The administration underestimated the magnitude of the economic imbalances that spawned the recession, and overestimated the government’s ability to quickly right the ship. Despite the Obama administration’s massive economic interventions, unemployment remains high and the economy is still sluggish. The administration has been defending itself by claiming that its actions prevented a worse recession or even a depression.
Now the administration is making the same claim with regard to the housing market.
As I discussed last week
, federal policymakers are apt to respond to crises with quick-fix measures instead of considering what policies would best serve long-term growth. The result is wasteful programs like the homebuyer tax credit, which only succeeded in introducing more distortions into the economy.
The homebuyer tax credit temporarily induced people to purchase homes. Now that the credit has expired, sales of new and existing home have fallen. Taxpayers are out billions of dollars, and the necessary correction in the housing market was merely delayed. Not only has there been no long-term benefit, people who were induced to purchase homes now risk being stuck with underwater mortgages if housing prices decline further.
HUD Secretary Shawn Donovan was recently asked by CNN to justify the administration’s policies in the wake of renewed weakness in the housing market. Donovan responded with the company line that “this housing market would be a lot worse had we not brought down interest rates to record lows, provided a home-buyer tax credit, [and] helped millions of families stay in their homes.”
Maybe this statement is true, and maybe it isn’t: it’s impossible to know. However, the answer is less important than the answer to the following question: Are the administration’s housing policies good for the long-term health of the housing market and broader economy?
Considering that the administration’s housing policies have largely been an extension of the policies that contributed to the housing bubble and bust
, the answer is no. In fact, the government’s role in the housing market has expanded. The federal government now backs more than 90 percent of new mortgages, which means that the U.S. housing loan market has been partly nationalized.
In the CNN interview conducted by Ed Henry, Donovan was questioned about previously “rosy” statements he made about the housing market.
HENRY: Let's stay on housing for a moment, though. You are saying it could have been a lot worse without some of the president's initiatives, but over the last year, you have been pretty rosy about your scenario in the housing scenarios.
I want to go through some of your statements. In December of last year, you said, "We believe we may finally be seeing the light at the ends of the tunnel." You said in May, "The truth is that our housing market like our economy has begun to turn the corner." You also said at the beginning of this very month, "There's no question that the state of today's housing market is in significantly better shape than anyone predicted a year ago." Mr. Secretary, do you still stand behind those rosy statements?
DONOVAN: Look, Ed, here is what happened. For 30 months before the president came into office, housing prices fell every single month. They have stabilized as a result of our policies up to now. American homeowners added a trillion dollars in equity over the last year. So I think there is no question that our policies have made a real difference. The real issue is today, and as I said before the July numbers were worse than we expected, worse than the general market expected and we are concerned. That's why we are taking additional steps to move forward.
HENRY: But in May, you said we are beginning to turn the corner. Can you still say that? Are we still turning the corner when these numbers are so awful?
DONOVAN: Ed, compared to where we were -- and I am talking about where we have been for the last 18 months, the housing market, no question was significantly better. The issue now and what we are focused on is the future.
Unfortunately, when Donovan says the administration is focused on the future, he means more government housing programs.
Instead of allowing the laws of supply and demand to reestablish order, the administration has fallen victim to the fatal conceit
that it can successfully “plan” the housing market. Even though prior attempts to plan the housing market created an economic mess, Donovan apparently believes that this time it will be different.
It won’t be.