Tonight's first order of business, a risky bit of policy in America makes it feel like the inmates may be running the asylum, as the saying goes.

Barack Obama, concerned about the lacklustre health of the U.S. housing market, is making it easier for first time buyers to purchase a home.

The thing is, policies aimed at encouraging home ownership in America, including tax deductions on mortgage interest payments, arguably drew unfit buyers into the market and, in the asset bubble of 2006, created an environment that rewarded home ownership at all costs.

To think the answer now is to repeat that mistake is an odd conclusion.

— Amanda Lang


housing foreclosure

U.S. laws making mortgages tax deductible were a big factor that drove the American housing market off a cliff to start the Great Recession. (J Pat Carter/Associated Press)

Few cities suffered in the U.S. housing crash more than Phoenix, Arizona. That was the backdrop today for President Barack Obama, who announced new measures to prop up a sector still shaken by the Great Recession.

Obama says the Federal Housing Administration is cutting the cost of mortgage insurance by half a per cent. The move — affecting first-time home buyers, minorities, and struggling Americans — adds up to about $900 in savings per year for each of 800,000 borrowers. The FHA believes the rate reduction will also bring 250,000 new borrowers into the market.

It's a market that sure is in need of a jump-start. Yes, home prices have recovered in many markets and fewer homes are underwater. But the financial crisis rattled lenders into a tight leash. And the FHA has had to hike loan premiums five times since 2008 to pay for default losses. Both have left hundreds of thousands out in the cold.

That could explain the sudden cool-off we saw this past year. Up until November, U.S. home resales were down four per cent and new home sales barely budged, compared to the significant demand witnessed in the previous two years.

While the U.S. housing market could use the lift, Canada may be in a far more precarious state. Deutsche Bank goes as far to say our market is "in serious trouble." Because while Americans have been steadily paying off debt since the economy was rocked, Canadians have piled it on.

Our household debt to income is at a record high. Meaning many Canadians, and their homes, could be at huge risk should interest rates rise this year.

Amanda Lang discussed the issue with Diane Swonk, chief economist and senior managing director at Mesirow Financial on Thursday's episode of The Exchange with Amanda Lang.