Competing interests in home prices

Brad Sherman, a Democratic representative from California, wants you to pay more for your home.

Mr Sherman today objected to the FHFA’s plan to roll back the temporary increase in the conforming loan limits put in place during the housing market crash.

“Nothing could destroy this recovery more than a double dip in home prices,” he told Edward J. DeMarco, Acting Director of the FHFA, the group that controls Fannie Mae and Freddie Mac, the government sponsored enterprises, at a hearing.

At the beginning of next year, the GSEs will no longer be able to buy loans on the secondary market that exceed $625,000. In 2006, the secondary mortgage buyers limited to loans that cost less than $417,000. In 2008, as mortgage funding for “jumbo” loans dried up, the limit was raised – on a temporary basis – to almost $730,000 for high cost parts of the country.

Mr Sherman wasn’t pleased that the temporary measures were approaching their end, arguing that the shock of lowering the limit could lead to further home price declines. “People struggle and save and have to buy a home for $500,000 or $600,000,” he said. Home prices at those levels are what the local Los Angeles economy is built on.

Of course, he’s right. (Never mind that the median home price in Los Angeles and the surrounding areas is $331,400, according to NAR data.) Removing any government prop to the housing market makes it likely that home prices will fall. Making them – gasp – more affordable.

Clearly, housing volatility which causes an overcorrection isn’t desirable. The fall will cause pain, and prices will ultimately rise to their market price. But if a government prop is distorting the market and keeping prices artificially high, then removing the prop will allow prices to more quickly adjust to their market rate – making it less expensive for people to buy those homes – and take taxpayers off the hook for any losses resulting from the jumbo loans. (Right now, Fannie and Freddie receive an unlimited line of credit from the US Treasury).

Mr Sherman isn’t alone in wanting to protect hard-working people from continuing to lose the wealth they’ve built up in their homes. But home transactions are two-sided – using taxpayer money to prop up prices makes it harder for people who are now “struggling and saving” to buy a home.