states will be subsidizing high-cost, high-appreciation states as yet more money flows to California and New England.
You can gauge the insanity of this by considering the home price appreciation in much of America relative to the appreciation in the high-cost areas.
What it’s like on average: Over the 5 years ending Sept. 30, 2007, the U.S. home price index rose 46.9 percent to $220,800, a compound rate of 8 percent. That means we collectively did really well, because consumer prices rose only 2.8 percent a year over the same period. The appreciation figures to a median wealth gain of $70,000 over the period.
What it’s like in pricey areas: Over the same period, home prices in the Los Angeles area rose 107.9 percent, to a median price of $588,000. Homes in the Riverside area also rose 107.8 percent, to a median price of $377,000. Homes in the San Diego area rose 61.7 percent, to a median price of $589,300. Homes in San Francisco rose 52 percent, to $825,400. And homes in San Jose rose 50.6 percent, to $852,500. As a result, a homeowner in the San Jose area enjoyed a wealth gain of $286,400, while a Los Angeles owner enjoyed a gain of $305,200. An appropriate theme song here would be Dire Straits’ “Money for Nothing”— rapid appreciation is way better than working.
What it’s like in low-cost areas: Over the last five years, homes in the Dallas area appreciated only 16.9 percent, reaching a median price of $146,800. Even though the Austin area has appreciated 9.7 percent in the last year, its five-year appreciation was only 28.8 percent, to $188,200. Ditto Houston (25.8 percent, to $155,800). Even booming San Antonio trailed the national average at 39.5 percent, reaching a median price of $154,700.
The same can be said for home prices in many other areas. Home prices in Columbus, Ohio, rose only 13.9 percent over the five-year period, to $151,600. Homes in Kansas City, Mo., rose only 20.2 percent, to a median sale value of $157,000. Homes in Detroit actually fell in value by 0.9 percent, hitting a median sale value of $142,900.
The wealth gains were very small. It was only $21,200 in Dallas and $26,400 in Kansas City. That’s less than one-tenth of the wealth gain in the high-cost/high-appreciation areas that are to be protected.
I could go on, but you get the idea. Scarce mortgage money will go to high-cost areas to protect their appreciation of 50 percent to 100 percent over the last five years. And the money will come from areas that have experienced much less appreciation.
That ain’t right.
So, in the interest of fairness, I’d like to make a profoundly crackpot proposal.
Let’s not try to stimulate the economy with piddling $600 checks. Let’s do what government does best. Let’s give everyone an Equal Home Appreciation Opportunity! To do this, I propose that every homeowner receive a Home Appreciation Equalization Bounty.
Homeowners who enjoyed living in above-average appreciation areas will receive nothing because they’ve already made a (tax-free) bundle.
Homeowners in low-appreciation Dallas, however, would receive a (tax-free) check for $37,673 to compensate them for the appreciation they missed over the last five years. The check would bring them up to the national average appreciation rate. Homeowners in Columbus, Ohio, would receive a check for $43,922 for the same reason. And those in depressed Detroit would receive a check for $68,926 to make up for all the appreciation they’ve missed.
Talk about stimulus! Talk about putting spending power where it’s needed! My plan would give Iowa City a veritable Starbucks buzz. Would it be expensive? Of course.
Am I crazy? No doubt about it.
Maybe I should run for Congress.
Information Sources on the Web and Column Notes:
All five-year appreciation figures in this column were taken from the most recent OFHEO report. The report presents home values as an index, not as prices. The prices came from the quarterly survey done by the National Association of Realtors. The methodology for compiling the figures is different, and the NAR figures are more subject to distortion because they represent a constantly changing mix of home sales rather than a moving index of similar properties. For that reason, all figures in this column should be regarded as back-of-the-envelope approximations or ballpark figures.
OFHEO report for third quarter, 2007
http://www.ofheo.gov/media/pdf/3q07hpi.pdf
National Association of Realtors:
http://www.realtor.org/Research.nsf/files/MSAPRICESF.pdf/$FILE/MSAPRICESF.pdf
Consumer Price Index History
http://www.nh.gov/nhes/elmi/cpihistory.htm
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) A. M. Universal, 2008