Housing

One of the biggest issues facing Americans today is housing prices and the immediate effect that falling home prices have on the economy and peoples' desire and ability to consume. The topic provokes a lot of fiery response.

Lots of people want to prop up home prices. I noticed that the Senate supports a $15,000 tax credit toward the purchase of a new home in the latest version of the stimulus bill.

My view is that over the last six years we have lived through one of the greatest asset bubbles ever, and that just because asset prices increased and now they are lower, it does not mean we need to get back to the elevated prices. Americans need to take our lumps and generate real economic growth rather than support false asset prices. We did not deserve to take out 100% loan-to-value mortgages, we did not deserve to spend $10 a day at Starbucks, and we did not deserve to drive around in the latest supped up Hummer (and replace it every two years).

These thoughts are expressed below in an email I recently wrote to Elizabeth Warren, chair of the five-member Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act. She is clearly an intelligent woman but as it relates to this issue and "getting America back on track", I think her focus should be elsewhere. The email follows:

Dear Ms. Warren,

I wanted to reach out to you regarding your interview on NPR. I heard the interview last night, 12/11.

You seemed set on providing mortgage relief for people who were unable to afford their mortgage payments or were “underwater” on those mortgages. Why in your view is it important to backstop these mortgages and people, who should not have gotten into those homes in the first place? Why do you and others appear to be making an argument that everyone deserves to live in an owned home and that asset prices should remain artificially inflated?

In my view, assets prices across all asset classes have fluctuated over time and we have continually seen fortunes made and lost as a result of those so-called bubbles. No one was calling for assistance when the tech bubble burst. Investors in the tech bubble speculated and eventually got burned, but that is part of free markets. That is why they are called free markets.

For three and half years I have told my soon-to-retire mother to book her gain on price appreciation on her townhouse in the Washington DC area. I suggested selling and downsizing since she is nearing retirement age. She has seen her home, and greatest source of retirement capital, decline in value by about $300,000 in the past year and a half. However, she is not complaining because she knows she had the opportunity to book the gain and that the gain was unprecedented. There is no apparent reason why she would have a right to a lower mortgage or some other sort of plan to keep homes in her neighborhood at the same “value”. That would be the antithesis of a free market.

I can direct some blame to the banks, real estate agents, originators, et al., but the buyers are also complicit. And I believe this complicity was equally spread among equally greedy parties. A buyer could see the mortgage payment and their monthly paycheck and determine whether he or she could afford the payment. If that individual made the decision to purchase a house on the assumption that it will appreciate in value indefinitely into the future that is either the definition of greed or ignorance.

Can you tell me a sound reason as to why X percentage of the citizenry “deserves” to own a home? Instead of artificially supporting prices, we should just let the system wash itself out and life will go on. Sure, people will be poorer, but the home prices were inflated to begin with and that can be confirmed by comparing average selling price to replacement cost at the peak of the bubble. Even the most unsophisticated buyer could easily see that in early 2006 that he or she could get an interest only mortgage or rent a comparable place and that in some cases the mortgage payment would be 2.5x the rent payment (and more in some markets). This decision just did not compute if one looked at average house appreciation over time rather than over the last five years. I can supply a specific example from my own experience if you would like to see the math.

For all of those people that are complaining because they cannot afford their mortgages or have lost hundreds of thousands of dollars in house appreciation, I say “tough”. And that includes my own mother! Do you think that my father-in-law and mother-in-law (public servants for the last 25 years), who just paid off their retirement home in full deserve some kind of rebate for their financial responsibility? I would love to more clearly understand your view as to why we should support bogus asset prices. Can you offer a clearer explanation or direct me to a paper that can?

Sincerely,

2outof4