By now, it has become painfully clear that the economic disaster that is facing the Nation originated in the housing market. Whether you assign primary blame to greedy bankers, reckless mortgage “bundlers,” irresponsible rating agencies that assigned AAA ratings to junk, or to greedy and at times dishonest home buyers who succeeded in deluding themselves that buying a house is a big-time investment rather than an acquisition of a family home, the fact is that in recent years too many homes were sold at prices that were way too high. This necessitated financing through mortgage loans, which the home buyers could easily obtain. Well! Not to mention that it is not the fault of buyers who are duped in this manner. All they want is to purchase a home that they can renovate to suit their needs while they relocate to a new place. For instance, constructing a brand new garage for their car, which they may have gotten transferred from a previous location by using services similar to car transport sydney to perth (or whatever location they might be moving to or from). In addition to the cost of purchasing a new home, such renovations tend to be prohibitively expensive. That is also one of the reasons why many of them prefer to finance their homes with mortgage loans.
So what are we to do? You’d think that bringing home prices down to a reasonable level, so that once the dust settles people can continue buying them without going broke, is the way to go. Right? Not if you listen to our betters who (after wreaking havoc on the banking system) presume to lecture us on how to – are you ready? – do it again by bringing back high housing prices.
It turns out that the folks who gave us the unfolding economic debacle, believe that what we need is a “recovery in residential real estate prices.” So says a Grand Poo-Bah identified in a full-page ad in today’s N.Y. Times (3/4/09, at p. A7) as Chief North American Economist for Bank of America and Merrill Lynch. But wait a minute! Wasn’t it the high level of home prices that led directly to the excessive borrowing by home buyers, that in turn led to the ongoing mortgage meltdown and foreclosure epidemic? Do we really want to go back to that unfortunate state of affairs as a means of resuscitating “the next bull market”? What utter nonsense.
So here is our advice to the Big Finance Pooh-Bahs: No guys, you’re wrong. Maybe a return to high housing prices will resuscitate the bull market as you say (in which case the investors in that market will deserve whatever they get when it inevitably collapses again). But what the country needs is housing that Joe Sixpack can buy if he is so minded, without going into unmanageable hock up to his eyeballs. Is that so unreasonable? Doesn’t seem that way to us. But what do we know? We didn’t run Merrill Lynch into the ground while collecting gazillions of dollars as a “bonus.” All we have to offer is common sense – a commodity that is evidently sorely lacking among the financial movers and shakers.
We could stop here, but we won’t. There is another matter implicated in the past couple of decades’ insane run-up in home prices, that needs to be addressed. How did housing prices reach those stratospheric heights? Just to say that home prices were bid up by buyers is to describe the effect, not the cause. In order to buy a new home, people may have to spend dollars more than their income. Nowadays, affordable housing seems to be a myth rather than a fact. Despite such harsh conditions for a home buyer, some companies like a Lynchburg realtor maybe, can assist in finding a suitable home based on an individual’s requirements. Still, several parameters are present that can affect the rising prices of homes. A number of reasons could be advanced, but one major one is the government land use regulation policy. Check out the book by Dartmouth’s renowned land economist, William A. Fischel, entitled REGULATORY TAKINGS: LAW, ECONOMICS AND POLITICS (Harvard U. Press 1995), particularly Chapter 6 which demonstrates how
repressive land-use laws limiting construction of housing, and that state’s courts’ eagerness to enforce them in a draconian manner, led directly to a rapid escalation of home prices. It was a case of limiting supply while demand grew apace. This engendered a belief on the part of would-be homebuyers that if they didn’t get in on the gravy train today, they would not be able to do so tomorrow, to say nothing of the fact that courts neither saw, nor heard, nor spoke evil when it came to reviewing local anti-growth, anti-this and anti-that regulations that were thinly disguised efforts to raise the drawbridges into desirable upscale communities. Thus, it was no secret that this system would necessarily bring about higher and higher home prices. As Fischel put it, a rising tide lifts all boats but the unfortunate regulatory climate blew the boats right out of the water – even those “little boxes” that sold in the 1950s for $10,000 a piece were fetching around $400,000, ostensibly providing their working class owners who bought earlier with undreamed-of retirement nest eggs. Or so it seemed.
And Fischel was hardly alone. Two Presidential commissions on housing came to the conclusion that it was the NIMBY syndrome (and the judicial acquiescence it regulatory excesses even when property owners’ constitutional rights were at stake), that was implicated in the unreasonable escalation of home prices. See e.g., “NOT IN MY BACK YARD” – REMOVING BARRIERS TO AFFORDABLE HOUSING, Report of the President’s Commission on Housing, at 177-181 (1991). The causes of growing unaffordability of housing were obvious to anyone who would take the trouble to look. You don’t believe us? Check out the dissent of Supreme Court Justice William P. Clark, Jr., in Agins v.Tiburon, 598 P.2d 25, 35 (Cal. 1979) presciently noting that extreme judicial deference to restrictive local land-use regulations would inevitably lead to unreasonable escalation of home prices in desirable areas and produce a socio-economic cleavage between the haves and the have-nots.
And so, the escalation of home prices to unaffordable levels grew out of the land-use regulatory regime which led to the disaster that is unfolding now. Any suggestion that we should go back to the state of affairs in which the housing prices “recover” their unaffordable status as our economic salvation, is simply absurd. But what can you expect from the people who gave us the ongoing disaster in the first place?
Two updates. First, check out Tim Padgett, Despite the Crash in Prices, Affordable Housing Still Lacking, TIME, Feb. 25, 2009: “Even as a backlog of hundreds of thousands of newly built and foreclosed homes are languishing on the moribund housing market, more than 750,000 families [in Florida] are in need of affordable housing.” That doesn’t seem like evidence of a need to bring home prices up, does it?
Second. Don’t miss the op-ed in today’s New York Times (John D. Geanakoplos and Susan P. Koniak, Matters of Principal, 3/5/09 at p. A27), arguing that instead rescuing the improvident lenders, the federal bailout should benefit the under-water homeowners who are still hanging on to their overpriced houses. Why? Not because of altruism. It’s because market data show that “monthly default rates for subprime mortgage and other non-prime mortgages are stunningly sensitive to whether a homeowner has an ownership stake in his home.” Homes with mortgages that are 160% of the estimated home value have an 8% monthly rate of defaults, while homes that are worth 60% of their mortgage balance suffer only a 1% rate of default. So it’s economically sensible to give those folks a manageable stake in their homes rather than foreclose on them and kick them out, leaving the lender with abandoned, unsaleable homes, which means that everybody is worse off. So it may be better for the lenders to take that “haircut” and reduce their mortgage balances instead of foreclosing. And if the government is going to choose whom to benefit, most of those homeowners seem more deserving than the bankers who are presumably big boys who knew or should have known the risks they were taking on.
Follow-up. Will miracles never cease? The New York Times of March 8, 2009, at p. 2 (Business Section) quotes Treasury Secretary Timothy E. Geithner as follows:
“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing market.”
Now it remains to be seen how Secretary Geithner proposes to accomplish that.