Is there any reason to subsidize construction loans?
Is Brad Miller — one of the most financially-sophisticated Congressmen in the House — really sponsoring a bill in which Treasury would provide loan guarantees for homebuilders? Calculated Risk responds as one might imagine:
I thought this was from The Onion … unfortunately it is not.
My feelings were very much with CR’s, but I thought it was at least worth asking Miller what exactly was going on. He pointed me to a letter he wrote to Treasury a year ago, and added this:
Yes, there is a huge overhang of existing housing units in many markets. You may recall that I’ve been very critical of Treasury for not doing much more about foreclosures, which is pushing down housing prices and adding to the overhang in many markets. Total household net worth declined by more than the GDP over about an 18 month period. Much (probably most) of that was the result of the decline in home values. I think that the loss of household net worth has been as much of a factor in economic anxiety as unemployment, and the diminished consumer spending that has resulted is making a strong recovery very difficult.
That is not true in every market. I certainly don’t suggest that we build more timeshares in Las Vegas, which is obviously comically overbuilt, but the apartment vacancy rate in Raleigh is three percent. Regulators are pushing lenders, generally smaller banks, to limit their real estate exposure without much regard to the demand in the specific market. So we’ve gone from indiscriminate lending to indiscriminate refusals to lend, or worse, lenders are calling existing performing loans. The housing industry has led us out of recessions in the past, which is obviously not going to happen this time, but the inability of homebuilders to get acquisition, development and construction loans in markets with a demand for new housing is making the recession much worse. About 16 percent of jobs in the recent past have been in the housing industry. Unemployment in the homebuilding industry is now about 25 percent. The continued high unemployment in that industry is a huge drag on any recovery, and it’s pretty tough on the unemployed.
The bill requires that the loans only be in “viable” markets, which means not comically overbuilt markets. Treasury should be able to tell the difference, and banks need to as well, since the guaranty is capped at 80 percent of the loan.
I am not new to this issue. I am attaching a letter I wrote to Treasury more than a year ago.
So in short, I agree with you that building houses for which there is not a demand does not build real economic strength, but I think building houses for which there is a demand does.
So, that’s the rationale, and there are parts of it which make sense. If banks are as dysfunctional and self-defeating in their relations with homebuilders as they are in their relations with homeowners, then I’m perfectly willing to believe that they’re destroying projects which can and should be perfectly profitable for them — and in the process causing unnecessary unemployment.
But the fact is that the history of government stepping in and telling banks what to do is a sorry one, whether it’s done by outright instruction, in which case the banks tend to lose a lot of money, or whether it’s done through loan guarantees, in which case the government tends to lose a lot of money.
I daresay that there are homebuilders out there who deserve loans they can’t get. But the same is true of other businesses too — businesses which create the vibrant sectors of tomorrow’s economy that ideally we really want to encourage, rather than crowd out. Banks aren’t going to lend more if this bill passes: they’re just going to shunt their lending from non-guaranteed sectors to homebuilding. And that can’t be good for the long-term health of the economy.
As for the unemployment problem, there’s no doubt that we want the people who have lost their jobs in the homebuilding sector to find new jobs as quickly as possible. But do we want those new jobs to be in the homebuilding sector? Not really. If we’re going to encourage job creation, let’s try to do it in areas of the economy which will help drive exports rather than imports, and which underpin a genuinely strong economy.