Mark Zandi

Court jester economist for power Mark Zandi tried to pull a fast one by readers of the Washington Post, by actually making the argument, in the face of all evidence to the contrary, that the Obama Administration successfully fixed the foreclosure crisis. He has to make a mental leap in order to do this, claiming that the state of the housing market in 2012 is directly related to foreclosure mitigation and housing market programs from 2009. Of course, we know the causes of the housing market “recovery” and they have nothing to do with those programs, and everything to do with over-speculation by institutional investors who have bought up massive amounts of foreclosed properties.

Zandi ignores this, and instead makes the completely implausible notion that Administration housing programs did the trick. In particular he singles out the first-time homebuyer’s tax credit, a stimulus program:

Temporary tax credits also enticed home buyers to act sooner rather than later, breaking a self-reinforcing deflationary cycle in the housing market. Prospective buyers had remained on the sidelines, waiting for prices to stop falling, and their reluctance caused prices to drop still more.

The tax credits didn’t spark additional home sales so much as pull sales forward from the future; sales weakened sharply as soon as the credits expired. The credits also were expensive, costing the Treasury tens of billions of dollars, and much of the benefit went to home buyers who would have bought homes anyway. But the tax benefit gave buyers a reason to stop waiting, ending the downdraft in prices.

This is innumerate and ahistorical. As Bill McBride explains, the homebuyer’s tax credit did not end the downturn in prices. Indeed, they continued to decline, almost unabated, from January 2009 until the bottom this year. Zandi knows this and even included all the reasons not to do the tax credit in his analysis. Moreover, the tax credit actually increased the excess supply of housing, because it incentivized the purchase of new homes, leaving existing homes vacant. As much as anything, this accelerated the drop in prices.

The homebuyer’s tax credit was really a waste of money, and an expensive one at that.

Zandi does bother to mention the ineffectiveness of HAMP, though he shields the Administration from criticism by failing to mention how the program actively harmed borrowers. More borrowers have been kicked out of the program than have received an ongoing permanent modification from it. Zandi acknowledges that “the administration probably should have added a financial stick to HAMP’s carrots, to induce banks to participate more aggressively.” But he doesn’t wrestle with the fact that they haven’t even paid out their carrots, spending less than 10% of the money allocated in three and a half years. Moreover, the only time he mentions the actual stick that the Administration could have wielded, in the form of accountability for foreclosure fraud, the largest consumer fraud ever perpetrated in history, he uses it to casually mention that it has boosted short sales (which is nothing more than foreclosure-lite).

Zandi also doesn’t understand how investors purchase homes. He says that they were attracted to purchase through low mortgage rates, but the vast majority of investors pay cash and then use the home as an investment that pays out with rental revenue streams. Also, while he claims that investors “timed the market” through purchases in 2009, they actually had far more to fall. Now we’re seeing the investor purchases in earnest, three years later.

I don’t know how you can look at a somewhat improving housing market today, after 7 million home losses and 3 million more facing eviction, and say that the response to the foreclosure crisis was effective. Indeed, the pain that the foreclosure crisis put on the overall economy goes a long way to explaining why we still sit mired in 8% unemployment.