The newspapers are full of stories about politicians frantically searching for a way to prevent foreclosures and dramatic declines in the price of houses across the United States. The thinking seems to be that high house prices are good for the economy. Maybe they are good for the banks and Wall Street firms who lent money on the theory that a crummy 100-year-old wooden house was worth $1 million. It is tough to see how high house prices are good for the economy as a whole and for job growth.
Suppose that I want to employ a woman who supports a family of four in California, Boston, or New York City. I have to pay her enough that she can afford to buy or rent a three-bedroom place to live. If that three-bedroom place costs $1 or $2 million, I will have to pay her quite a lot of money simply so that she can survive. I might find that a worker in Guadalajara, Bangalore, or Shanghai could do the job for less than half the salary and yet live quite comfortably. The next time that I get a big tax break from the Federales, therefore, I invest it in a new office somewhere that has a reasonable cost of housing and therefore a reasonable cost of labor.
We spent most of our investment capital over the last ten years building huge and luxurious houses. Americans were by far the best-housed people in the world before, but now many of us are truly living like kings. Does this help our international competitiveness? Does an employer care that we can go home to a 6,000 square foot McMansion and watch a 60″ TV in our media room? I don’t see why the employer would care. In fact, an employer would probably prefer that his workers be housed in sufficiently squalid conditions that employees were encouraged to linger in the office. Certainly the employer doesn’t want to have to pay a worker extra just so that he or she can afford to pay rent or mortgage in an artificially inflated housing market.
Reporters and pundits are saying that government intervention in the housing market is inevitable. As we hand out tax dollars to ensure that $1 million houses are still priced at $1 million, let’s not forget to hand out some more tax dollars to employers as an incentive for them to keep hiring Americans who need to pay a $70,000 per year mortgage.
I can’t figure out where the pressure for a bailout is coming from – I don’t know anyone who’s not incensed at the idea of tax money bailing out people who bought more house than they could afford. Particularly the ones who used “stated income” liar loans to do so.
Particularly angry are the people who can’t currently afford to buy a house, and were expecting the bubble pop to bring housing prices back to realistic levels – they’re the real victims of the housing price bubble, but they’re never mentioned in the reporting or the demagoguery.
Phil,
You omit that the brunt of this decline is being felt not by “million dollar home-owners” but rather by the average Joe who talked himself into buying way more home than he could afford, gambling on rates staying low and home appreciation staying high.
Whose fault is that? Average Joe’s, for certain.
Now the real question is do you want to allow the banks and businesses to collapse just so we can save tax dollars and teach these guys a lesson, while simultaneously watching our already slowing economy grind to a halt as we spiral into a deep, deep recession?
Not saving at least some of this mess with tax cuts and other assistance is akin to saying we shouldn’t attempt to put out a fire because we already have a water shortage.
Is the wheat worth the chaff?
In and around many large cities in the world (London, Tokyo, Moscow, etc.) housing prices are equally high. High fuel prices and a miserable public transportation system here make it that much more difficult for non-executives on down.
Todd,
You might want to Google the term “moral hazard.” And it is not at all clear that “we have water;” I believe the national debt has doubled during King Bush II’s reign. How much money do you really think it will take to support the Great Housing Ponzi Prices forever? By what right do the bankers/brokers/appraisers/REALTORS/speculators who drove Lexus SUV’s for the past 5 years have to extort money from middle class people in Topeka who are trying to save a few bucks so they can send Toby and Alexis to Kansas State?
Letting nature take its course here would not be “just to teach the banks a lesson.” It would be justice and capitalism. Is the government’s “failure” to bail out my failed business “to teach me a lesson?” I don’t think so; it was the natural result of my poor choices…Adam Smith’s “invisible hand” gave me a good hard smack that I’ll be paying back over many years. But I’m not demanding a bailout.
Here’s an article where a strawberry picker (probably illegally in the US) earning $14k/year obtained a $720k mortgage. Is that really the kind of “business” that should be “saved?”
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2007/04/13/carollloyd.DTL
Would you kindly submit a list of businesses/industries that should be protected from their own stupidity IN ADVANCE?
This is not a surprise natural disaster that harmed a strategic area of the economy. It’s the long-overdue collapse of a Ponzi scheme affecting shelter, a fundamental need and large portion of the family budget.
I’m sick of being held hostage to “THE ECONOMY.” The richest and stupidest now can steal unlimited amounts of money from citizen taxpayers just by invoking that magic phrase. Now King Bush II specifically denied a bailout for the automotive industry, so there apparently are some limits. But, otherwise, where does it stop? We will probably subsidize child pornography next, if the producers will only threaten “If we stop then THE ECONOMY will suffer.” And why do we have 20 million crime-prone illegal aliens clogging schools and emergency rooms? That’s right, “THE ECONOMY” needs them (who cares about the Americans whose waages are lowered and whose communities are trashed).
I’m not at all convinced that a recession is any more or less likely if the Ponzi prices are supported. Given the weak dollar, if houses were cheaper, then the US might be a somewhat cost-competitive for manufacturing and engineering. If middle-class Californians weren’t spending $800k for 800 sq ft concrete boxes, then perhaps they could spend more on consumer goods and even invest in the stock market.
The big question is what will happen to prices as baby boomers start downsizing and moving toward their retirement.
K,
The tax cuts and other incentives the Fed is considering would have no positive effect on the crooked mortgage lenders who certainly contributed to the current mess. They are already going out of business from the slowdown.
I call it business “evolution”.
However, there is one simple solution that I have never seen mentioned that would immediately make the U.S. economy more friendly to hiring engineers instead of going overseas: Have our American engineers take a pay cut. THAT would certainly make their labor more affordable to U.S. business.
Maybe they should take a cue from the auto industry workforce?
I belive Alan Greenspan would refer to what’s happening as “Creative Destruction.” The Bush Adminsitration and his corporate masters have praised “Free Markets” and abhored “Goverment Interference.”How soon they are willing to abandon Adam Smith.
The first step to solving the “Credit Crunch” would be to reinstitute the usuary laws and repeal the Bankruptcy Reform Act of 2005.
This actually dovetails nicely with your Japan comparison a while back. Japan’s housing prices skyrocketed forever, then steadily declined every year for 15 years. Maybe this could happen again?
Philip,
There is no way in Bangalore you can get a three bedroom apartment for the same price I paid a few years ago for a single family home on a half acre lot on the MA-RI line.
Bangalore and virtually every city in India has seen a real estate boom reminiscent of the earlier part of this decade. It has also been helped by lax loan underwriting standards, with no reference to the ability to pay. When I visited my folks two years ago, my retired father was besieged by unsolicited offers from foreign banks (e.g. Citibank) willing to give him fantastic loans sight unseen.
As an example, a 2-3 bedroom apartment in a third-rate locality in Bangalore with zero landscaping (basically a big tall building) goes for around $100,000. There is no way in heck you can find a half acre lot anywhere unless you are filthy rich.
Most Indians are displaying the same kind of confidence in an ever-rising real estate market that we saw in the US. Either I will be proved right soon enough, or I have missed out on the investment opportunity of a lifetime.
You know what, put a frigging freeze on all loans currently, so that they can’t balloon any further. In fact, take the ones have have ballooned over the last 6 months back to rate they were 6 months ago, and at least get those people stable in their payments.
Then make all those rich credit card companies reduce their interest rates back to a reasonable 12 or 15%, instead of 28 or 35% so that people can pay those cards off, sooner and have more money to put toward their mortgage payment.
Then take all the crooked mortgage companies who lied to get the ARM sold in the first place (which is what happened to us), and make them responsible to carry the next 3 months mortgage payments on those ARMs so that those people can get caught up.
This seems like a reasonable compromise between the “idiotic public who should have known better” and the crooked banks and mortgage companies who should have known better and keep the government out of it except for having to force these regulations.
Credit card companies should not be able to extort the public nor should banks, lenders, etc.!!!!
Jagadeesh Venugopal wrote:
Either I will be proved right soon enough, or I have missed out on the investment opportunity of a lifetime.
You will be right, but believe me it is wrong to right.
I bought below what they said I could, and stayed. Then
refinanced a while back for a lower rate. I didn’t put myself
underwater as everyone treated their housing as an ATM.
But lucky for me I get to help everybody else buy over their heads
and remodel and go on vacations. YAY ME!
Same problem down here in the ‘Luck Country’. That’s Australia, large island west of New Zealand.
Funny thing is, with a population of 20 million the ‘investors’ would like us to believe that there is in-fact a land shortage. Today it is more expensive to buy a home in my street, when factoring in income and the fact that this backwater dust bowl is about 20 years behind everywhere else, than just about anywhere else in the world.
Fact is, money was cheap and rather than use that fact to get out of debt sooner, many chose to borrow more, buy more, borrow more, buy more. You get the idea.
If it means we have to go back to thatch huts and open fires to wake people up to the folly of ‘credit’ then so be it.
But that’s a scenario many would like to avoid. The problem with all this investing is that it’s left us ill-equipped to anything other than invest.
Personally, I have a hard time accepting that people losing something that they probably shouldn’t have is more important than people who have nothing.