The Housing Crunch

I don’t profess to be an expert, or even an amateur, at Economics. But the bailout seemed (and seems) like a poor idea to me. Mostly, this is because it (a) seems to let the financiers who made terrible decisions get away without repercussions and (b) it seems to be treating a symptom rather than the cause. The cause, in my opinion, is an American way of life that’s out of touch with our economic realities. Especially in the housing market. I clipped a nice comment from Slashdot regarding the housing crunch, read on to see it. I’d love to hear everyone’s thoughts on the bailout/economy!

The aforementioned slashdot quotation:

The underlying problem is, house prices are *way* over-inflated. Inflation-adjusted, they peaked at *double* the historical norm, and all this mess started when they came back down just 10-30% (regional). There is a generation of people who honestly believe that house prices don’t go down, and have made grave mistakes in their personal finances as a result. Nation-wide, house prices above about 3x the median hosehold income aren’t sustainable, and we’re still about 5x (and of course far worse in the housing bubble cities).

While there were certainly a subset of loans that were just bad – forged docs, impossible payments, etc, and that’s what’s causing this month’s crisis, the problem is much deeper. There’s an entire culture now of buying a house with a mortgage payment of 80%+ of your take-home pay, counting on cashing out equity every year because “house prices only go up”. This isn’t a problem the government can fix.

Sure, the governement needed to intervene to avoid a market panic, but really it just needed to “make a market” in these mortgage-backed securities, to allow them to trade at a value not absurdly depressed by that panic. That’s not a $700B bailout, that’s just splitting the difference between buyer and seller.

Long term, however, house prices are certain to fall back to sustainable levels, and anyone thinking “we just need to put this problem behind us so house prices can start rising again” is in a dream world. The governement isn’t going to solve that problem, and shouldn’t try. Do the minimum to stop the panic, and get out.

What do you all think?

4 Responses to “The Housing Crunch”

Yes, I’m commenting on my own post. I just read bob Cringeley’s take on the situation, and I thought it was also enlightening (his first “solution” isn’t bad, although it neglects some aspects.. his further solutions aren’t practical). Nevertheless, his assessment of the situation is interesting. Take a look.

Paradoxdruid - October 6th, 2008 at 3:19 pm

Houses aren’t necessarily certain to fall back to sustainable levels. They could just sit at current levels, as current homeowners choose to just sit on what they have rather than sell, and let the values of their homes erode under the pressure of inflation. There will be some sales in this market by forced sellers, but people who can make their payment but aren’t happy with their house will just suck it up rather than change.

Ted - October 6th, 2008 at 4:17 pm

If you haven’t already heard these This American Life articles, then I highly recommend it.
Another Frightening Show About the Economy
The Giant Pool of Money

There are some many things about this situation, how we got here, the current situation, and where we go from here. I personally believe that this began in the 80’s with the deregulation of banks and lending institutions, was exacerbated by the giant push for home ownership starting in the 90’s and continuing in to the 00’s and the tech boom in ’01 set up the final blow by making housing the only place left in the economy where you could be “guaranteed” to make money. You add to that the relabeling of a 2nd mortgage (which was the butt of the joke for at least one episode for every major sitcom up through the 90s) as a Home Equity Loan or Home Equity Line of Credit, and encouraging everyone to use that to “live it up”, and you’ve got a crisis in the making.

For those who are interested, information on mortgage equity loans as a percentage of the US gdp and what the “growth” looks like without it.

But I’m sure everyone on this forum has looked into what caused this crisis, so I’m not going to ramble too much on it. Why am I sure, because everyone here is a friend of Paradox and therefore must be a thinking individual who cares. The big question on everyone’s mind is, now what?

The bailout. I’m not too thrilled with it, although I am happy that some Senator had the wherewithal to add a provision to allow the Treasury to purchase equity shares in banks and other lending institutions behind the backs of the Republicans (who had been fighting against it), which is the solution the plurality of economists had suggested. But it’s the bailout (rescue, whatever) that we have. This NEEDS to fix the commercial paper market first. If it doesn’t, we will see some major layoffs and companies like GE shutting doors because it doesn’t have the capital on hand to run. If you don’t know or understand the commercial paper market, listen to the first of the This American Life articles listed above. Once we get that solved, next is the banks. The banks have two problems, 1) credit loss swaps (aka complex insurance policies) and 2) the housing crisis. The first of those, I’m still baffled on what I think should be done. It scares me. It scares me bad.

The housing crisis. This is a catch 22. A lot of people bought houses that they SHOULD NOT HAVE BOUGHT. But bought them they did. And in the new neighborhoods, it could be a rather sizable percentage of the population. In older established neighborhoods, it’s more of a shotgun pattern. If we bail them out, we create a moral hazard and we prop up overvalued housing, making it harder for people to enter into the housing market. If we don’t bail them out, then neighborhoods will be destroyed due to falling house prices, which hurt people who did purchase within their means, and could lead to more jingle mail. Falling housing prices will continue to bring the rest of the economy to its knees.

Buying up the loans from the banks is difficult, since the loans have been sliced hundreds if not thousands of times, so you have a lot of paper to buy. You can’t just ask a bank to allow for settlement of a loan, because in a lot of cases they don’t own enough of the loan to be able to make that decision. So you have to ask a lot of groups, and hope they agree. Those that do own whole cloth loans aren’t about to let them go either, as they hope they can suck as much income out as possible while the person is still paying (a Damn the Torpedoes! Full Speed Ahead! approach).

Here’s what I think should happen.
1) We need to change the bankruptcy laws so that courts can change the value of the loan. This was changed during the past 7 years, it used to work that way. What this will do is allow people who have jobs, and could potentially keep paying for a house if the loan is reset to what the current housing value puts it at, the ability to keep paying, but only after realizing that they will have to declare bankruptcy and would normally foreclose. The banks now are still getting something, not as much, but something. They don’t have to send out people to check on the house to see what needs to be done to resell it. They don’t need to worry about trying to sell it, or the tax liabilities if it stays in their hands. The neighborhood benefits because it starts to stabilize the housing prices there, and they don’t have another see-through house. It helps the couple, as they don’t have to move and can keep some semblance of dignity, but they didn’t get off scott free, as bankruptcy is a difficult thing to go through.

2) If a bank has controlling interest on a rental property, DON’T KICK OUT TENANTS THAT ARE STILL PAYING YOU. This is what doesn’t make sense to me. The banks seem to think it it’s in their best interest to avoid paying property tax by vacating a house with paying tenants and hoping it sells in time for not too much of a loss. This causes a see through house, which makes it ripe for vandalism, which costs the bank, and devalues the house because it devalues the housing market in that area. Something needs to be done to force the banks to make a good faith effort to keep tenants in a place while they attempt to sell it. If they don’t, well, this will start to spread and mutate.

3) Places like Countrywide were creating a workplace that encouraged predatory and “lier loan” lending. The people who initiated it (including some CEOs) need to be thrown in jail for market manipulation, racketeering, predatory lending, and hostile work environment.

I have a lot more to say, but I don’t have time to write it out. The above won’t fix it. I do believe it will help. We do NEED to fix the commercial paper markets first though. As for letting the “markets correct themselves”, these aren’t ideal markets, cow’s aren’t spherical, elephants aren’t frictionless, they won’t fix themselves.

ParadoxDruid is a bad bad man for getting me started on this.

styopa - October 9th, 2008 at 5:44 pm

Good synopsis, check this out:

Taylor - October 14th, 2008 at 9:09 am

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