In an op-ed published on Thursday, the editorial board at the Wall Street Journal criticizes Washington’s latest attempt to bail out homeowners. They argue that this intervention will be as ineffectual as the those that preceded it, and that homeowners would be better off if the government hadn’t intervened. From the editorial:
The practice of bailing out homeowners has several unintended negative consequences. The following are among the most egregious, in my opinion.
(1) Bailouts discourage employment.
Just like any other type of unemployment benefit, payments to homeowners decrease an individual’s incentive to be employed. This contributes to a higher and longer-lasting unemployment rate.
(2) They penalize individuals who borrowed responsibly, and they encourage people to live outside of their means.
Why put 20% down for a cramped ranch-style when you could buy a McMansion and have the taxpayers pay for it?
(3) Many people bought houses that they couldn’t afford anyway, and they will foreclose on them in the future. For many people, a bailout is just delaying the inevitable.
As described in a relatively recent article in the New York Times:
(4) They cause housing prices to be artificially high.
Here is a Washington Post article on the subject. The latest proposal, like many of its predecessors, inflates home prices. Additionally, the $8000 homeowner tax credit allowed individuals to buy a more expensive house than they could otherwise afford.
(5) There is a moral hazard problem. If a person knows that they are likely to be bailed out, then they are more likely to assume risk.
I oppose bailing out people who bought houses that they couldn’t afford, and I disagree that the government should encourage homeownership. When a person invests her money, she assumes risk. Higher returns are supposed to be the payoff for accepting larger amounts of risk. Buying a house is just like any other investment outside of Treasury Bonds — there is a possibility that the individual will lose money. In some aspects, real estate is riskier than stocks because houses are not diversified (i.e., in the event of a natural disaster, a person’s entire investment is wiped out). A person should do thorough research before she makes what will be one of the largest financial decisions of her life.
I recommend the article “5 myths about home sweet homeownership” by Joseph Gyourko, chairman of the real estate department at the University of Pennsylvania, in the Washington Post. It repudiates the commonly-held idea that homeownership is a investment that has good returns and no risks. To me, the following is the most eye-opening statistic in the article:
[Cross-posted at Amateur Philosophy.]
Filed under: Government Spending, Market Efficiency, Uncategorized, Unintended Consequences