A chicken in every pot and a car in every garage.
Herbert Hoover never said those words, but they were part of his presidential campaign literature in 1928. Should they be the goals of American politics?
Should we subsidize the price of chicken to keep poultry and grain farmers happy while consumers pay less at the grocery? How about lowering the cost of owning an automobile by allowing automobile interest payments to be refunded as tax credits? Along with these compassionate steps, should we provide low-cost loans so consumers can have bigger pots and stronger garages?
I think not. Nor do I think home ownership should be an avowed goal of government policy. Yes, I know, home ownership correlates well with lower crime rates and neater lawns. But what disservice have we done to millions of Americans and the efficiency of our cities by encouraging sprawling home ownership?
The current national indigestion from mortgage foreclosures is a direct result of pushing home ownership beyond its reasonable economic limits. People who cannot afford to own and maintain a house are offered contracts that feed on their dreams-not on their capabilities. This fantasy is supported by the real estate-housing construction-financing industry.
Outright fraud also was involved. Information was fabricated or not properly revealed. Predatory lenders, colluding with rapacious home builders and corrupt appraisers, were responsible for some of the much-publicized foreclosures. These cases will get the greatest attention because we can find clear evidence of wrongdoing.
Most of the problem, however, rests with the ignorance and bloated aspirations of home buyers. They are encouraged by a federal government that allows them to deduct real estate taxes and mortgage interest payments from their taxable income. They are misled by local and state politicians, who boast of their efforts to keep taxes on homeowners low. They are seduced by developers’ advertisements, Web pages and home shows. They are fed a line about building wealth based on inflationary expectations.
Without adequate cash reserves for life’s ordinary events (unemployment, taxes, health emergencies, etc.), borrowers go into the tank, drowning under massive debts, losing their homes.
What is to be done and for whom? Shall we rescue the borrower who is losing a home? Should we buy homes in neighborhoods where many such homes exist to prop up the prices of nearby properties? Shall we rescue the initial lenders who accepted marginal (“subprime”) contracts or shall we bail out Fannie Mae and Freddie Mac who bought those contracts? Perhaps we should pay off the current owners of those mortgage contracts so they do not turn away from financing the housing market and bring on a recession?
Housing is one of our nation’s most important industries because so many inputs for a house involve domestic (local) labor, services and goods. Think about it. If we bought $500 million less in housing next year, would that have a greater or less domestic impact than if we bought $500 million less in TVs, cell phones and computers?
Because the reasons for foreclosures are numerous, it is hard to find a simple solution. From my limited understanding, if anyone is to be given assistance, it is the unfortunate persons who bought into the temptation of home ownership. Let’s try to keep them solvent by working out mortgage-payment schedules that penalize them as little as possible. Let’s spread the finance woes over the real estate agents, mortgage brokers, lenders and home builders who conspired with government to lure the unsuspecting into financial quicksand.
Then, let us be sure future home buyers are sufficiently educated to assume the contractual and social responsibilities of home ownership. At the same time, make the penalties for outright fraud much tougher and develop sanctions for practices on the edge of moral conduct. Most of all, eliminate government subsidies of home ownership. It’s not for everyone.
Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to [email protected]