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CMHC and Fannie Mae-- will same mandate yield similar outcome


lennie_88
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Absent a new way of thinking about how the government can promote homeownership, Mr. Mudd said, there is no way to escape the fact that “government entities created to support homeownership as a social good will tend to socialize the risk to all taxpayers.”

 

When I read this quote from the former chief executive of Fannie Mae I could not help but think of the similar role CMHC plays in encouraging homeownership in Canada. It seems pretty stupid to have the same organization charged with expanding home ownership and underwriting loans/insurance. It seems highly probable that the push to increase homeownership will beat out the need to underwrite with prudence. Surely this drives home prices higher and socializes risk. Why is this so widely accepted as a good thing? What is wrong with renting until you can truly afford to buy? I don't understand....

 

 

 

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What is wrong with renting until you can truly afford to buy? I don't understand....

 

-Because it's nice politically to say you want people to own their own home.

-Because this extra credit doesn't show up as new taxes.

-Because it's well implemented in most people's head that it's better to be an owner then a renter.

-Because home ownership encourages the velocity of money, therefore increasing government's revenues.

-Because politicians have an outlook of maximum 4 years...

-Because most people have an outlook of maximum 1 year...

-Because most politicians loose focus of the social impact and concentrate on the popularity.

 

Keep your cash on the side... it's going to be great to buy all those apartments at a PE of 5. I can wait longer then failing homeowners can.

 

BeerBaron

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Home ownership encourages household formation and stimulates economic growth.

Manufacturing growth only creates new jobs to a certain extent, because productivity growth is increased via technology.

On the other hand, when home ownership is increased, it stimulates building activity creating more jobs for tradespeople and builders, financiers and home lenders, home furnishings etc.

A secondary effect of this maybe that as household formation increases it increases the rate at which births occur b/c families have a stable environment with which to raise children, and so population growth is increased too further stimulating economic growth.

 

Although some could say that this government intervention into the housing market is part in parcel of why we had a bubble in the first place, since Fannie/Freddie were pushing for home ownership rates about 70%. Lax lending standards ensued especially as banks were just underwriting so they could onsell to Fannie/Freddie.

 

Thus republicans/libertarians have some argument when they say that the current regime is to excessive in terms of regulation, since it was government intervention in the housing/credit markets whilst at the same time lax oversight of that intervention under Bush that created the problems in the first place.

 

The government tries to help, but sometimes in the long term it actually hurts Joe The Plumber.

 

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What is wrong with renting until you can truly afford to buy? I don't understand....

 

-Because it's nice politically to say you want people to own their own home.

-Because this extra credit doesn't show up as new taxes.

-Because it's well implemented in most people's head that it's better to be an owner then a renter.

-Because home ownership encourages the velocity of money, therefore increasing government's revenues.

-Because politicians have an outlook of maximum 4 years...

-Because most people have an outlook of maximum 1 year...

-Because most politicians loose focus of the social impact and concentrate on the popularity.

 

Keep your cash on the side... it's going to be great to buy all those apartments at a PE of 5. I can wait longer then failing homeowners can.

 

BeerBaron

 

Sounds like you are calling for a double dip Beer Baron.

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Sounds like you are calling for a double dip Beer Baron.

 

Well, I don't predict anything it can go up or down, a lot of people way more clever then me were proven wrong trying to forecast so why should I believe I'm right.

 

Like most value investors I get all excited about awesome deals. I love dips because they bring correlations between asset classes.

My money is in "low downside/high upside" stocks until it looks like I should switch assets.

 

I just hope I'm not repeating' Fisher's mistake of 1929 (see Common Stocks and Uncommon Profits), thinking the market will go down but believing your stocks can resist the earth trembling more then others.

 

BeerBaron

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What is wrong with renting until you can truly afford to buy? I don't understand....

 

-Because it's nice politically to say you want people to own their own home.

-Because this extra credit doesn't show up as new taxes.

-Because it's well implemented in most people's head that it's better to be an owner then a renter.

-Because home ownership encourages the velocity of money, therefore increasing government's revenues.

-Because politicians have an outlook of maximum 4 years...

-Because most people have an outlook of maximum 1 year...

-Because most politicians loose focus of the social impact and concentrate on the popularity.

 

Keep your cash on the side... it's going to be great to buy all those apartments at a PE of 5. I can wait longer then failing homeowners can.

 

BeerBaron

 

Great insights. Thanks!

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