Around the middle of last week, I noticed a ton of new blog posts popping up on the internet calling for an end to subsidies in the housing market. “Let the housing market crash!” seemed suddenly to be the prevailing sentiment. The outcry came on so quickly and so strong it resembled an organized effort. It was such a striking phenomenon I felt it must indicate our arrival at some sort of tipping point. Lo and behold, the following Monday the New York Times and Los Angeles Times both ran articles on the subject and yesterday it was all over National Public Radio. When bloggers and major news media align with such force and unity there is definitely something significant afoot. Revolution is in the air. People are mad as hell and they’re not going to take it anymore. I have maintained since the initial run up in prices that housing is vastly overpriced and needs to fall dramatically in order for the market to reach economic sustainability. The national recovery depends on it. It has always perplexed me as to why we haven’t heard more outrage over the subject or even discussion of it in the press. Now, four years after the peak of the housing bubble the topic has finally surfaced, and with a vengeance.
Two years ago, when the Bush administration was conjuring up its now famous TARP bailout effort to buy or insure up to $700 billion of troubled assets, I wrote a letter of protest to Congresswoman Barbara Boxer. I was outraged by the idea that after enduring years of housing bubble mania I, along with every other responsible tax paying citizen who’d done the sensible thing and resisted the pressure to gamble away every last dollar on ponzi real estate opportunities, was now going to be held responsible for the cost of the debt left in its wake. I advised her that we should not participate in any effort to forestall foreclosures or prop up housing prices, as not only was it futile, terribly expensive and would cause further damage down the line but it was just generally unfair and an outright moral hazard. My thought was that if we were going to spend government money on cleaning up the mess we should let the free market take care of pricing and invest our dollars in something that might actually make a difference. We could, for example, focus on educating our children in economics and personal finance, a subject virtually nonexistent in our public school curriculum at this time. Obviously my advice was either never considered or it was just thrown to the curb with the rest of that week’s trash, which of course I expected would be the case. All I got in return was a lousy form letter talking about the virtues of stimulus and all the sad families who would be unable to stay in their homes.
Well, let’s talk about that for a moment. I don’t mean to make light of the tragedy of foreclosure, but why on earth is it my responsibility to keep people in their homes when they obviously didn’t even take a moment to do any homework before signing off on a loan they could in no way afford to pay? And the reality is many did know they couldn’t afford to pay but signed anyway, gambling their money on a bet that housing would appreciate enough to put them ahead on the deal. If you lost on that kind of gamble in a Vegas casino, would the taxpayer be expected to foot the bill? The mere suggestion is laughable.
I was a humble renter at the time the housing bubble started to inflate. I lived with my husband in a modest suburban house with a big grassy yard and an office from which I ran my small freelance animation business. At the end of 2004 our landlords decided to refinance and pull their growing equity from the place, and they raised the rent to close to double what we’d been paying. We’d been there ten years. We were forced to move. I had a two month old baby and it was right before Christmas. Now, being a renter I’d always known there was some impermanence to the situation, but this transition played out so quickly and with such brutal timing we were left reeling. My brother had come to visit from out of the country and spent his holiday packing boxes with us as our landlords paraded prospective tenants in and out of the house, through our strewn belongings and our sleeping newborn’s room. We lost our home. It was messy and terribly unfortunate, but totally legal (believe me, we looked into it!). The government offers nothing in the way of assistance to people in our position. We were lowly renters and not deserving homeowners. No bailouts available.
We moved and resettled into an apartment half the size with no yard, and have since had another baby. I no longer have a studio space, but as I’ve decided to stay at home to raise our kids I can do without that for now. We don’t have much room, but we are living within our means. We are debt free. We are waiting until it makes financial sense to buy a home. When we were forced from our last place, I’d have thought the bubble would be long past us by now. That bubble grew into a real dragon though, and there’s still a long way to go before we see the end of its reign. Yet, I have much to be grateful for. I have my family. We have a decent place to live in a relatively nice section of town (rent controlled, this time!). We have flexibility and we are still able to build toward our dreams. We are thankfully not one of the many families facing foreclosure today. One plus side of renting is that if you lose the place it doesn’t touch your credit score.
So, what ever happened to all that TARP money anyway? Apparently it didn’t do anything to prevent foreclosures or stabilize housing prices. At best it prolonged the anguish by slowing the fall somewhat. And those troubled assets it was supposed to take care of (the whole point of the TARP bailout) are still on the books of the banks that held them then. What a waste! And what a lovely gift to leave our children, who will still be paying the bill after we are all dead and gone. I ran across this fantastic chart at the Doctor Housing Bubble website a couple weeks ago showing the progress of foreclosures since the peak of the housing bubble. (Click on chart to enlarge.) It is remarkable for a couple of reasons. First, you can see that we are now far beyond the number of repossessions that led us into economic crisis in the first place and caused the stock market to spontaneously lose over a third of its value. Secondly, we can see clearly how none of the government programs aimed at preventing foreclosure have had any lasting effect at all. The truth is, the tsunami is too big to stop. We are talking about the deflation of an eight trillion dollar housing bubble. That’s a lot of evaporating wealth. Seven billion dollars of TARP money (and whatever we’ve spent on the rest of those programs) just isn’t going to buy enough sand bags to hold that sucker back.
As we sit discussing strategies and kicking around our various measures to deal with the housing market, prices just keep sliding steadily down… and so it will continue until working fundamentals are reached. Water seeks equilibrium. With every new program the government employs more of our money is wasted. In fact, the only people who’ve received any real help out of it all are big banks, corporations and Wall Street. Housing prices will not stop falling until real household income can justify the cost of a home, and real household income is diminishing every day.
Perhaps one of the most shocking aspects of the whole story is that despite the fact that most of the toxic loan products that created this mess are no longer available, many people have continued to put their financial well being at risk buying overpriced houses they can’t truly afford. Where I live in Los Angeles, housing in some places is still in the bubble high range with many neighborhoods costing six times or more what local income can support. How, you might ask, is this happening? Well, it’s happening because the government has stepped in where the defunct bubble lenders left off. Countrywide is out of business but the Federal Housing Administration stepped right up in its place offering loans with three percent down in a market overpriced by fifty percent. Currently at least four out of ten loans in Southern California are backed by the FHA. This is an agency that was created to help lower income folks who were struggling to buy a modest home. The agency is now backing loans on three million dollar apartments in Manhattan. We are already seeing huge default statistics on these government insured loans, yet the government keeps the supply going and people keep signing the paperwork. That dream of home ownership sure makes folks crazy. And the very bad news again is that taxpayers are going to be on the hook for these souring FHA loans. We’re talking about hundreds of billions of dollars of loans.
I want to touch upon the concept of moral hazard here. Simply put, moral hazard occurs when a party is not held responsible for it’s damaging actions. This results in creating an incentive for that damaging behavior to continue. A party that is insulated from risk tends to behave more recklessly than if it had been fully exposed to that risk. If a company is deemed “too big to fail” and rescued from the loss of its bad investments by the government, for example, it will be more careless with risk taking in the future, knowing that failure will not be a consequence of bad decision making. If people who gambled on housing and lost are bailed out they will tend to feel it is safe to repeat the behavior that put them at risk of foreclosure in the first place. In other words, lessons will not be learned and in some cases justice will not be served. There is dignity in facing the consequences of one’s actions and taking responsibility for them. To prevent people from experiencing consequences is to rob them of dignity and the opportunity to learn and grow. It is condescending and treats adults as children, emphasizing victimhood and robbing people of their power.
Let the housing market crash? Do we have a choice? It is crashing anyway. Nothing has or will be able to stop it. Foreclosures are at record highs. Unemployment is as well. July saw a drop of 27% in sales of existing homes across the nation. Prices are bound to follow. So yes, let’s at least stop throwing good money after bad on ill conceived bailout plans and come up with a more effective way of helping people through this mess. Get something new going. If we must throw money at something, how about we try flowing a little cash the way of small business, exploratory science and arts, or financial education. Maybe start living within our means and saving for a change. Now that’s a novel idea. It’s time to pay the piper, folks. It isn’t pretty but we all played some part in getting here. This is an opportunity to get clear about what that part might have been. Then maybe we’ll have an opportunity to do things differently next time around.
Dr. Housing Bubble
Countrywide and Pay Option ARMs on Trial
August 26, 2010
Dr. Housing Bubble
FHA Has Become the New Toxic Lender of First Resort
August 15, 2010