An unsupportable American dream

Millions of Americans face foreclosure, the value of their homes below the value of their nominal mortgages.

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Millions of Americans face foreclosure, the value of their homes below the value of their nominal mortgages.

Terence Corcoran, Financial Post · Tuesday, Aug. 24, 2010

One of the great paradoxes of the U.S. economy is how something as personal and individualistic as home ownership — a core value at the heart of the American dream — could have been turned into one of the world’s biggest socialist disasters.

Yesterday, the U.S. housing meltdown continued, with existing home sales plunging a record 27% in July. Forecasters had expected the worst, but this was far worse than the worst.

The U.S. housing market is at a point where it seems to be dragging the United States down as if the country were some hapless satellite of the old Soviet Union that refuses to face the facts. The game is over, the old regime is technically dead. Time to liberate U.S. housing from the old socialist ways and bring it back to the old American free market where it belongs.

But nobody wants that freedom, at least not yet.

American home ownership, artificially created over decades by trillion-dollar government-backed loans, guarantees and regulation, continues to operate under the old rules. Somehow, the mess that Washington created is still thought of as the mess that Washington can still fix.

Millions of Americans face foreclosure, the value of their homes below the value of their nominal mortgages. Lenders are carrying mortgages that have little or no value, or writing them off. Foreclosures accounted for 22% of total house purchases in July.

The only real hope for a revival in the market is a return of buyers with confidence in the economy and in an environment where prices reflect the market rather than more government flim-flam support.

The July drop off in re-sales in part reflects the end of one of the latest government housing support measures — a tax credit of up to $8,000 for buyers. When the support ended, so did the buying.

These stop-gap measures only prolong the agony, with billions in government money generating short-term activity without doing anything to resolve the long term problem—too much housing and not enough people with the wherewithal to support the housing at current prices.

As if blind to the futility of keeping up the socialist game, the Obama administration keeps bringing in new programs. There will be a $1-billion zero-interest loan program to help some owners avoid foreclosure. The U.S. government will make government loans of $50,000 available to help under-water owners pay mortgage, tax and insurance payments. Another $2-billion in housing aid is expected from the U.S. Treasury Department.

None of this will help. At the extreme, there are calls for the government to take even bigger steps, including the equivalent of a total nationalization of all U.S. mortgage financing. That big idea comes from Bill Gross, the head of Pacific Investment Management Company. The money manager called for the complete socialization of the old socialist failures—Fannie Mae, Freddie Mac, and various other government agencies under one “Government National Mortgage Association.” The objective would be to “guarantee a majority of existing and future [mortgage] originations.” The government would then apparently hold all the mortgages backing the great American dream.

These are desperate times, but this seems more desperate than ever. It may also be the inevitable destination for a decades-old expansion of government into a market that should and could have looked after itself, were it not for politicians and bureaucrats that were all too eager to pander to a public myth and fantasy that every American had a right to home ownership.

That pandering has not stopped. The bottom in the U.S. housing meltdown is unlikely to be reached until it does.

Financial Post

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