There’s a lot of discussion of Obama’s (and some state governments’) housing bailout plans. Several measures are designed to provide price support for housing – the tax credits for purchases, as well as the newly announced refinance option for troubled homeowners.
The goal of these policies is clear; they want to try and arrest the slide in home values (and so personal wealth) and provide a backbone to the consumer economy.
…are they the right thing to do?? There’s a separate argument about whether they will work, but let’s skip over that.
One thing that’s concerned me over the years has been what I perceive to be an overall overinvestment in housing. The fact is that too much of our national capital is tied up in what is really a consumption item – private housing – and not in businesses, infrastructure, or other places where more wealth and capital can be created.
Let’s talk for a second about what I mean by ‘overinvestment.’ Today, the average starter home is 3 bedrooms, 2 baths, a 2-car garage, and 2,000+ square feet. When my dad built GI homes after WWII, they were 2 bedrooms, one bath, carport, and 900+ square feet. But we have reset our expectations, and even affordable (ownership) housing now must be better than that.
And the speculative approach to housing has fed the problem; because if houses are going to go up 10%, you’re better off owning a $600,000 house than a $300,000 one. So we all overbuy housing and tell ourselves a) it’s our right as consumers to live like this – island kitchens, granite countertops; and b) that it’s a good ‘investment’.
And as a consequence, we tie up a substantial portion of our national capital in homes. Yes, they trigger other economic activity – someone has to install the countertops – but in reality we’d be better off is that capital (and labor) had been invested in productive assets. (Note: there are a broad set of issues in international finance that this decision triggers that are well worth having, but not here and now).
So – if that’s the case, why dump more capital into preserving home prices and maintaining their inflated importance in our economy??
Why not let them fall to a sustainably lower level, and use the capital elsewhere?
A few reasons come to mind. First that the capital lost when home prices go down doesn’t magically appear somewhere else. It’s lost, debited from the national books, with no corresponding new asset to take its place. Second that the followon effect of homeowners (like me!!) seeing hundreds of thousands of dollars in household wealth suddenly evaporate won’t be pretty.
From my point of view, I think we need to do something about declines in home prices (personally, I’d be a little more modest, and offer credit to banks that agreed to lower interest rates for existing borrowers in targeted markets, and possibly offer upside-down homeowners direct credits to stay in place in the form of secured junior liens (to get something back when prices go back up). But I’d also like – a lot – to see policies aimed at moderating the overdiversion of national assets to housing as the cycle moves toward recovery.