Since high home prices can no longer be overcome by financial innovations in lending, state and local governments are trying their own market manipulations to sustain inflated home prices.

The federal reserve’s zero interest rate policy is fraught with unintended financial consequences. The policy of inflating house prices is eagerly embraced by a federal reserve that wants to see collateral value backing restored for bad bubble-era loans. While this policy benefits bankers and existing homeowners; however, it harms everyone else.

When I first started writing about real estate matters, some of the bulls accused me of talking down the market so I could profit from its demise. When I replied that I wanted prices to go down and stay down because it’s better to spend less on housing, people responded to me as if I were insane.

Some people live their lives from one infusion of debt to another spending all their income on debt service and repayment in one form or another. At the extreme this devolves into Ponzi borrowing where people borrow from one lender to repay another in a downward spiral that implodes once the borrower runs out of lenders to sustain the Ponzi scheme.

High house prices that keep rising higher is not a benefit to borrowers who rely on rising house prices to support their personal Ponzi schemes because these borrowers end up losing their houses and endure the unceremonious fall from entitlement when their lenders cut them off.

High house prices that keep rising higher certainly don’t benefit buyers who must pay higher and higher prices to own their homes. They bear all the costs but obtain none of the benefits — at least until future buyers push prices even higher.

High house prices that keep rising causes significant problems with affordability, particularly if house prices rise faster than incomes. In the past people could get around this problem by taking on interest-only or negative amortization loans or even borrowing at extremely high debt-to-income ratios. Those risky practices were eliminated in response to the disaster they spawned during the housing mania.

So without toxic affordability products, what can be done about the affordability problem? The answer is obvious, isn’t it?

Lower prices.

Unfortunately, the simplest and most effective answer is not the one anyone embraces. Instead, we now have state and local governments looking for “innovative” ways to keep inflating house prices. These programs are all doomed to fail because they merely compensate for the real problem: prices are simply too high.

By SUSAN HAIGH / THE ASSOCIATED PRESS, March 9, 2016

HARTFORD, Conn. – … “If you’re not working on Wall Street, how are you going to come up with that down payment?” said Hernandez, who considers himself lucky to have earned bachelor’s and master’s degrees with only about $15,000 in outstanding student loans. “I know people who graduated with $20,000, $40,000, $50,000 in loans. To be completely honest, most of them went back home.”

With the total amount a potential buyer can borrow capped at 43% of gross income, a large student loan payment consumes so much of this allowance that the indebted Millennial buyer simply can’t raise the money needed to buy a home. (See: Imprudent student debt debilitates Millennial home shoppers)

Realizing that millennials like Hernandez are burdened with debt, a difficult job market, weak wage growth and a less affordable housing market than their parents, some states are looking to keep educated young professionals within their borders for years to come by helping out with their housing costs.

This is completely the wrong approach. For each person they help in this manner, they merely crowd out a different potential buyer, particularly in areas like Coastal California where the supply of homes is too little to meet the demand. (See: Affordable housing subsidies are grossly unfair)

Initiatives like mortgage down-payment assistance, rent subsidies, urban homesteading incentives, partial student loan reimbursement and even “millennial villages” are being considered across the country to help professionals put down roots in communities. … The first phase of Maryland’s “You’ve Earned It” program ran out of money in less than two months because of demand. Now in its second phase, the program provides a discounted mortgage rate and down payment assistance to college graduates with more than $25,000 in student debt and who buy a home in certain regions of the state.

These are all well-meaning ideas, but they are all flawed. I once received a letter from the City of Santa Ana detailing a program where they provide $40,000 of down payment assistance to buyers who meet their qualification standards. Think for a moment about what this does.

First, the number of applications who want this subsidy would obviously out-pace the supply because they are giving out free money.

Second, the selected applicants are essentially lottery winners who gain a house on luck rather than merit. Third, and this is the most important point, the selected applicant will outbid the current, hard-working, wage-earning buyer on the bubble and deny them their family home.

Where is the justice in that?

Rhode Island’s new Ocean State Grad Grant program makes awards for mortgage down payments to recent college graduates. Recipients can get 3.5 percent of their first home’s purchase price, up to $7,000. Travis Escobar, 25, president and co-founder of the Millennial Professional Group of Rhode Island and a 2013 graduate of Rhode Island College, said the incentive will help encourage young professionals to stay in Rhode Island, where the average student carries about $30,000 in debt. Homeownership seems impossible when you’re living on your own, often underemployed and making student loan payments, he said. “Buying a house? You’re not thinking about that,” said Escobar, who lives in Providence.

Nor should you be.

[listing mls=”OC16049588″]