Tuesday, September 23, 2008

Homeowners Will be Hurt by Bailout

Assume for a brief moment that politicians in Washington genuinely care about homeowners. Is the best way to show affection to lavish cash?

It is a conundrum for the parents out there. You want the best for your child - but at what cost? Most parents try to avoid spoiling their children. In one sense of the term, it is to imbue an appreciation for what they have, possibly with a dash of the concept that hard work is a requirement for rewards. But a more literal definition of "spoil" is to ruin - to flaw. A child that is given too often does not appreciate how to get, and over time becomes impaired.

So it is with the mortgage market and homeownership. It is simply harmful to assist in the retention of an unaffordable home. The result is squeezing more money out of those who can ill afford it to prolong the unsustainable. At it's core, this credit crisis is about a housing boom in which people bought more house than they could afford based on the twin siren songs of a bubbling market and near-zero interest rates. Important pillars of a stable housing market had gone, most notably buying based on monthly income relative to monthly payments.

Housing had simply become unaffordable. The rate of price increase had far outpaced that of income, creating a massive distortion. Instead of allowing this important relationship to normalize, the government proposes to exacerbate the problem. Bailing out a homeowner who simply bought more house than they could afford will end up harming them - in addition to the negative impact on the public in general who is footing the bill.

For all those politicians who are falling over themselves trying to help out, there is one simple method, time-tested and near guaranteed for success: lower taxes.

1 comment:

Anonymous said...

Finally, someone telling it like it is! Amen.