The Cost Of Curing Negative Equity

foreclosure

This study from the New York Fed has been floating around parts of the blogosphere for the past couple of days. It’s an analysishome ownership rates and the effect of negative equity on the rate. I just got around to reading it and it’s worth your time.

The authors contention is that the high rate of negative equity that currently exists means that in reality the home ownership rate is less than officially published numbers. They go on to speculate that the large number of upside down homeowners is going to eventually result in a much lower ownership rate. Hardly stuff that most would disagree with.

They do a perfunctory discussion of the logic of home ownership and the perceived positive externalities that accrue to society as a result. To their credit, they do mention that some take exception to this concept.

While these studies all point in the direction of social benefits from homeownership, it is important to point out that other research is far less conclusive. Recent work by Engelhardt et al (2009) indicates that the measured benefits from homeownership may result from the fact that people who choose to buy homes are different from those who choose to rent, in that they are also more likely to value investing in social capital. They conclude, for example, that the estimates described above “overstate the impact of homeownership on political involvement and that the true effect . . . is zero or negative,” at least for their small sample of low-income households. While more research is warranted here, existing public support for homeownership implies that policymakers believe that its social benefits are substantial.

Despite this bow to an alternative point of view, the authors appear to side with the idea that higher home ownership rates are a desirable public policy outcome. Accordingly, they argue at the end of their paper that mortgage modifications involving principal reductions are the best medicine for what ails the market.

Cynically, I am going to suggest that the appearance of these types of studies aren’t entirely the product of scholarly research and inquisition. The government establishment appears to be gearing up to spend a lot of money in one more shot at curing the housing market. Having failed miserably at that task by reducing monthly payments, they will now attempt a cure by writing off substantial amounts of mortgage debt.

In many respects, this represents a real victory on the part of underwater borrowers. It reminds me of nothing so much as the manner in which the American consumer forced the car industry into offering substantial rebates on new car purchases. Remember, when the industry briefly introduced zero interest rate loans after 9/11 with the caveat they would disappear never to return again? Well, they did withdraw the offers after a month or so of exceptional sales and what happened. The consumer sat on their collective hands and waited for the industry to blink, which they did.

In many respects, that’s precisely what those in mortgage hell have been doing. Many of those involved in the HAMP program have had handed to them a no lose proposition. They drag their feet while they live rent free and each time they hear that this is the last best offer, they see another moratorium or new offer come down the pike. Genius is not required to conclude that at the end of the day the government is going to do whatever it takes to avoid any further deterioration of the market. Street smarts suffice.

One can accept the assertion of the Fed study that positive results do accrue to the nation from a higher rate of home ownership and at the same time ask what should be the cost of securing those benefits. Unfortunately, it seems as if we view those externalities as priceless, ergo there is no limit on the amount of money we should expend to stave off a decline in the rate as a result of negative equity. That’s a questionable policy position.

While these studies all point in the direction of social benefits from homeownership, it is
important to point out that other research is far less conclusive. Recent work by Engelhardt et al
(2009) indicates that the measured benefits from homeownership may result from the fact that
people who choose to buy homes are different from those who choose to rent, in that they are
also more likely to value investing in social capital. They conclude, for example, that the
estimates described above “overstate the impact of homeownership on political involvement and
that the true effect . . . is zero or negative,” at least for their small sample of low-income
households. While more research is warranted here, existing public support for homeownership
implies that policymakers believe that its social
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