From my friend Jeff Scott, a link toGretchen Morgenseon’s column in the New York Times Why Treasury Needs a Plan B for Mortgages :
Of course, cries of moral hazard will erupt if borrowers get large cuts in their principal balances. Rightly so. Why should those who took on too much debt to buy too much house get rescued when those who were prudent go unrewarded?
But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors.
As Jeff wrote to me, this article embodies the general consensus that rising home prices are some kind of a public good: “Can the Times editors think of any other market where they can complain about the general harm that comes about as an effect of falling prices? The real estate lobby seems to have won a permanent propaganda victory over economics journalists on the dangers of falling prices in real estate.”
I believe that there is a widespread perception that rising housing prices “create wealth”. This is of course a fallacy of composition: if the prices of a good that you own rise relative to other prices, then you benefit. But this rise in prices does not represent a magnitude of new wealth created, only a shift in the distribution of existing wealth. People who do not own the good and wish to purchase it are worse off.
Rising housing prices as a public policy — through mechanisms such as the GSEs and preferential tax treatment — only cause resources to be shifted to house construction. These resources must come from somewhere; as a result we have less of something else.
As with any other price, a lower price benefits buyers while a higher price benefits sellers. There are a few prudent folks out there who chose to rent rather than overpay for a home, and would like to have the chance to buy a home at a bargain price.
Would investors be hurt, as Morgenson says, by more foreclosures? Investors are not a single homogeneous class with uniform interests. Older investors who rely on their investment properties for income may may not intend to sell any time soon; these investors care more about rents than resale prices. Flippers who bought at high prices, intending to resell at a profit, would suffer losses.
Morgenson ignores an important class of investors: people with cash who do not (yet) own properties but would like to do so. These investors-on-the-sidelines are waiting for a lower price to buy. Also, younger investors who are seeking to build a property portfolio would take a loss on their existing homes, but given their long time horizon would benefit more from the ability to augment their portfolio at bargain prices than the capital loss on their existing portfolio.
One final point: the “nobody” who wants more foreclosures must be the same nobody as in “nobody saw this crisis coming”.
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Be careful with her surname. Whether it is Morgenson or Morgenseon, I don’t know; but clearly it’s not Morgenstern as you put it. I guess she’s not like Oskar.
If someone borrowed money from me and used their house as collateral, and didn’t pay me back, I would want a foreclosure to get something back.
If you don’t want to get foreclosed on, then don’t borrow money you can’t pay back.
Sorry, it was me.
I’m the nobody who wants more foreclosures so that housing might again one day be affordable. Do they really think it better to price everyone out of the market, creating a nation of non-owners? Do they really prefer making the cost of everything else catch up to housing rather than let it fall back down in relation to other goods. (which is assuming they bother to consider this, which is doubtful, being they are wishful “thinkers”)
In other news, hardly anybody understands why I’ve sold my old house and rented the past 3 years. Along with the blank stares (think violation of the American Dream), they all STILL think I’m missing out on “building equity.” This continues even after I point out that banks now own a greater percentage of our homes than ever as our “equity” has decreased, while our leveraged debt (that dangerous double-edged sword) has increased. “But rates are low!” they say. *face palms*
Personally, I do not understand where equity is to be gained from a bubble. The only one who gains is the bankster that lends nothing out at interest for an over-priced asset. Well, other than the politician that has to “Do Something!” in order to save us, that is.
As always, their gains come at our expense.
And I’m the nobody who wants more foreclosures since someone defaulted on my loan. If they won’t give me my money back, then I want their house.
Is buying a house with a thirty year mortgage really that different from renting to own an appliance or furniture, a practice at which most people scoff?
I mean, once a so-called “homeowner” has paid off the mortgage with interest and all the associated fees after literally decades, hasn’t he really paid like twice the street value of his house (or more) to the bank and other agents involved? That’s not even including all of the upkeep costs. Also, if he stops paying his mortgage, stops paying his property taxes, or even stops paying his homeowner association fees, couldn’t all that “equity” he has supposedly accumulated go up in smoke? I cannot begin to imagine how much home prices would plummet if all banks demanded a firm 25% downpayment for any new mortgage.
And, yes, I have always been very content with renting a place to live and will likely continue to do so for the foreseeable future.
Not really, because you’re always “renting” from the State through property taxes and eminent domain. If the State doesn’t approve of how you use your property, it will steal it from you through eminent domain.
I figured out how to generate more tax revenue. Let’s turn Obama’s house into a luxury hotel. I have a business plan and everything.
Actually, if we actually could not default or virtually default via the money printing press then the Chinese would be perfectly happy to see us collapse in a spiral of forclosures. Their debts would be worth more because the US dollar would be strong, they’d soon own a large proportion of our capital base, and once the forclosures ended they’d be in poorer shape from a nominal point of view but much richer in terms of real wealth.
Thing is that we wouldn’t allow this to happen.
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