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The latest
housing initiative announced today by the Obama Administration draws the U.S.
government and, by proxy, all taxpaying Americans, further into the
inescapable quagmire of a devastated real estate market.
By transferring
more underwater mortgage balances onto the public books, the plan puts
taxpayers on the hook for further losses if housing prices continue to fall.
Given the massive support for real estate already afforded by record-low
interest rates and massive federal tax and policy incentives, there are very
good reasons to believe that home prices will indeed collapse when these
crutches are removed. Recent spikes in long-term interest rates warn of this
prospect.
If the
Administration had allowed losses to fall where they rightfully belong,
namely on those who foolishly loaded up on toxic mortgage bonds, then the
housing market would have already found its true clearing level. Instead,
every measure is working to prolong and delay the ultimate reckoning, while
setting up taxpayers as the patsy. Given the horrendous government deficit
projections for the next several years, any losses incurred by the government
mortgage portfolio may add a critical stress on America's fiscal viability.
In addition, the
moves add even more incentives detrimental to economic growth. By targeting
benefits toward unemployed homeowners, or those who are delinquent in
mortgage payments, the program will encourage some mortgage holders to defer
job-hunting and miss payments. Also, in offering loan-balance reductions, the
program makes no distinction between homeowners who naïvely overpaid
during the speculative peak and those who willfully put themselves underwater
by taking advantage of home equity loans on existing mortgages. In short,
these policies reward profligacy and penalize prudence.
The longer the
government continues to distort the underlying economics of the real estate
market, the longer it will take for the sector to heal itself – and the
longer the sickness will infect the broader economy.
Reprinted from Investment News.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the
tenuous position of the American economy, the housing and mortgage markets,
and U.S. dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley,
2008).
More importantly take action to
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