Tuesday, March 6, 2012

Atlantis and the Housing Market


With Congressional gridlock and the fact that it's an election year, some of you may be frustrated by the sheer lack of progress made by the U.S. government in bringing down unemployment. Although  in recent months, the job reports have been pretty encouraging, it would still take more than 5 years to bring unemployment down to around 5% at the rate we've seen the past few months. The reports are good, but not astoundingly so. Now, back to my original point, what can be done by the government given the congressional gridlock? Well, precisely what President Obama came out and did today: he's further easing the process by which homeowners with federally-provided mortgages that are worth more than their houses can refinance at the very low interest rates of today.

So, what does this mean for the average homeowner whose mortgage is more underwater than Atlantis? Well, here's what the FHA had to say about it:
"The changes could increase the reach of FHA's streamlined refinance program by 3.4 million households paying interest rates higher than 5 percent, the agency said. A typical borrower would save about $1,000 a year in premiums and $3,000 a year including savings from lower rates, the FHA said."
So the average borrower would save about $4,000 a year. Considering the median income of the U.S. is right around $50,000, that's around 8% of their income. That's hardly an insubstantial amount of money they save, which would presumably be put towards other forms of consumption. As some of you may know, spending money has a multiplier effect--if I, as a result of refinancing, now have enough money go out and buy 26 hammocks full of Snuggies, that creates an increased demand in the hammock and Snuggie markets. With this increased demand, the artisans of the hammock and Snuggie industries will have to hire new workers to meet the new aggregated demand levels. So the money flows in large cycles, with the newly hired Snuggie and hammock technicians spending their newfound income on some other random stuff. A whimsical anecdote, to be sure, but a more or less accurate one, according to macroeconomic theory.

In any case, this move by the Obama Administration looks even better when you consider the fact that one of the main factors constraining our recovery is an incredibly high level of household debt (since it constrains spending). Given that the housing bubble drove household (especially mortgage) debt through the roof, allowing underwater mortgages to be refinanced (and thus reduce household debt levels) will be instrumental to our recovery.

Make no mistake, however, in reading what I've just said--high levels of household debt are the problem right now, not high levels of government debt. If high levels of government debt were the problem, we'd see interest rates on T-bills start to rise. So that's my good news for the day. Hopefully we'll see those underwater mortgages rise from the briny deep, and with them, perhaps, our economy. I call poetic license on that dramatic flair.