South By North Strategies, Ltd.

Dean Baker of the Center for Economic and Policy Research isn’t a fan of the federal government’s approach to dealing with the foreclosure crisis.

The limited benefit to homeowners from this programme would be of concern, except that we know that the money shelled out by the government went to investors and servicers (ie banks). And, as we in Washington know, money handed out to banks is always money well-spent, isn’t it?
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The flow of money from taxpayers to banks is not hard to recognise. It is easy to distinguish between helping banks and helping homeowners. Homeowners are helped if either: 1) Their cost of being a homeowner is less than or equal to the cost of renting a comparable unit; and 2) They accumulate equity in their home.
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A serious plan for helping homeowners would have limited taxpayer dollars to modifications where 1) or 2) was likely to be the case. This would involve looking at factors such as price to rent ratios, a hugely relevant issue that never seems to come up in policy debates on helping homeowners.
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The point is simple: if the ratio is high then homeowners would likely save money by renting. Furthermore, a high ratio is good evidence of a bubble, which would mean that prices would be lower in future years, guaranteeing that most homeowners will not accumulate equity before they sell. As it stands, the housing bubble has not fully deflated, so prices in many areas will almost certainly be lower in two to three years, guaranteeing that many current homeowners will never accumulate equity.