Remember Gresham's law? It's the one that says bad money drives out the good money. Well, it also applies to lending.
During the home price boom, bad money lending - subprime mortgages and no-down-payment adjustable-rate mortgages - displaced conventional 30-year mortgages. The popularity of these Gresham's law mortgages, in turn, contributed to the price bubble.
Now our friends in Washington want to save the economy by making certain Gresham's law for home mortgages continues, but in a different way. One of the provisions in the proposed economic stimulus package is a temporary increase in the maximum size of mortgage Fannie Mae or Freddie Mac can buy. The current maximum is $417,000. The proposed maximum size is as much as 75 percent larger: $730,000.
The idea behind the increase is simple. Let government-backed institutions provide a better flow of mortgage funding for hazardous bubbly areas with recent price spikes, such as California and much of the Northeast.
Unfortunately, every dollar of mortgage money that goes into these areas will be a dollar of mortgage money that isn't available where home prices are much lower and haven't appreciated much over the last five years.
So low-cost, low-appreciation states will be subsidizing high-cost, high-appreciation states as yet more money flows to California and New England.
You can gauge the insanity of this by considering the home price appreciation in much of America relative to the appreciation in the high-cost areas. Take a look at figures from the Office of Federal Housing Enterprise Oversight and National Association of Realtors, and do a little back-of-the-envelope math.
Over the five years ended Sept. 30, 2007, the US home price index rose 46.9 percent to $220,800, a compound rate of 8 percent. That means we collectively did really well, because consumer prices rose only 2.8 percent a year over the same period. The appreciation figures to a median wealth gain of $70,000 over the period.
Over the same period, home prices in the Los Angeles area rose 107.9 percent, to a median of $588,000. Homes in the San Diego area rose 61.7 percent, to a median of $589,300. And homes in San Jose rose 50.6 percent, to $852,500. As a result, a homeowner in the San Jose area enjoyed a wealth gain of $286,400, while a Los Angeles owner enjoyed a gain of $305,200. An appropriate theme song here would be Dire Straits' "Money for Nothing" - rapid appreciation is way better than working.
Over the past five years, homes in the Dallas area appreciated only 16.9 percent, by contrast, reaching a median price of $146,800. Even though the Austin area has appreciated 9.7 percent in the last year, its five-year appreciation was only 28.8 percent, to $188,200. Ditto Houston (25.8 percent to $155,800).
The same can be said for home prices in many other areas. Homes in Kansas City, Mo., rose only 20.2 percent, to a median sale value of $157,000. Homes in Detroit fell in value by 0.9 percent, hitting a median value of $142,900.
The wealth gains were very small. It was only $21,200 in Dallas and $26,400 in Kansas City. That's less than one-10th of the gain in the areas to be protected.
That ain't right.
So, in the interest of fairness, I'd like to make a profoundly crackpot proposal.
Let's not try to stimulate the economy with piddling $600 checks. Let's do what government does best. Let's give everyone an Equal Home Appreciation Opportunity!
Homeowners who enjoyed living in above-average appreciation areas will receive nothing because they've already made a (tax-free) bundle.
Homeowners in low-appreciation Dallas, however, would receive a (tax-free) check for $37,673 to compensate them for the appreciation they missed over the last five years. And those in depressed Detroit would receive a check for $68,926.
Talk about stimulus! My plan would give Iowa City a veritable Starbucks buzz. Would it be expensive? Of course.
Am I crazy? No doubt about it.
Maybe I should run for Congress.
Scott Burns is a syndicated columnist. He can be reached at firstname.lastname@example.org.