My friend and co-author Jared Bernstein used his NYT blogpost to defend the Federal Housing Authority (FHA). I am mostly sympathetic to his case. The FHA has played a positive role in the recovery, helping to support the housing market when private funding had largely disappeared. However, I was struck by his reference to a study by Moody's Analytics which purportedly finds that house prices would have fallen by another 25 percent had the FHA not been there to support the market.
I didn't actually find the Moody's study on the FHA, but Jared did link to a paper from the Center for American Progress (CAP), which has the following paragraph:
"It’s difficult to quantify the agency’s exact contribution to our economy in recent years. But when Moody’s Analytics studied the topic in the fall of 2010, the results were staggering. According to preliminary estimates, if the Federal Housing Administration had simply stopped doing business in October 2010, by the end of 2011 mortgage interest rates would have more than doubled; new housing construction would have plunged by more than 60 percent; new and existing home sales would have dropped by more than a third; and home prices would have fallen another 25 percent below the already-low numbers seen at this point in the crisis."
It is difficult to envision this story. Mortgage interest rates would have doubled without the FHA? Let's see, the FHA was an important source of demand for mortgages. So we eliminate a big source of demand and then mortgage interest rates double? I wonder what economic theory they are using over at Moody's. (Anyone relying on Moody's for an assessment of the housing market should remember that it completely missed the collapse of the housing bubble.)
In the same vein, how do we get a 25 percent further drop in house prices? There were already investors entering the market in large numbers by the end of 2010 with private equity and hedge funds starting to buy up large amounts of housing. If they knew the FHA was leaving the market, is there some reason to believe that they would not have taken advantage of an even greater buying opportunity?
Perhaps Moody's modeled a surprise disappearance of the FHA from the housing market, where Congress just votes to end its existence at the end of the month. Perhaps we would then see a sharp fallofff in house prices, but it wouldn't take too long for investors to come in and take advantage of the lower prices. A 25 percent drop in house prices that lasts for 3-4 months would be unfortunate for the people who had to sell in that period, but would not have much impact on the economy.
I think on the whole the FHA has been a net positive for the market and helped many low and moderate income families buy houses. In fact, it is to the FHA's great credit that it became virtually irrelevant during the peak housing bubble years. It could not compete with the lax standards offered by subprime lenders. But it is better to make an honest case for the agency, not try silly hype of the sort coming from Moody's and the CAP report.
Typo corrected -- thanks Mark Brucker.
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