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.
But…
…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.
I presume the house still looks the same as it did before the adjustment. If so, there was no wealth lost. The “capital lost” was not really a loss. The added value was artificially created and therefore never real to begin with.
I’m not sure that leaving a housing bubble inflated is necessarily the sensible solution. I think we’re going to have to suck up the losses and move on; seeing things re-inflated and burst again 5 years down the line after more tax money is thrown away doesn’t seem sensible (btw, I’m British and have no dog in this hunt )
The “right price” for a given house is the price a buyer is willing to pay for it. If the government is a “willing buyer”, it can set the price, but it will need to cough up a ton of cash to do so.
Also, there are numerous people on the other side of the deal here: people currently renting, who would like to buy but can’t – and who weren’t “smart” enough to get junk mortgages and be bailed out. They are the people really getting screwed over here: their tax dollars will be spent to keep house prices high.
So what’s ultimately the problem here? People that are happy in their current home aren’t looking to sell, so they shouldn’t really care. And people looking to move will have to buy a new house in a deflated market, so they end up coming out ahead since the taxes will be lower.
So who is worried? People looking to borrow against the perceived value of their homes.
Everything about this crisis goes back to borrowing. What is really going on here is that people are in a panic that they may not be able to borrow as easily (or recklessly) as they used to be able to. Too bad. Aside from the government (obviously) the era of easy credit is over for the moment. Pouring trillions of dollars into the sewer to try to bring back the reckless credit markets that go us into this is lunatic.
The first problem is the need to disaggregate the housing issues.
In some parts of the country, housing prices are dropping as the result of unemployment and migration to places to find new jobs. Michigan, some major cities like Memphis. Trying to pump up housing prices appears to a fools errand.
In Southern California, housing has been so unaffordable that a couple with above-median income cannot afford to buy a house without some wacky financing. I believe AMAC did the math in the comments here at Winds. It’s not just speculators, but young families trying to start families in the best home they can afford.
The rest of the country, or about 45 states, have problems that are not defined by the housing crisis. Trying to pump up the national housing market in order to help about five states is not very practical.
I meant to comment on this before, but for various reasons, just wasn’t able to. And this is a tough and uncomfortable issue for me, because it puts me dangerously close to being a hypocrite, and I hate being a hypocrite.
You see, I was, and am, generally in favor of a banking bailout, as long as the bailout is well run. (I’m not going to define well run in any great detail because I am not a banker, but I will note that Chris Dodd throwing around the N-word is extremely unhelpful.) I am not, however, generally in favor of bailing out the home borrowers.
The banking crisis, it seemed (and still seems) to me is an actual matter of paramount national importance. The United States can survive without, say, a robust auto industry, although it would hurt many individuals who rely on that industry today. I don’t believe the United States can actually survive without a financial industry, because finance is too intertwined at too deep a level in everything we do. It therefore makes sense to me as a matter of national self-interest to bail the industry out. One ought to make the bail-out as excruciatingly painful to the indistry as possible, while passing as little of that pain on to the rest of the economy, though, in order to avoid moral hazard.
The housing industry, though… seems more like the automotive or the steel industries than the financial industry. If housing prices fall sharply, then a lot of people are going to ge burned by it. But is this an actual threat to the state on the level of the financial industry? I cannot convince myself that it is so. Nor was I able to convince myself of the need for an auto bailout, rather than bankruptcy and reformation. Moreover, where exactly is the hedge against moral hazard? The financial bailout has been so painful for the bailed out that some of them have threatened lawsuits, or actually sued, to get out from under the “help” given to them. Are the terms here for foolish borrowers going to be as harsh? I cannot convince myself that it is so.
None of that explains why I feel even slightly hypocritical, though. So in full disclosure, here is why I might be one:
I would benefit very directly by falling housing prices, because I have been renting for the past fifteen years, with an eye on buying something once the market returns to sanity. To say that I feel betrayed by my elected government for having my tax dollars taken from me in order to make expensive goods that I want to purchase more expensive, to benefit people bought them when they could not afford them is a grotesque mockery of an understatement.
Greg F is right– you’re not losing capital unless you can’t pay your mortgage and get your home taken away from you. I have no interest in keeping the value of your home high, and every possible interest in driving it lower.
My modest proposal is therefore to keep the solution to this “problem” confined to the housing industry– fund it solely by an increase in property tax on single home dwellings. Leave us renters alone.
I think its the numbers that are getting thrown around that makes my head spin. It’s like we’re through the looking glass here. I heard Dennis Kucinich the other day arguing that we need several hundred billion for infastructure in the next stimulus bill. What happened to the first stimulus bill?!
When you start adding all this up, the numbers start to speak for themselves.
There is apparently about 10 trillion dollars in mortgages in this country. If 90% are safe, that means we are talking about around 1 trillion dollars of toxic debt. We’ve already spent (or have earmarked) more than that! And now we’re talking about several trillion more to come. By the time we’re done, it could well be the case that we are borrowing over half of the value of every single mortgage in America to supposedly stop this recession that was supposedly caused by the mortgage crisis.
In other words- the government could have bought up every single questionable debt on the books by now and done just about anything with them. But we are in more trouble than when we started. Doesn’t that bother anyone else? If _nothing_ else, it proves that just tossing money around doesnt solve problems, and can indeed make problems worse. That’s a damn important lesson considering the rhetoric we’ve heard about ‘stimulus’ of late. It is flat out dangerous thinking to assume as long as the government is spending money its helpful to the economy.
Marcus Vitruvius: There is no hypocricy in pointing out that the government’s policies in maintaining prices and existing ownership hurt buyers and non-owners. We need that larger view to make the best policy for the entire public.
Those who want to maintain price levels need to tell me what the proper valuation of “this house”:http://isteve.blogspot.com/2009/02/that-340k-500-sq-ft-home-in-compton-now.html is.
There is at the very least the possibility of self-serving hypocrisy when my bail-out politics– which I dress up in terms of what is best for the nation– also align perfectly with what helps or hurts me personally.
Of course I don’t think I’m being hypocritical, but if I saw someone else in a similar position, I’d raise an eyebrow.
As a homeowner, I might by accused of seeking an opportunity to upgrade.
My “modest proposal” would involve banks identifying housing price levels that defaulting borrowers can afford and “swapping” houses. For example, the holder of $700,000 mortgage is determined to be able to afford only a $350,000 note. The bank finds a willing “swapper” with good credit and a good payment history to move into the bigger house without any change to their mortgage payments. This seems to be outcome maximizing, and addresses the problem that people in houses they cannot afford do not have the extra money to maintain the home’s value anyway.
Here’s my modest proposal: the government take 1 trillion dollars and buys up all of the subprime mortgages at a set percentage on the dollar. After that, lenders are on their own. There will be no nationalizing and no more bailouts.
The government will then collect on all the mortgages. Any foreclosures, instead of attempting to sell the house (and hence pull down the local market), the government will bulldoze the property and turn it into a park or open space (raise surrounding property values).