Sound Advice Regarding Federal Housing Policy

Today, the homeownership rate is 67.4 percent and falling. Government policy, including FHA insurance, the quasi-nationalization of Fannie and Freddie, and the Federal Reserve's massive purchases of mortgage-backed securities, is intended to slow this decline. The thinking is that housing prices were being driven down by panic and that the government had to step in lest the nation's main source of household wealth be swept away.

With luck, these improvisations will work. Even if they do, the price will be high. Take just one policy measure, the $8,000 tax credit for new homebuyers, which Congress might soon extend. According to a recent article by Ted Gayer of the Brookings Institution, it would cost the government about $15 billion, or about $43,000 per additional home sale.

And the federal taxpayer, the ultimate guarantor of trillions of dollars in mortgages, will emerge from the crisis deeply enmeshed in an asset category that, recent experience has shown, carries considerably more risk than was once commonly believed.

Story here.

Of course, the objective is to keep housing prices from falling, covering up failures of past housing policies. There are too many people in homes they cannot afford, and a general oversupply of homes can only be rectified by decreasing home prices. Forestalling the inevitable has certainly made things worse.