One of the things that I think is badly understood is that the government cannot do much to prevent house prices from falling. Foreclosures are not the cause of price declines; they are a symptom of them. The underlying event is too many houses, and too little demand for them. Propping up existing mortgages does absolutely nothing about the mismatch between supply and demand.
People point to waves of foreclosure sales, and falling home prices, and assume that these things are related. They are, but the price shock is actually relatively small. Banks aren't any fonder of selling their assets at a loss than homeowners are. They will sell the property for whatever they think they can get for it. The fact that they can't get much reflects the fact that the areas with the most foreclosures are the areas with the most marginal buyers--i.e., the areas with the most marginal demand. Real estate declines are lumpy; the houses with the best locations hold much of their value, while the places on the fringes, the exurbs and the gentrifying neighborhoods, plummet.
It is true that foreclosures dump a lot of houses on the market at once, but again, this represents an actual mismatch between supply and demand. The general rate of home occupancy is one family, one house. You can call them "owners" or call them "renters", but they will still only occupy one house. The credit bubble briefly expanded the number of people who were willing to gamble that some other family would want to occupy their house; and by convincing people that houses had investment value beyond providing a warm, dry abode, changed the price they were willing to pay for houses. Now the investment premium has vanished, as have the
To put it another way: if the current occupants cannot afford their house at anything close to the price they paid for it, the chances are that no one else can, either.
Stopping foreclosures can prevent some overshoot, but it does so by making housing markets stagnant. People who are just barely hanging on to their houses don't move to take better jobs, and they certainly don't invest in the houses, which means that the local housing stock erodes whether or not the houses are foreclosed on.
To the extent that there is an argument for a housing bailout, I think it rests not on keeping prices high, or keeping people in houses that they could just barely afford when they bought them (or after they refinanced them), but on preventing the price decline from crippling the future financial viability of either the borrowers or the lenders*.
That's the logic behind my lunatic plan--cut the losses to the lenders to the loss on the underlying collateral; keep the housing decline from crippling homeowners without awarding them subsidized housing in exchange for their financial illiteracy. A number of my readers squawked that this wasn't fair, that banks need that information--but in fact, this event in the housing market is mostly sui generis. The people defaulting may not be the brightest financial bulbs on the Christmas tree, but I think it's fair to say that there is little risk that they will, in the future, borrow 99% of their home value on an option ARM.
The problem right now is one of demand- credit has become tougher to come by and it will take time for people to save the necessary money for a proper downpayment. As far as stimulating the economy goes, wouldn't it be very beneficial to allow a temporary program where people are allowed to use 401k funds penalty free for the downpayment on a house? Put limits on how much you can pull, say 20k and no more than 50% of your 401k. Have a gradual phaseout of the program so there is incentive for people go take the jump on buying a house now. This is giving people access to money that they have already saved. And it would solve the problem of people putting little or no money down- if housing prices continued to drop people would be able go get out if they HAD to. I really don't see the downside to this.
I wouldn't be to sure about that.
Kipling said it even better.
Damon, because in 30 years I don't want my 401k robbed to finance the "Retirement Crisis" when the middle class is whining they can't retire in the manner to which their accustomed because 30 years ago they siphoned off their retirement funds to buy houses they couldn't afford.
Housing prices will rise when demand starts to exceed supply in geographic area. There are people out there (family has outgrown apartment or small house, want to move up to something nearer to work or fancier) who will step in and start buying once they have confidence house price tomorrow will be higher than house price today.
Any bailout plan should come with lender getting a lien on the property for the amount of the writedown, so that lender has possibility of recovering if the borrower subsequently sells the house for more money than the existing mortgage. I know this removes some incentive to hold out for a higher price when selling, but once the borrower is no longer underwater, he will be looking to maximize his equity share above the lien amount.
the divide is even greater than you described. Renters are effectively subsidizing homeowners interest payments. It is somewhat comical that the "responsible" are irate they have to subsidize the "irresponsible" while being subsidized by those that aren't even in the game at all.
"Banks aren't any fonder of selling their assets at a loss than homeowners are."
The "banks" that are actually selling these are the servicers. They don't care, they get a bonus for performing the foreclosure anyways.
In regards to speculators, there is a new wave moving in on foreclosures that I have seen in some areas. They haven't disappeared at all, just took a break.
Megan,
I'm curious, what are your thoughts on this NY Post Column (http://www.nypost.com/seven/02212009/postopinion/opedcolumnists/the_foreclosure_five_156287.htm)? Basically, the thesis of this column (The Forclosure Five) is that forclosures and house price drop isn't a national problem, but one confined to five states (Califonia, Nevada, Arizona, Michigan & Florida).
The underlying event is too high house prices, and too little demand for those houses at that price. I'm still not convinced that there's too few houses in many areas, judging by Ed Glaeser's research, Virginia Postrel's articles, and others.
Restricting housing supply would "work" to push back up home prices, but as a renter you should also oppose that. Also, restricting housing supply only makes the cycles of boom and bust worse, and makes the next housing crisis inevitable.
Talking about "too many houses" is misleading.
Sara- isn't the point of a 401k is that its optional? We can't count on 401k money to be there for people. 20k of 401k money isn't going to be the difference between a retirement crisis or not. Having someone in a paid off house would do more to avoid a retirement crisis than anything else you could do in my opinion.
The credit bubble was one cause, but a crisis this large has many causes, some necessary, some sufficient, and some that were neither but still made it much larger.
Restrictions on housing supply make cycles of boom and bust in housing prices more likely. Increases in demand translate into higher prices rather than increased supply, but as soon as demand slacks, prices fall quickly. (True, the stable nature of housing means that housing stock does not go away, it just deteriorates in low demand, which explains Detroit.) There are reasons that, despite the credit bubble, house prices in Texas (and NC) stayed relatively stable.
Much of the boom in Arizona and Nevada was started by Californians moving in who expected home prices to rise dramatically and couldn't believe how cheap housing was there.
" The underlying event is too many houses, and too little demand for them."
This is probably the case in Detroit and other parts of the rust belt. It is not the case in much of the coasts.
In Northern VA for example the local governments encourage businesses and people from around the world to come to the area but they restrict the amount of new housing. In Loudoun county, one of the fastest growing counties in the country, half of the land is zoned for houses with at least five acre lots.
What do you expect to happen to house prices when the supply of houses are not allowed to increase to match the population? The residents bid up prices to a level that that was beyond the reach of people with median level incomes. If the county had allowed more modest homes to be built prices would probably not have increased as much earlier in the decade.
I think the divide is more than just renters/homeowners; it's more like homeowners who want/need to sell soon vs everyone else. Having my house value increase hurt me by increasing my property tax; I will see no benefit to the increase unless and until I sell my house. I would much prefer that house values continue to drop until they reach their long-term trend.
I'm a home owner, but I take the side of renters.
I'd rather have a lower nominal house price on my home than empty houses around me. The actual utility of my home remains the same regardless of price.
If people have to spend less resources or acquire less debt to have a place to live, that gives them a higher discretionary income to use for "good things" such as increased savings, lowering debt, medical coverage, tuition, starting a business or even just wasting it all on consumer goods.
Mercer - You said: "If the county had allowed more modest homes to be built prices would probably not have increased as much earlier in the decade."
The reason that localities pull these stunts is to lessen the increase in taxes that always accompanies denser development. One home on a 2-5 acres lot will certainly not increase the number of children much, while a whole bunch of densely built homes will. With the increase in kids comes the need for more school buildings and the teachers and administrators that work in them. A lot more people also increased the need for more cops, firemen, etc.
One would think that the increased tax base would take care of that increase in costs, but it NEVER does. In almost every case the taxes on people who might have lived in the area for decades increase drastically.
Generally, local government has been elected by the people who already live in the area, and that local government is supposed to represent their interests, not the interests of people who don't live there but would like to. In adopting the local zoning, the government of that county lowered the rate of increase in taxes AND assured residents that the value of their homes enjoyed a nice increase.
Having banks own and sell houses, at least from what I've seen, is a disaster; they're bankers, not property managers. Most of the foreclose houses in the market I've been watching are sold "as is," and have frozen pipes, water damage, etc., substantially diminishing value. This, in turn, drags down prices in the neighborhood. (I guess the upside is it creates construction jobs once the house is sold.)
Consumer goods aren't inherently wasteful. I think my boss would have something to say if I showed up at work in my underwear. Which I wouldn't do, because it's cold outside.
Everybody needs some stuff. The trick is knowing when to stop, short of when Bank of America pulls your credit card out from under you.
I used Zillow to estimate my house value for College Finanicial Aid filings (ah the College Board) and now they send me periodic updates on its estimated value. Here in the Hartford burbs my house has stayed close to its recent value but the overall town has declined. THe decline is all in the $500K and over single family homes. Now this area never spiked like NYC or Boston and so declines are lower.
Affordability stays the same, government can only introduce lags. The house next door was owned by an older man and there were no improvments. It was snapped up from his estate by a 20ish woman. You need modest prices to allow people to afford houses.
How about being honest enought to tell people that drawing a check from the government for the last fifteen or twenty healthy years of one's life, to cover living expenses, a check supplied from a young person's labor, was never a viable paradigm? Then we tell those of us younger than fifty (which includes me) that nondisability benefits don't start until age 75, and then offer a 100% tax credit for a downpayment on a primary residence, up to the amount paid in social security taxes for the next two years? Hell, I'd offer the same tax credit on a downpayment on a car, if I weren't fairly sure that most of the benefit would accrue to Honda and Toyota, meaning that the Big Three management and UAW would still be seeking welfare.
Yeah, I know this is not viable, for any number of reasons, but underpinning all of our fiscal problems is a vision of "rertirement" which is completely at odds with any human experience going back more than a few decades. The human race didn't evolve from roving packs of hunter/gatherers so we could sit around on our asses for 20-25% of our adult lives, not providing any economic value to anyone else.
Many people will learn from their experiences, and at least as many more people will not and continue making things worse for themselves.
I have direct experience in my family with two siblings who consistently dig themselves into a hole, and when they realize they can't get out they dig a little deeper. They've been doing this for a long time, and between them have racked up about 100k worth of debt to my parents over the last 7 years, not to mention their debt to creditors.
They -may- get themselves out of their hole some day, but likely they will not and if they ever do, just through shear lack of consumption as soon as things are bright they will follow the same pattern again -- as they've done for 7 years.
Its unfortunate as no amount of suggestions, references to financial advisors, etc helps when the person claims they "feel like their are drowning and your nagging doesn't help because they already know they are screwed."
When you suggest maybe you shouldn't trade in your car with an upside down loan for the 10th time or maybe you should avoid eating out with the family every Friday night, it just makes you the bad guy in their minds...
This situation may improve, but as soon as it does in 10 years we'll find ourselves right back where we are now.
Sumner:
"As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X, or in the better case, what A, B, and C shall do for X.... [W]hat I want to do is to look up C.... He is the man who never is thought of."
I am C, the renter, and forgotten man.
What I'm worried about as a homeowner is that if the market slows to a crawl, the bank appraiser won't be able to look at comparable properties that have sold in the last three months. I just refinanced, and the "comparable" the bank was forced to use was totally inappropriate because nothing in my neighborhood has sold in the past three months. It didn't scuttle my deal because I've paid down the mortgage enough that the undervaluation still didn't push my remaining balance over 80%, but it seems like someone wanting to buy the place from me would have had real trouble getting approved.
I can see how this could become a vicious cycle, where no one can sell because no buyer can get approved for a mortgage, and no buyer can get approved because no one can sell. And it seems like it only takes three months of no sales for the cycle to get very serious.
sam - you remind me of one of my favorite short-lived cable shows, Larry Winget's Big Spender. (Tag line: It's your own damn fault.) Guy basically goes to broke people and introduces them to - a BUDGET! Really, that's pretty much it. As you'd expect, most of the fun was in the varied ways people had screwed themselves. Tarted up leased cars was a popular one; I'm amazed at how many people actually argued that "projecting an image of success" is (i) necessary to their career and (ii) requires a $100,000 car. Once he even told a couple to sell their monster house, which was pretty novel pre-bust.
Sorry about your siblings, tho - watching family screw up consistently is a frustrating as all get out. Hope they don't expect you to pitch in to dig them out at least ...
How about being honest enough to tell people that drawing a check from the government for the last fifteen or twenty healthy years of one's life, to cover living expenses, a check supplied from a young person's labor, was never a viable paradigm?
Exactly. As a member of the below 50 crowd like you, I watch with dismay the $30 trillion avalanche gathering steam that will hit about the time I'm hoping to retire (on my private savings). That's going to make this ongoing circus look tame by comparison.
For the love of God Megan, what did you expect? You KNEW the O was a bitter anti-capitalist socialist at heart - you KNEW all his economic instincts were damaging - you are on record! Now, these legislative initiatives come about - curiously divorced from the O administration in your narratives - and you have..... misgivings. These are not random occurrences, and you are not noticing a disturbing trend. This is THE PROGRAM - on speed! This is what you voted for - the man was ALWAYS pro-victim and pro-government, always anti-business and profit motive. Wow, and this ISN'T what you wanted? Yeah, I bet alot of the cool kids feel that way now.....
Housing prices on miuch of the West Coast and East Coast have been frankly insane. I'm been shaking my head in disbelief for a number of years at 50 year old 2 bedroom junkers going for $500K in California.
People can afford roughly 2.5X gross income for a house. Prices are going to fall until they get to something like like - median price house matched to median income.
Median household income in the US in 2007 is about $50K, with range by states from $68K to $36K. Its higher for couples with children - lets say $75K. They can afford about $180K for a house.
CNN showed a clip this week of a lady in California advocating a stand-still on forclosures. She paid $800K for her new house (it looked very nice), now worth $625K. She was a bus driver. They didn't mention what her spouse did. But unless her spouse is a heart surgeon, she can't afford that house.
This is not a close call, where perhaps a 1/4 point reduction in the mortgage rate would make the difference. She is in over her head by a factor of 3 or 4 or 5. SHe was speculating in real estate. And if the price had gone up to $1 million, I'm sure she would have been happy to keep the gains.
I bought my current house about 10 years ago, for right at $200K. It was somewhat less than I could afford, but I didn't want to overextend.
Now, you can perhaps imagine my TOTAL lack of support for seeing may tax dollars go to keep here in the $800K house.
In short, Obama is stealing from me to pay off (mostly Democratic) housing speculators.
What The Old Guy said. However, I think the actual numbers may be slightly higher than the median incomes for the whole population suggest. Those stats include grad students, retired people, and so forth. Median incomes are somewhat higher if you consider only working adults between, say, 30 and 65. Those are the primary house buyers.
But the basic idea is right. You certainly don't want to take out a mortgage for more than 2.5x income, although the house price itself may be higher if you have cash to put down.
When prices are at that level again, lots of people will be happy to buy. And I'm sure that banks will be happy to lend. If any are left.
"Median incomes are somewhat higher if you consider only working adults between, say, 30 and 65. Those are the primary house buyers."
On the other hand, those are the prime years for paying for other stuff: raising kids, funding retirement, funding college, etc. Your 30-55 year old has both higher than average expenses and income.
Yup. Your prime earning years are when you pay for everything else. Including your own education in many cases -- many of us didn't get our way paid for us.
Which is why it is even more important not to take out a mortgage for more than 2.5x income.
"but I think it's fair to say that there is little risk that they will, in the future, borrow 99% of their home value on an option ARM."
There is a certain portion of the population that is suseptible to real estate fever. They will always be willing to strech beyond what is prudent to live in a nicer home.
Some people are more than willing to never go out, never go on vacation, never save any money, drive a beater , etc. if it means they can live in their dream house. Others, would prefer to live in a less expensive home and have money left over for dinners, vacations, clothes, cars, savings, etc.
"Damon, because in 30 years I don't want my 401k robbed to finance the "Retirement Crisis" when the middle class is whining they can't retire in the manner to which their accustomed because 30 years ago they siphoned off their retirement funds to buy houses they couldn't afford."
Ha!
Best. Reply. Evah.
I agree though, everyone. Let's fix this housing crisis. Here's how:
No programs.
No bailouts.
Get the government the hell out of the equation, this is none of their concern. Whatever they get out of this in the form of taxes is whatever we allow them to have, and that's that. THEY work for us, the market is not their personal piggy bank to troll for easy money and cheap votes.
Let the housing market crash and burn, and what rises out of the ashes will surely be better. It will be hard in the short term, but we will all be better off for it down the road.
And yes, I am a homeowner with my own stake in this and plenty to lose, and I am prepared for that.
Now, you can perhaps imagine my TOTAL lack of support for seeing may tax dollars go to keep here in the $800K house.
In short, Obama is stealing from me to pay off (mostly Democratic) housing speculators.
I didn't read of anything that he's proposing to do that would. The plan seems very focused on those cases in which smaller adjustments would make a difference. People who are out-of-stratosphere extended aren't going to be helped; they are going to be worse off than the parade of perpetually indignant renters.
"they are going to be worse off than the parade of perpetually indignant renters."
How do you figure that? They bought at the peak in 2007 with zero down, they made a few payments and then stopped. They will stay in the house for free for a year or more and then move into a rental. Seems like they got to live in a nice home for a year for free with the only repercussion being a ding on their credit report. And for most of these people, being unable to get credit will be a blessing in disguise.
Old guy, I didn't know that lenders checked party affiliation when you applied for a mortgage; and I certainly didn't hear of Republicans being turned down because of party.
And the idea of living in a McMansion is anathema to most of the granola-chomping liberals I know. They want the inner city or the farm, not the 3-acre subdivision with granite/steel kitchens and 3 baths.
What I do see is that this housing crisis is worse in a lot of Republican-led states. (CA, FL, AZ, NV for instance.)
So your bias is a little silly. Maybe it's because you're old? Nah, it's gotta be that your Republican, instead.
I'm one of those indignant, nay furious, renters. I chose to rent for extremely sound financial reasons, which remain to be true to this day. I've yet to meet or see or hear an interview with a single homeowner in trouble who didn't believe they got a great deal when they bought their home. It's more: they bragged about the deal they got and how great their equity already was. The utter phoniness of these people is that they immediately tried to manipulate their assessment to reduce property taxes or to do a cash-out refinance. I say foreclose on them all and may they go to hell.
I do have to say, it's amusing--in a cynical way--to see all those "angry renters" realize that no, the housing market ISN'T going to crash so badly that they can buy a condo in the city for $1500 a month. Because that's the basic strategy of all these "prudent" renters; to a man, they'll tell you that their whole plan was "wait for the crash, then buy cheap". Renting won't save enough money to buy until you look at a 10+ year timescale.
Hey, I'm a homeowner who bought before this housing bubble mess and I can't rent for cheaper than my mortgage payment (so much for the "cheaper rental"). However, I think most would find renting would be preferable to having their furniture thrown out on the street not to mention the humiliation and stress of foreclosure/eviction/bankruptcy. It is more than a "ding on the credit report." Don't envy someone else their troubles, lest yours grow worse; there is no white horseman coming in here to save the grossly over-extended from the natural consequences of default (foreclosure. eviction. bankruptcy. and I hear potential landlords aren't real excited about those on the credit report, either).
If we are going to mark people's houses to market and give them a mortgage for that amount, then why not allow any potential buyers who are interested to bid any amount larger than the amount offered to the current owner, with a 10% down payment. If the goal is to prop up housing prices, this method is as good or better than Obama's plan, but it doesn't reward the irresponsible at the expense of the responsible.
And regarding the claim that foreclosures are a detriment to a neighborhood, I'd rather live next door to a buyer who buys the foreclosure in a responsible way than next door to the guy who lied about his ability to repay and then gets bailed out by the government (i.e. me).
Homebuyers already get a mortgage interest tax deductions worth tens of thousands of dollars over the years. I think that's enough assistance for the mortgage holder.
MM - I don't really understand your plan, and frankly I don't really understand the housing crisis on more than a superficial level, but THANK YOU for at least mentioning the fact that there are people out there who aren't scared shitless about housing prices dropping, and who might even benefit if it gets really cheap. I just can't understand why I should have to pay so that somebody can stay in their 300k house with a 200k mortgage. It's like I'm subsidizing somebody who is screwing me out of being able to afford a house. I mean, we have to do something but this seems like bullshit.
"Foreclosures are not the cause of price declines; they are a symptom of them."
Wrong... A family will not leave a house simply because its value has dropped, if they can afford the payments. On the other side, people who suffered loss of income and cannot afford to stay in their houses must either sell or be foreclosed upon. In the former case, they don't have much leverage with the buyer and will take the first semi-acceptable offer. In the latter case the bank will sell at the price that's just enough to cover the mortgage amount with interest and the legal costs. In both cases, loss of income leads to a sale at a liquidation price. Since residential appraisals are based on comparable sales and the credit is very tight, a single foreclosure leads to a chain reaction of depressed house prices within a one mile radius, which spreads futher away with each depressed sale.
"Wrong... A family will not leave a house simply because its value has dropped, if they can afford the payments. On the other side, people who suffered loss of income and cannot afford to stay in their houses must either sell or be foreclosed upon."
*********
People who suffered loss of income and cannot afford to stay in their houses are NOT forced to foreclose; they are forced to sell. If they can not sell for what is owed then they are foreclosed upon. Hence, foreclosures are a symptom, not a cause.
I agree with your central point. I own my home, and I can see no reason to regard falling prices as bad or rising prices as good, because I have no intention of selling anytime soon. Lower prices are better for buyers, and higher prices are better for sellers. Saying that lower prices are bad is to say that sellers are more important than buyers.
But I do have a quibble. Banks ARE more interested in selling quickly than Owner/Occupiers because they are receiving no benefit from the house. O/O s get to live in their houses. They are receiving (and consuming*) the equivalent of the rental value of their house. If you owned stock, but weren't getting the dividend checks, you'd be more motivated to sell than somebody who was receiving dividends.
*And because unless you're taking in borders you consume all of your housing, it still doesn't make sense to "buy more house" to maximize your appreciation.
For all the complaints about "responsible renters", morality, &tc, &tc... The "responsible" thing to have done over the last decade is to do whatever the dominant demographic was doing.
Anyone with half a brain and the slightest grasp of history could have forseen that the great masses of middle-class voters are not going to be allowed to fail. As for the "morality" of it all, tell it to the native Americans...
Oh, noes! Life is not fair!
Heh.