Just the other day I was reading a story in which the housing market has apparently rebounded so well that the administration is going out on a limb, pushing banks to overlook weaker credit ratings in granting mortgages to prospective homebuyers:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

– Zachary Goldfarb, “Obama administration pushes banks to make home loans to people with weaker credit,” Washington Post, 2 April 2013 : http://tinyurl.com/c9fuwqr

But today I see this story by Karen Weise, writing in today’s Bloomberg BusinessWeek, who reports that the great mortgage rates available these days are masking home prices that are still far higher than the historical norm:

Home values are now at three times the median income—that’s 15 percent higher than they have historically been, relative to what Americans earn.

Even so, the perception of affordability, combined with the fact that home prices compared with rental rates are at levels last seen in the early 2000s, is making it tempting for people to think now’s a good time to buy a home.

​“We are currently in a carnival funhouse mirror,” says Stan Humphries, chief economist at Zillow. ”Homes seem quite affordable when at base they are not.” …

 More likely, in his view, is that as rates rise and push mortgage payments higher, people are going to realize that homes—and not just mortgage payments—are overpriced for what the nation as a whole earns, which in turn could send home prices tumbling again. 

– Karen Weise, “Cheap Mortgages Are Hiding the Truth About Home Prices,” Bloomberg Businessweek, 10 April 2013 | http://tinyurl.com/dybpm7w

Weise’s story gets even bleaker in the Washington DC area, if Fairfax County, Virginia can be used a bellwether for the area. Median household income and home market values for 2011, the last year Fairfax County reports, were $105K and $429K, respectively, yielding a home price to income ratio of almost 4.1, off the chart above, and over 1.5 times today’s national ratio.

Government guarantees on risky loans to underqualified creditors to buy overpriced homes – gosh, what a great business model! I really can’t think of a great time for the government to be going out on a limb to underwrite risky loans. But even if I could imagine such a time, a time when it’s facing unprecedented national debt is probably not one of them.

PS: The temptation to title this “Funhouse Mirror,” “Objects in mirror are larger than they appear,” or something else like that was enormous. However, the prospect of taxpayers and home buyers risking every last cent to prop up an inflated market just doesn’t seem very funny.