I’m sure you would agree “boom and bust ” markets are not really very healthy for the economy. What is best is steady growth over time with little volitility. Both mania and panic should be regulated to prevent bubble/burst disasters. FHA backed loans create an effective short term floor. By short term, I mean 3-5 years. We can see that even now. FHA loans have been essentially propping up the market for the past 2 years.

My problem with the floor created by the FHA is that it is not in line with moderate incomes. No family should be able to get a $750K FHA backed loan in the Bay Area. If a family makes $200K a year, then they are not moderate income and should not be able to get FHA loans. If that family make $81,000 (roughly 10% below median in Santa Clara County), the government is creating a debt slave allowing such a high limit.

The proper use of FHA is give loans to moderate income families. Take our family making $81,000 in the Bay Area. They would qualify for a home that costs about $250,000. Of course, government loans are not the only game in town (though it may seem that way now). Private loans must be regulated to end the practices of no doc loans, Option ARMs, etc. These debt bombs create the bubble aspect of a boom and bust market, but we are taking about the value of a floor.

The question you ask is a rather loaded question. If you are not seeking an answer that is built into the question, you are asking:
Who would benefit from FHA loans being used in the manner I describe?
1) Short term, buyers benefit from falling prices.
2) Long term, the market benefits from having minimum standard that will be insured by the government creating less volitility on the bust end of the market cycle. State governments benefit from having a baseline of property taxes that can be counted on (not CA because of Prop 13, but that’s another story). Taxpayers benefit because we are not on the hook for financing $750K homes in the Bay Area.

I am also a renter and have been for the last 11 years for the simple fact that I never believed the “appreciation” was real. I have been pretty angry about the way renters are treated in this country and the illusion of home ownership. It should be treated as a shelter and special place for a family to flourish………not as a cold calculated commodity. I remember sitting in a marketing meeting back in 1995 and an article being read about how Fannie and Freddie were going to be expanded to provide liquidity to the masses. It sounded wrong headed and dangerous as I listened to it that very day and look how badly it has ended.

Thanks for your insight and repositioning of an important ideology to its rightful meaning.

And another thing….Robert Shiller has turned into a complete government shill…..how disappointing.

Good work!

Joe

You are right about the FHA floor and the fact that the program has been completely bastardized. But, I’m not sure that a “backstop” is needed…especially when that backstop serves to make homes more expensive for the people it’s trying to help.

If FHA turns an $80,000 entry-level home into a $150,000 home, who dose that help?