Down-payment ‘insurance’ for housing market?

Prof. James A. Wilcox

Reading an op-ed piece by James A. Wilcox in the New York Times yesterday, I was struck by the novelty of his ideas for what amounts to government-backed insurance against a loss in home equity.

But the more I read the column by the respected economist, a business professor at the University of California, Berkeley, the more dubious I became. He writes:

Down-payment protection would provide a sensible and affordable way to restore confidence.

He contends that a large number — perhaps two million — of potential buyers who are renting or living with relatives hesitate to take the risk of making a purchase even if they have good jobs and credit histories.  Says he:

While near-record numbers of houses all over the country are empty, the sidelines are crowded with this huge ‘shadow demand.’

His solution for activating that demand, whatever its dimensions, would be to permit homebuyers to purchase protection against loss from the government in return for a one-time fee that could be 1 percent of the property’s purchase price.  The fee could vary with the risk of demand by market.

As someone’s whose economics training was limited to an introductory course in the dark ages, I’ll rashly venture my first objection:  If the risk could be determined as accurately as the vast majority of economists had predicted the housing bubble — that is, not accurately at all, if you missed my sarcasm — then any risk assessment would be highly questionable, if not disposable.

The devil begins to make his inevitable entrance into Wilcox’s modest proposal as he gets into the details.  Two of his points, in boldface, are followed by mine in italics:

• Based on the government’s house-price indices of some 400 areas, homeowners with declines in average house prices would get a check for the difference or have the payment applied to their mortgage principle up to the amount of their down payment.
  

Average?  If appraisers could use averages, they wouldn’t have to visit properties.  In fact, we wouldn’t need appraisers at all. 

And what about that new barking dog, gasoline station, fire next door or, conversely, the stunningly renovated row of brownstones, a new Whole Foods or a shelter just shuttered down the block?  They’re not going to be taken into account.

In addition, I’m not sure how Wilcox can be sure of the average percentage of down payments in the future.

• “Depending on the fees and revenue gains, based on a scenario of two million participating home buyers, the expected net cost to taxpayers would be a few billion dollars annually, far less than some of the housing programs that have already been tried.”

A few billion?  That seems like a laughably optimistic estimate considering that the nation’s housing stock has lost as much as $6 trillion in value since 2006. 

According to Federal Reserve Chairman Ben Bernanke, negative equity in housing totals $700 billion, a sum that is significantly greater than a “few” billion, though doubtless in excess of the down payments that homeowners have made.  If merely 1 percent might represent down payments, then the government’s risk today would reach $7 billion; if 10 percent, $70 billion.

With sales volume dropping to just under five million homes last year, a five-year low, Wilcox’s parameter of two million potential buyers, based on what he elegantly terms “shadow demand,” is conservative to the extreme in its omission of all other purchasers.

There is nothing like original thinking and fresh ideas, but Washington’s paralysis and the columnist’s assumptions suggest that Wilcox’s proposal is dead on arrival.

Still, nice try!

Tomorrow: Weekly Roundup

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Malcolm Carter
Licensed Associate Real Estate Broker
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Charles Rutenberg Realty
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