I’m all for removing government intervention in the housing market. But I also understand the pain we might have to endure if we did it all overnight. Perhaps instead of constantly looking for new ways of intervening, the government ought to start down the road of reducing future intervention by making the future purchase of new homes (those that haven’t gone beyond the planning stage) not eligible for any type of government backed loans. If buyers can come up with enough down payment to satisfy lenders to provide a loan free of government support, fine. Otherwise, let buyers seek already built homes. This is critical to removing more new supply from a market stock full of foreclosures. This might have a positive effect on home values, while also starting us down the road of less government intervention.
FHA mortgages have gone bananas, and are over 40% of all new loans in some states. FHA requirements are 3.5% down, but with cash back and the just ended (for now)$8k incentives, many were buying for effectively 0% down.
What’s all the more troubling is that FHA has very strict standards for the quality of the home (it is designed to stop shady landowners from selling crappy property to the unknowing, helpless poor – not the problem of the housing crisis).
So the interesting outcome of all this, and you don’t need a crystal ball to see this, is that in addition to the foreclosures on all of the crappy new development areas that have happened already, the next round of defaults will be on some of the best ($550k or less) property out there by new, young middle income people.
