Frozen
- Posted by ryan on December 6th, 2007 filed in In the News
I’m still thinking through the potential effects of this plan to freeze interest rates for struggling homeowners. As someone who bought a home in 2005 with a prime, fixed-rate mortgage, I’m kind of wishing I’d gone for the unconventional loan product and gotten myself a lot more house.
My general thought right now, however, is that we’d be much better off following Larry Summers’ advice and ensuring that there’s a ready supply of mortgage credit to qualifying borrowers. I suspect a big problem with the housing market currently is that people who’d like to and are able to buy are having difficulty getting a mortgage. Absence of liquidity in the housing markets is going to force prices down farther than they need to go, and it makes it difficult for struggling homeowners to get out of their mortgages by selling their properties.
At any rate, the lesson here appears to be that if you see everyone else borrowing well beyond their means, you should too, since the government cannot credibly allow large numbers of homeowners to go into foreclosure.
December 6th, 2007 at 5:18 pm
I’m kind of wishing I’d gone for the unconventional loan product and gotten myself a lot more house.
Mmmmm, I think you’ll be happier than you think two years hence when it’s the largest houses in DC that have dropped the most in value.
December 6th, 2007 at 5:24 pm
Honestly, I’m not sorry I took the loan I did. I’m curious to know your thinking on why large houses will lose more value, though.
December 7th, 2007 at 11:17 am
Talk about Moral Hazard!
December 7th, 2007 at 11:18 am
I guess my thinking is that house prices have likely overshot their true value in several urban markets in the U.S. — NYC, SoCal, DC — and that this has partially been driven by the irrational exuberance of investors who were speculating on flipping houses within a couple years. I suppose my mental model leans towards thinking these types of investors preferred larger properties, but now that I think about it more I am having a hard time coming up with a great justification for why this would be the case. Still, I have this intuitive feeling it may be true, although perhaps it is less true for NYC or urban DC, and more likely a problem in the suburbs of DC or southern California.