Sunday, January 26, 2014


Last week I criticized a Kevin Drum post complaining (in effect) that the government wasn't subsidizing home mortgages enough.  Drum quoted from a Felix Salmon post which is also wrongheaded in my view.  Salmon complains:

Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.

In the first place all cash buyers exist so even if no mortgages were available at all you could still sell.  So it appears this is really a complaint about the price obtainable.  Perhaps the value of units in Salmon's building has dropped significantly and the owners are in denial about this.  This would also explain the lack of refinancing, banks are justifiably reluctant to refinance a $600,000 mortgage on a property currently only worth $400,000 (for example).   Banks should not be lending money based on inflated valuations and public policy should discourage them from doing so even if current owners would prefer otherwise.

Salmon also appears to believe that there are both credit worthy potential buyers who are unable to obtain mortgages and banks with money with which they are unwilling to make mortgage loans because mortgage rates are too low.  But it is a bit hard to see why this wouldn't lead to rising mortgage rates (as potential buyers bid up the rates) attracting more lenders.

Salmon concludes:

Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers. I’m in general a believer in renting rather than buying, but the US is a nation of homeowners, and in such a country, a liquid housing market is a necessary precondition for economic vitality. Right now, we don’t have one — and we don’t have much hope of getting one in the foreseeable future, either.

It is hard for me to figure out what this even means.  Obviously the housing market is much less liquid than the stock market.  I recently bought a townhouse in New Jersey and sold a townhouse in New York and would estimate the transaction costs (shared between the buyer and seller) were at least 10% of the sales price.  In contrast buying and selling stock has much lower transaction costs, perhaps .1% of the sales price for a liquid stock like IBM, a hundred times less.  It is also much quicker and easier to buy or sell stock (to an extent that actually made me a bit uneasy considering the amount of money potentially at risk).   But this has little to do with availability of mortgages.  The very liquid stock market is largely cash based.  In fact mortgages make the housing market less liquid by adding layers of fees and required approvals to a typical transaction.   So it appears once again that Salmon's real issue isn't that the housing market isn't liquid (which has always been the case) but that prices are lower than he thinks they should be and that the government should be propping them up by offering subsidized mortgages.   I don't agree.

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