Obama Administration: Supply, Demand Ineffective at Determining Home Values

The Special Inspector General of TARP says (click through for handy chart):

Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”

In general, housing obeys the laws of supply and demand: higher demand leads to higher prices. Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices. The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS. Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income.

Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices. In addition to direct Government activity, home prices can be lifted by general expectations among homebuyers of future price increases.

Does anyone out there share my fear that “expectations among homebuyers of future price increases” will be increasingly determined by government subsidies and programs rather than, say, what homes are actually worth? And if that’s the case, shouldn’t we expect another crash … or, failing that, another couple trillion dollars of ill-conceived borrowing to prop up a housing market overdue for another crash?

If, Then …

President Obama (on Twitter):

If big financial firms can afford massive bonuses, they can afford to pay back the American people. Watch: http://bit.ly/V-8

Interesting. I’m guessing the President is referring to funds under the TARP programs and that banks that paid bonuses should be able to repay what they owe the government under TARP. First, the magnitude between bonuses and TARP funds is quite large, so the statement is nothing more than bumper sticker logic. It’s Twitter, after all. If you can afford to go on a vacation, does that mean you can afford to pay off the balance of your mortgage upon your return? Probably not.

Beyond that, what evidence is there that the outstanding funds, if paid back sooner rather than later, would be returned to taxpayers or used for deficit reduction, however small the impact? Very little.

The President has said TARP would be “winding down” soon. By “winding down,” the President apparently means that Treasury will be taking unallocated or repaid TARP funds and using them for completely new purposes:

In a letter to congressional leaders, Geithner defended the program, which has provided more than $250 billion in capital injections to banks.

[Geithner] said TARP will be refocused to aid homeowners facing foreclosure and to provide capital to small and community banks so that small businesses have access to credit. Treasury is also reserving funds to facilitate small-business lending.

Some funds may be used to increase Treasury’s contribution to the Term Asset-Backed Securities Loan Facility. Based on the statute that created TARP, the Obama administration would need Congress to approve any further extension of the use of TARP funds.