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Congress Should Not Micro-Manage The Economy

Not so much because tinkering with the economy on a regular basis is messy as much as having Congress doing the tinkering is just dangerous. Remembering that the Prime Directive of nearly every member of Congress is “Do nothing that interfere with my re-election”, and the corollary is “Take care of my deep pocket special interests”, it is exceptionally difficult to trust anything that Congress does, especially when it is wrapped up in the “we’re here to help” blanket.

So today (Thursday), the House passed a bill [1] to spend yet another $300 billion that we don’t have in order to firmly entrench the new entitlement: home ownership.

We won’t spend any time bemoaning the end of apartment dwelling as we know it. Nor the fact that the riskiness of investments are going to slowly erode (erasing the potential of high returns in its wake).

No, we’ll just camp out on the fact that this bill is taking money out of our pockets and being used not just to help those who have exhausted all recourse with their lenders (many of whom, by the way, are working vigorously to help homeowners who are at risk of foreclosure without the governments help, thank you very much), but to make borrowing and lending money for homes a no-risk, no-fault arrangement.

The bill creates a $7,500 tax credit for first time home buyers and billions to communities to buy and fix abandoned homes, and a special FHA guarantee to lenders who write down the principal on homes that have significantly dropped in value (for about half a millon homes).

The biggest problem in my mind is the tax credit. That’s going to make a real mess of things. It will make it much easier for borderline borrowers to be convinced to buy a bigger home than they can really afford. It will certainly make the whole mortgage experience seem so much easier for the first year.

But wait, what do mortgage lenders do when they know there’s more money available as part of a deal? They figure out how to add it to the deal itself. If this bill passes, I guarantee that lenders will find a way to turn that $7,500 into down payment money… it will end up thrown into the escrow account as soon as it’s available. An automatic $7,500 taken off the bottom line, lowering the mortgage payment. And realtors will use this money to convince people they can afford a lot more house than the really can.
Wait, why make it hard in the first place? Why not just give the first time home buyers $7,500? Wouldn’t that be easier, more effective, simpler? Cut through all the red tape? Oh, yeah, then it looks like te Bank was doing it instead of the Government. Or, as I’ve said recently, Congress just likes to use the tax system to manipulate behavior… in this case, stimulating home buying.

But what is not showing up very clearly in the news (I see it in a few places, but not all), is the fact that the tax credit is really just a loan from the Government. Yup, that’s right, the poor sucker thought he got a free $7,500 just for buying a house, and now he’s stuck paying the IRS an extra $500 every year for 15 years. Has that ever been done before?

And here’s what’ll happen. The first year they have to pay it back, they won’t even know they have to pay it back, and instead of owing perhaps $675, they’ll owe $1,175. And they might not have have it, so the IRS fines them for being over the $1000 “owing” limit, and more for being late. Then, the next year, they might have the money, but they’ll still not have adjusted their W4, so they’ll go over the “owing” limit again. Finally, they’ll get it right the next year, but they’ll have figured out what a scam the government has played on them. PLUS they will have paid for part of the money the first year since they’re taxpayers just like me, and we’re all going to be paying for this. Because when the Government lends money out at zero percent, they still have to pay the interest on the $7,500 they borrowed in the first place. That means we’re all paying that interest. And, by the way, this eats up a third or more of the money saved on the mortgage interest deduction (which most people don’t take anyway).

What is troubling here is that Congress appears to be making things better, but they’re actually going to make things worse (at least they’re consistent). They believe they are making it easier for people to “live the American Dream” (home ownership is evidently the American Dream). Instead, they will manipulate people into buying more house than they can afford (in a market where it’s easier to buy a lot of house anyhow) and put them into a potentially worse position than they needed to be. Remember, home ownership is more than the purchase price of the home. Property taxes, heating & cooling, upkeep, furnishing, cleaning… you get the idea. So this bill, intended to fix a mess caused more or less by people buying more house than they could really afford, will simply create the same exact problem it’s supposed to solve. Nice.

I’ll add, just for perspective, that my wife and I lived in apartments for the first 11 years of our marriage and we don’t regret that for a moment. I do think that home ownership is great, and I know it means a lot especially for families with children. While I don’t begrudge that opportunity for anyone, I reject the notion that home ownership is a promise we should make to all Americans. It is inconceivable to me that we make it an entitlement. This is a steep and very slippery slope… we should stay away from it. Thankfully, President Bush plans to veto the bill, but the White House has stated they are open to discussion since they like of the features of the bill. We’re going to need to keep an eye on this one.

Of course, if Congress could loosen up another $15,000 in cash for each and every home owner for the next 2 years, without the pay back clause, that might be more effective. (for any US Congressmen are reading this, please, that was sarcasm).

If Congress really wants to make things better with the housing market, the stock market, and the economy as a whole, let’s get the FairTax passed. That’s HR 25, S 1025.

Update:  The more I think about it, the worse this gets.  The US Government now wants to compete with banks and does so unfairly by offering not only an interest-free loan for 15 years, but without any of the rigor the banking industry is required to use: credit analysis and appropriate contracting.  What happens if the homeowner dies?  Does his estate still own the money to the Government?  And again, I think this will end up as a deceptive program that if put together by any bank to an average Joe borrower would get them shut down.