Tuesday, December 16, 2014

Fasten seatbelts

Is it possible to have low interest rates and low down-payment requirements on home purchases without there also being risky lending? Events leading up to 2008 suggest that the answer is "no". But we are now heading this way -- again. Will this time be different? Who will be the adults this time? Marginal Revolution points to "fear of God" oaths required of Dutch bankers. But that's over there.

I just came across this from Arnold Kling and his review of Peter Wallison. Their summary of the last "boom" is convincing. I cannot see how a next round will be different. The participants are as politicized as ever. Housing markets and credit markets are seen as a great opportunity for policy makers of all stripes. Many on the left want to "help" low-income households get into a home; many on the right want to "help" builders sell more homes. That's quite a potent coalition.

Take a moment and take policy makers out of the picture; ask what would markets do on their own? Lenders would assess risk and adjust terms (including required down payments) accordingly. Lenders who guess wrong would (we hope) pay the price. Learning from failure is all we have. Fraudulent practices would have to be policed and prosecuted -- as with all transactions in all markets.

But in light of the potent coalition just cited, this is not the way housing will be financed in America. As they say, "fasten your seatbelts."