Free the Housing Market

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
http://www.doctorhousingbubble.com/countrywide

Dr. Housing Bubble
FHA Has Become the New Toxic Lender of First Resort
August 15, 2010
http://www.doctorhousingbubble.com/fha

Hollywood Loses Its Luster

This is the summer we said good bye to The Hills.  The departure of the popular reality-esque television show set in the hippest locations of Hollywood has left many fans distraught.  Personally, I never watched the show… that is, until literally the last week it was on when one sleepless night I stumbled across some sort of marathon running earlier episodes back-to-back without end.  I was instantly hooked.  It was the most ridiculous thing I’d ever seen on television and it hooked me like a bad cocaine habit.  I could not tear myself away from the glittering parade of freshly quaffed twenty-somethings streaming across the screen and talking endlessly about nothing of any consequence.

Coming in on things at the very end as I did, The Hills seemed to me like a sort of time capsule, perfectly capturing the mood of the great economic credit boom from which we now find ourselves emerging.  Images of the “expensive life” flashed in succession, with every meal eaten (more often left behind) at the trendiest of restaurants, every day a new adventure in fashion and clubbing, every personal exchange the promise of new best-friendship-forever or frivolous whirlwind romance.  The show got me thinking about the wild carefree mood of the roaring 1920’s, before the stock market exploded and melted down into the worst economic depression our country has ever known.

My mother once told me the secret to successful party going is to leave before it’s over.  That way you leave them wanting more.  Being far less suave than she and suffering from perennial issues with lateness, I’ve more often found myself the last guest lingering, and worrying the next day if I’d overstayed my welcome.  The Hills left the party at just the perfect time.  Of course we’d expect nothing less from such a stylish phenom.  Its time was coming to an end and it elusively slipped out the door back to it’s pumkin coach in the valet lot before the first stroke of midnight, never to be recaptured and always to be recalled with a tear.  Now as we wake in the wake of its splendid dream, we open our eyes to a Hollywood that seems somehow changed.  It has lost its luster, I’m afraid.  The party is over and the place has been left a bit of a mess.

Hollywood has long seen itself as recession proof.  Historically, the business of film making profited during hard economic times.  Growth of the fledgling movie industry coincided with the onset of the Great Depression and business boomed during the early 1930’s despite the severe unemployment and poverty sweeping the nation.  The explanation of this has always been that when things get hard, people need the relief of a bit of inexpensive escapism more than ever and a night at the movies has always been more affordable than many other forms of entertainment.  Now days, even softer on the budget are DVDs and services like Netflix and I Tunes that provide the movie viewing experience in the comfort of one’s own home.  For these reasons industry insiders have felt relatively secure that their jobs would remain stable through any economic hardship.  However, things may not be playing out quite as expected in the current economic downturn.

Work in the film business is growing scarcer under the deflationary pressure of the broader downturn.  One problem is there are fewer investors to fund film making these days.  Foreign money that gravitated toward the glamor of the industry in the past is no longer flowing in.  Investment from Wall Street has dried up.  The result is that there are fewer movies being made and so fewer jobs are available.  Production is down by as much as 25%.  People who are getting jobs are making less than they have in the past.  Even big name star actors are taking sizable cuts in pay.  Smaller specialty divisions have been closed down or absorbed into larger studios.  Distributors have been equally hard hit, so it has become extremely difficult to get any film up and running for business.

“It’s not that the cinema business is completely immune to recessions,” says John Fithian, chief executive of the National Assn. of Theater Owners. “But the industry appears to be recession-resistant.  If there are decent movies, people are going to come out.”

Unfortunately, decent movies seem to be growing scarce as well.  One of the worst tolls the recession has taken on the industry has been that the creativity of film making has been tremendously stifled.  Studios are willing to finance only what they see as a sure bet at the box office.  This means we are seeing a lot of tired sequel making or just plain derivative conceptual development in today’s cinema, which then fails to attract serious talent.  The trend is likely to end badly, as it produces films that no one is excited to see, let alone pay hard earned and increasingly rare cash for, and this perpetuates a downward economic cycle.  Fewer good films produce fewer people in the audience, which produces less money for the next film, which produces tighter restraint on creativity, which produces less access to talent, which produces fewer good films… and so the downward spiral goes.

Director Michael Moore, the man behind Roger and Me, Bowling for Columbine, Fahrenheit 911, and Sicko complained recently in an interview with Jane Boursaw of NBC Dallas television about Hollywood’s unwillingness to take on creative challenge.  “The money has really dried up since the crash,” Moore said. “They only really want to spend money on sure bets.  People don’t want to take risks, so we’re missing out on an American art form that could really speak to the country right now in profound ways.”

On another front, new technology has expanded what is available to today’s public as entertainment.  We have a fairly new and very exciting invention called the internet at our disposal.  The internet allows us to watch a seemingly infinite array of movies, television and all sorts of original media at a very low cost or even for free.  Sites like YouTube and Hulu offer a huge variety of viewing material without directly charging for it.  Adding to the economic stress is the fact that the internet generates substantially lower revenue than established business models like 30-second TV commercials and home video sales, which supported the costly economics of TV shows and movies until recently.

When it comes down to it, we really cannot compare today’s movie business with that of the 1930’s.  Film was a new and novel experience back then.  Just to see pictures moving about on a screen was worth the price of admission, which incidentally was something like a dime.  Today’s viewers are much more sophisticated and demanding.  They care about the subtlety of the acting, the believability of the storytelling and the grandeur of the special effects.  It is not exciting enough to just see images of people moving about.  Also, the cost of production was relatively minimal in the early days of cinema.  Crews were smaller and the technology was simpler.  There wasn’t the same involved system in place to produce a film that there is now, and the members of the crew were not making the kinds of exorbitant salaries many of today’s Hollywood employees have come to expect.

The mythology of Hollywood’s immunity to recession may actually be built on a false premise to start with.  The fact is, although cinema attendance increased during five of the last seven recessions, closer examination of movie box office receipts during the Great Depression tells a different story.  Attendance exploded in 1929 and 1930, after the advent of “talkies,” but as the novelty wore off ticket sales plunged sharply in subsequent years and did not recover until 1940.

It appears that Hollywood may not be as recession proof as it has liked to think itself.  Deflationary pressures are squeezing the industry as investment wanes and the availability of credit shrinks.  Workers in Hollywood are seeing projects cut back, wages furloughed and fewer opportunities for employment just as they are everywhere else.  This is in addition to other pressures that had already weakened the film industry’s resilience in recent years, like various labor battles and outsourcing to less expensive locations for production.  The real wild card in the outlook for Hollywood’s economic future is the length and depth of the downturn.  No one knows how bad things will get.  Me, I’m just waiting for that ticket price to drop a couple of bucks as deflation trickles down, and then I’m off to the movies to forget about all this depressing stuff.  In the meantime I think I’m gonna hit up Hulu and head for The Hills.

LA Times
Is Hollywood settling into a prolonged recession of its own?
August 23, 2010
Patrick Goldstein
http://latimesblogs

DFW, NBC Dallas
Michael Moore: Recession Killing Hollywood Creativity
By Greg Wilson
Updated, Aug 10, 2010
http://www.nbcdfw.com

World according to Dr. Castro
Hollywood LA Hit Hard by the Recession
Jan 16, 2010
http://livingstrongandhappy

LA Times
Downturn may not aid studios this time
Dawn C. Chmielewski and Meg James
October 29, 2008
http://articles.latimes.com