What Is Your House Worth Without Government Subsidies?
Would you make an investment in an asset that you understood to be dramatically overvalued because a third party was subsidizing its price?
If the DOW Index jumped to 20,000 from 10,000 today due solely to the Government incentivizing the purchase of stock, would you buy the index at 20,000?
Assume the Government reduced the margin requirement from 50% to 3.5%, guaranteed Americans access to margin credit and then materially subsidized the interest rate on such borrowings. (Before you dismiss the idea remember that the stock market bubble which resulted in the Crash of 1929 was driven by 10% margin requirements and low interest rates) Why not throw in an $8,000 tax credit for those who make margin stock purchases? Under these conditions the stock market might easily double in value.
I believe most rationale people would grasp the reason behind the price change and understand that the valuations are only sustainable if expensive Government subsidies continue in perpetuity. Yet many Americans are willing to borrow large sums of money to buy houses without considering that the value of the purchase has been inflated by long-standing and recently augmented subsidies.
How much would your house be worth without Government subsidies? Isn’t this idea at least worth considering given the high price and large amount of debt associated with a home purchase?
I suspect so few people give thought to the subsidized value intrinsic in homes because Government programs have been with us for almost a century and have been slowly layered on top of one another. This “excess value” did not appear dramatically and has long since been institutionalized in historical housing price data. Furthermore, people appear satisfied to benefit from new Government incentives and rising housing prices regardless of actual cost.
Since 1913 the tax deduction on mortgage interest has existed. What would housing be worth if this incentive was eliminated?
Fannie Mae was created in 1938 and has been making mortgages available to people of marginal credit ever since. Fannie, Freddie, HUD, FHA and all of the other Government Sponsored Entities further subsidize mortgage rates for the majority of borrowers. How much would houses cost if only people with appropriate credit qualified for mortgages and interest rates were not subsidized by the Government’s guarantee?
An endless list of Government departments and “affordability initiatives” have followed. Today the Government underwrites approximately 80% of all mortgages. How much would housing values decline if the Feds only underwrote 40% of mortgages? What about 20% or 0%?
At present house prices are being aggressively propped up by an $8,000 tax credit, 3.5% down payment FHA mortgages and the Federal Reserve’s $800 billion interest rate subsidy. What would prices have done this Summer during the “recovery” if these programs did not exist? What happens when they lapse?
A reasonable person could observe that after a century the Government appears firmly committed to its subsidy programs and, as such, why bother to worry about their effect of prices?
At present the Federal Government is on a path to insolvency for a variety of reasons. Budget deficits, $12 trillion in debt, unfunded pension liabilities and bankrupt social programs will force a dramatic change in public outlays or result in a disastrous economic failure. Either way it is possible that in the near future the resources taken for granted and used to distort the value of housing for generations may no longer be available to prop up prices.
Isn’t it a least worth considering what you house would be worth without Government subsidies?
I wonder if/when the $8,000 homebuyer tax benefit will actually lapse? It is at least possible that the credit will become a new, permanent layer of Government subsidies on home prices. Politicians are already discussing extending the program. If it does lapse and people are no longer paid to buy homes, we will see further evidence of the impact of these programs as home-buying activities wane and prices fall accordingly.
If the DOW Index jumped to 20,000 from 10,000 today due solely to the Government incentivizing the purchase of stock, would you buy the index at 20,000?
Assume the Government reduced the margin requirement from 50% to 3.5%, guaranteed Americans access to margin credit and then materially subsidized the interest rate on such borrowings. (Before you dismiss the idea remember that the stock market bubble which resulted in the Crash of 1929 was driven by 10% margin requirements and low interest rates) Why not throw in an $8,000 tax credit for those who make margin stock purchases? Under these conditions the stock market might easily double in value.
I believe most rationale people would grasp the reason behind the price change and understand that the valuations are only sustainable if expensive Government subsidies continue in perpetuity. Yet many Americans are willing to borrow large sums of money to buy houses without considering that the value of the purchase has been inflated by long-standing and recently augmented subsidies.
How much would your house be worth without Government subsidies? Isn’t this idea at least worth considering given the high price and large amount of debt associated with a home purchase?
I suspect so few people give thought to the subsidized value intrinsic in homes because Government programs have been with us for almost a century and have been slowly layered on top of one another. This “excess value” did not appear dramatically and has long since been institutionalized in historical housing price data. Furthermore, people appear satisfied to benefit from new Government incentives and rising housing prices regardless of actual cost.
Since 1913 the tax deduction on mortgage interest has existed. What would housing be worth if this incentive was eliminated?
Fannie Mae was created in 1938 and has been making mortgages available to people of marginal credit ever since. Fannie, Freddie, HUD, FHA and all of the other Government Sponsored Entities further subsidize mortgage rates for the majority of borrowers. How much would houses cost if only people with appropriate credit qualified for mortgages and interest rates were not subsidized by the Government’s guarantee?
An endless list of Government departments and “affordability initiatives” have followed. Today the Government underwrites approximately 80% of all mortgages. How much would housing values decline if the Feds only underwrote 40% of mortgages? What about 20% or 0%?
At present house prices are being aggressively propped up by an $8,000 tax credit, 3.5% down payment FHA mortgages and the Federal Reserve’s $800 billion interest rate subsidy. What would prices have done this Summer during the “recovery” if these programs did not exist? What happens when they lapse?
A reasonable person could observe that after a century the Government appears firmly committed to its subsidy programs and, as such, why bother to worry about their effect of prices?
At present the Federal Government is on a path to insolvency for a variety of reasons. Budget deficits, $12 trillion in debt, unfunded pension liabilities and bankrupt social programs will force a dramatic change in public outlays or result in a disastrous economic failure. Either way it is possible that in the near future the resources taken for granted and used to distort the value of housing for generations may no longer be available to prop up prices.
Isn’t it a least worth considering what you house would be worth without Government subsidies?
I wonder if/when the $8,000 homebuyer tax benefit will actually lapse? It is at least possible that the credit will become a new, permanent layer of Government subsidies on home prices. Politicians are already discussing extending the program. If it does lapse and people are no longer paid to buy homes, we will see further evidence of the impact of these programs as home-buying activities wane and prices fall accordingly.
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