Wacked Econ

It turns out that my home is going to sell this month, and I’m going to get out of it unscathed. I won’t be making money, but I won’t be losing it either, which, all things considered, is a good thing, especially given how some people - especially those who got into condo conversions at the height of the market or bought homes out in the far reaches of the suburbs - have fared in the Phoenix market.

In spite of the political pressure, it does seem that Congress will not pass a measure to bail out unlucky homeowners who got in at the top of the market and find themselves burdened by mortgages they can’t afford on homes that are now worth just 70 or 80 percent of their previous values.

Matt Yglesias rails against “blue dog” Democrats who have come out against bail out schemes. If one wants to take economics seriously - not that Yglesias admittedly does - then one has to confront the basic lesson that incentives do matter. There are two sets of incentives here. Buyers who, if they’re bailed out, will be even less risk averse the next time a bullish housing market comes along. And bankers who will be even less risk averse about floating even more questionable loans.

These are hard facts in large part because in order for incentives to work, they have to involve punishment as well as reward. And the punishment is not always pretty.

Take Keevin Simpson, who bought a north Phoenix home, in February 2006 for $138,129. Simpson spent $40,000 remodeling the home.  Assuming a 5 percent commission, Simpson would have to sell the property for $190,000 just to break even.  But none of the comparables has sold for more than $160,000, and the market has worsened since the last sale was recorded by the assessor in August.

Simpson may not need to sell right away. Assuming he has a mortgage of $120,000, he might come close to breaking even if he can rent it out for the next three or four years until the market recovers.

More likely, he’s going to lose a couple of hundred dollars a month until he can afford to unload the property in 2011.

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