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Federal policies skew house values

Froma Harrop

Froma Harrop

Not Seattle! Home prices in the “Queen City” of the Northwest were not supposed to go south. This isn’t Miami, Phoenix or Las Vegas, where suntanned speculators built big, borrowed big and went bust with a bang.

Yet just as the bubble markets seem to be settling (though on a still sandy bottom), property owners in formerly confident places like Seattle, Minneapolis and Atlanta are seeing their own late-in-the-downturn downturn.

Seattle home prices have fallen 31 percent from their 2007 high, according to economists at Zillow, the real estate website. Zillow thinks Seattle residential property has another 10 percent to go.

If sharp price drops can happen in Seattle, Minneapolis and Atlanta, then real estate is an even riskier investment than previously imagined. But while this development is not good for sellers, it offers a valuable lesson to us all.

Government policies have helped whip up home prices in both bubbly and seemingly froth-free markets. If Washington, D.C., really wants to help people buy homes — and I don’t see why that should be a public goal — it should let house prices fall as they may.

I’m not normally a government is-the-problem type, but in this fiasco, it was. Ironically, the government program that many on the right blame for the disaster, the anti-redlining Community Reinvestment Act, was not at fault. Most of the bad subprime loans issued at the height of the frenzy were made by institutions outside CRA rules.

Where conservatives and smart liberals rightly point fingers is at Fannie Mae and Freddie Mac. These privately owned companies had quite a scam going. They would buy and repackage risky loans that the taxpayers, in effect, guaranteed. Their executives spared no expense in lobbying Congress to preserve the deal and in paying themselves.

The time has come to wind down the twins, though not too quickly. They and the Federal Housing Administration now back 90 percent of all new mortgages. The housing market would totally collapse were this government support to be suddenly withdrawn. We must act with care.

Another government subsidy that needs to go: the tax deduction for mortgage interest. Many homeowners regard this deduction as something a white-bearded man brought down from Mount Sinai. But it does several unwanted things. It favors homebuyers over renters. It encourages people to borrow more money simply to get a tax advantage. It deprives the Treasury of needed revenues — an estimated $500 billion from 2010 through 2013.

President Obama’s deficit reduction commission recommended capping the mortgage interest deduction for home loans exceeding $500,000 (the limit is now $1 million). It would bar such deductions for secondhome mortgages and home equity loans. Let’s stop it altogether.

Would that be the end of home-owning as we know it? Hardly. Canada doesn’t allow any deductions for mortgage interest, and its housing market is far healthier than ours. Indeed, that could be a reason.

Shellshocked private lenders are now demanding that borrowers put more skin in the game. They’re requiring about 20 percent of the sales price upfront. Obama recently called for raising the down payment on conventional mortgages guaranteed by Fannie or Freddie to 10 percent.

Buyers who can’t come up with the dough are stampeding the FHA, whose mortgages require a down payment of only 3.5 percent. Small wonder that half the home loans issued last year were FHA-backed. Taxpayers should worry about being on the hook for them.

Government housing programs may yearn to help people buy homes. In practice, they make homes more expensive and therefore less affordable. They are also why a housing bust that started in Vegas, didn’t stay in Vegas.

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