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January 31st, 2012

Can we restart the housing market with down-payment insurance?

by Peter Miller


5-price-reducedThat’s the idea economist James A. Wilcox, a professor of business at the University of California, Berkeley, wrote about recently in the New York Times.

“Homebuyers could purchase protection from the government for a one-time fee, say 1 percent of the house purchase price, or $2,000 on a house selling for $200,000,” wrote Wilcox. “The fee could vary with the risk of house price declines in each area. The plan would be open to all buyers.”

Wilcox continues, “At the end of three years, the government would automatically mail checks to protected homeowners if average house prices in their area were lower than when they purchased their homes. (No decline, no check — just like auto insurance.)”

What could possibly be wrong with such a plan?

There are several implications to the Wilcox plan, none of them good.

First: One of the biggest political issues of our time is the incessant cry to make government smaller, to cut government spending. The Wilcox plan would increase the size of government because someone would have to estimate home values, mortgage rates, administer the program and issue checks. Wilcox wants the government to offer down-payment protection while many in the private sector want fewer government departments, agencies and programs.

Second: The fee to participate is a one-time charge equal to 1 percent of a property’s fair market value. If local prices decline 2 percent, who will pay the difference?

Wilcox wrote, “Only the federal government can readily offer a down-payment protection program that is large enough to raise actual and expected future house prices, which would in turn lower how much the buyer would have to pay. In addition, unlike private providers of protection, the government reaps substantial extra revenue when its policies raise national income. Even if the taxpayers provide some subsidy, to the extent that the economy does better, they would get some benefit.”

It’s easy to suggest that economists can estimate future values and that such models can protect taxpayers against excess claims. But economists are often wrong.

If you want a perfect example, just look at the projections made by the Federal Housing Finance Agency in 2010. According to FHFA–the agency that oversees (runs) Fannie Mae and Freddie Mac–there were supposed to be 6.467 million existing home sales in 2011. The actual number was 4.26 million, according to the National Association of Realtors, a difference of 2.21 million home sales.

Or, look at new homes. The FHFA said there would be 1.01 million housing starts in 2011. The Census Bureau says there were an estimated 606,900 housing starts in 2011.

The idea proposed by Wilcox can’t possibly work if the economic projections needed to avoid financial calamity are incorrect. We could get lucky and see home values rise to the point where no government down-payment guarantees are paid out–or we could be wrong and owe billions of dollars in borrower claims.

Given the country’s current political climate, it seems unlikely that there would be much support for a new government housing effort that would expand the bureaucracy and potentially create billions of dollars in new liabilities. Certainly no company in the private sector would offer such a nationwide plan, even with the Wilcox model now on the table.

One Response to “Can we restart the housing market with down-payment insurance?”

  1. Rob Swift Says: February 2nd, 2012 at 1:19 am

    I applaud Wilcox’s effort at attempting to come up with a novel solution to the overall housing mess we’re in, but I agree that this approach is — at the very least — extremely problematic. This is a far-reaching problem that affects all of us, directly or indirectly, so out-of-the-box thinking is exactly what we need right now. Short of waiting 10-15 years for the market to right itself again, we have to be looking for clever (yet reasonable) ways to get real estate back on track, without doing more long-term economic damage.

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