Subsidizing Bad Decisions (Thomas Sowell)

Now that the federal government has decided to bail out homeowners in trouble, with mortgage loans up to $729,000, that raises some questions that ought to be asked, but are seldom being asked.

Since the average American never took out a mortgage loan as big as seven hundred grand-- for the very good reason that he could not afford it-- why should he be forced as a taxpayer to subsidize someone else who apparently couldn't afford it either, but who got in over his head anyway?

Why should taxpayers who live in apartments, perhaps because they did not feel that they could afford to buy a house, be forced to subsidize other people who could not afford to buy a house, but who went ahead and bought one anyway?

We hear a lot of talk in some quarters about how any one of us could be in the same financial trouble that many homeowners are in if we lost our job or had some other misfortune. The pat phrase is that we are all just a few paydays away from being in the same predicament.

Another way of saying the same thing is that some people live high enough on the hog that any of the common misfortunes of life can ruin them.

Who hasn't been out of work at some time or other, or had an illness or accident that created unexpected expenses? The old and trite notion of "saving for a rainy day" is old and trite precisely because this has been a common experience for a very long time.

What is new is the current notion of indulging people who refused to save for a rainy day or to live within their means. In politics, it is called "compassion"-- which comes in both the standard liberal version and "compassionate conservatism."

The current political stampede to stop mortgage foreclosures proceeds as if foreclosures are just something that strikes people like a bolt of lightning from the blue-- and as if the people facing foreclosures are the only people that matter.

Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices-- prices perhaps more within the means of the new occupants?

The same politicians who have been talking about a need for "affordable housing" for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?

The political meaning of "affordable housing" is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit.

Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

Study after study, not only here but in other countries, show that the most affordable housing is where there has been the least government interference with the market-- contrary to rhetoric.

When new occupants of foreclosed housing find it more affordable, will the previous occupants all become homeless? Or are they more likely to move into homes or apartments that they can afford? They will of course be sadder-- but perhaps wiser as well.

The old and trite phrase "sadder but wiser" is old and trite for the same reason that "saving for a rainy day" is old and trite. It reflects an all too common human experience.

Even in an era of much-ballyhooed "change," the government cannot eliminate sadness. What it can do is transfer that sadness from those who made risky and unwise decisions to the taxpayers who had nothing to do with their decisions.

Worse, the subsidizing of bad decisions destroys one of the most effective sources of better decisions-- namely, paying the consequences of bad decisions.

In the wake of the housing debacle in California, more people are buying less expensive homes, making bigger down payments, and staying away from "creative" and risky financing. It is amazing how fast people learn when they are not insulated from the consequences of their decisions.

There are a couple of topics never referred to in the columns and daily squawks from the ‘media’.

Houses that are in foreclosure are now in the hands of the banks.
Part 1: Since almost every city-county-parish entity has a grace period of as much as 5 years with UNPAID property taxes before the taxing entity takes over—who is paying the property taxes on these foreclosed homes?

I contend that the taxes are NOT getting paid. If I were the main bookkeeper for a bank- I would tell them to suspend property tax payments until they can sell the property to a new buyer. The new buyer picks up the past due taxes, and the bank has not depleted it’s assets in keeping the property taxes up to date. If the house doesn’t sell before the grace period time’s up, then pay ONE year and get another year of grace time, etc.
This action causes the coffers of the taxing entities to be similarly depleted, and then all the entitlement programs that the Feds-state-county, etc have in place cannot be fulfilled.
Kalifornia has had overpriced property for many years. Totally “pumped up”—to quote a term the Governator likes to use— and that higher price causes higher and higher taxes.
Another glitch: All home prices needed by the seller include the 5-6-7-8 % commission that the real estate agents/brokers get in the sales transaction.
Take an $800,000 house. That draws a $48,000 commission total at 6%. Kalifornia property taxes are calculated on Prop 13, and that is 1% of the base price, plus local bonds. It averages to about 1.25% of the sale price.
$48,000 of commission also carries that 1.25% of property tax. Isn’t that wonderful? So $600 of the first year’s tax bill is a tax being paid on the commissions that the agents drew for the sale/buy efforts. Dirty little secret, eh? Then that tax can be raised 2% a year forward. Doesn’t take all that long to add another $100 to the tax bill, etc.
NObama wants to eliminate realestate interest and dramatically lower charitable contributions deductions. What is he planning regarding the property taxes?
IF NObama gets real estate interest eliminated, then in effect, that interest will be double taxed:
The bank reposrts that interest as income—which it is to the bank. They pay taxes on that money.
If you or I cannot deduct our real estate interest, then we will effectively be paying income tax on that same money...hence, that interest is DOUBLE TAXED. Is that legal?
What incentive is there for a person to try and buy a home? The age-old ratio for buying a home was that your payment could not exceed 31% of your income.
Since that calculation was based upon always having the interest as a deduction, is that ratio calculation now wrong? It is being used in this massive attempt at getting more people to buy the foreclosed homes. If that interest deduction is dropped, does the 31% ratio still hold as valid?
I think it is another piece of smoke and mirrors from the NObama administration. None of them seem to be very good at math- even the Treasury Sec-Geithner- is known to not be good at math, and does NOT like math. Great choice for someone to be Treasuty Sec, eh?
Part 2: If the banks are not paying the taxes on foreclosed properties, are they paying the insurance? I know for a fact that in Wisconsin, the home insurance companies will not insure an empty house- unless you are in the process of remodeling or something. But if the house is just ‘vacant’ , the insurance does not pay for any damages.
What is the status of these thousands of foreclosed homes?
Uninsured?
Property taxes not being paid?

I think all of the above is happening..
Anyone got info?

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