Interesting article on the housing market, today. Many economists have declared that the government should once and for all stop trying to "solve" the problem of plummeting house prices and just let the market fall to whatever level it will ultimately fall to. On the one hand, this could help prospective buyers, who will see house prices fall; on the other hand, this will hurt current homeowners, who will see the already diminished value of their houses diminish even further. In turn, this could exacerbate the economy's problems, as these homeowners decide simply to walk away from underwater mortgages. As the article points out, "If [homeowners] see an identical house down the street going for half what they owe, the temptation to default might be irresistible."
Now, we stipulate here that the Solipsist does not own a house, so his opinions come from that perspective.
We remain unconvinced by the implied--or overt--arguments of this article. For one thing, we dispute the inherently unfairness of homeowners having to pay off mortgages whose balances are now higher than the value of the houses for which they paid. In fact, one of the proposed government interventions would cut mortgage balances on such houses. But while it may seem unfair to make someone pay off a $500,000 mortgage for a house now worth $250,000, consider that these people agreed to pay off a $500,000 mortgage. They probably assumed that the house would increase in value. If that had happened--if the house had appreciated to, say, $750,000--would we now say these homeowners were responsible for that amount?
Some will say the banks and other lending agencies acted dishonestly and that homeowners should not be held responsible for their deceptive--perhaps criminal--behavior. Fair enough. We don't want to see people losing their homes living on the street. The problem we have, though, is that many of these government programs seem focused more on protecting the value of homes, rather than on protecting the people who live in them. A government program that helps people avoid foreclosure and eviction is something we can get behind. A government program that seeks to make sure people don't lose money on their investments is ludicrous.
Maybe this comes from our non-homeowner mindset, but we've always considered that, if and when we do buy a house, it will not be an "investment": It will be a place to live. As long as we can continue living there, our ability to flip it for a profit will remain a minor concern.
Well done, Sol! The housing boom(perhaps bubble is more appropriate)was a convergence of several factors. In essence it became "money for nothing...."
ReplyDeleteI'm not sure you quite followed the article. Or maybe I didn't. You say you "dispute the inherently unfairness of homeowners having to pay off mortgages whose balances are now higher than the value of the houses for which they paid". No one suggested it was unfair, only that it may create the attraction to default. You also say "The problem we have, though, is that many of these government programs seem focused more on protecting the value of homes, rather than on protecting the people who live in them. A government program that helps people avoid foreclosure and eviction is something we can get behind.' and yet all of the government incentives are protection for the homeowners to keep them from falling between the cracks not to prop up the value of their homes. Tax credits, mortgage modification programs, low interest rates, government-backed loans, these are all intended primarily to aid the homeowners situation in or going in to a mortgage. There will be collateral effects to the home values as the homeowners maintain their mortgages and do not default. These are in fact the programs that you refer to when you say "A government program that helps people avoid foreclosure and eviction is something we can get behind". So suffice it to say you agree with the government. Letting them all just fall to foreclosure would be unenlightened to say the least. I'm sure you can see the transparency of those arguing against these measures. They are essentially trying to deregulate the market and push it to move, remember they profit no matter whether they sell a $100,000.00 home or a $250,000.00 home. Profit only happens when it sales! Let the market fall and it will stimulate sales.
ReplyDelete"These are all intended primarily to aid the homeowner's situation. . . ." That's the part we're not sure we agree with. In theory, perhaps. IF, for example, a homeowner with a $500,000 mortgage--who legitimately qualified for that mortgage (i.e., no "liar loans," etc,)--has lost his job, and is now unable to make payments on a 500k mortgage, it would seem desirable to offer him some relief--perhaps in the form of renegotiating his mortgage to reflect the house's current value (indeed, this is common sense--it's sad that the banks themselves don't recognize this and just renegotiate without government coercion, but that's another story). We have a problem, though, with the thought that people who agreed to pay 500K--and are capable of doing so--might get a nice hand from the government to enable them to pay less, simply by threatening to default. At the same time, if they do that, then the houses could just be resold at a lower price, which will, ultimately, stimulate sales, too. Look, we are far from a diehard capitalist; in this instance, though, we think houses are, in general, ludicrously overpriced. And in this case, we think the more government tries to prop up the market, the more harm is done to the "little guys"--in this case, prospective homeowners who just want a place to live and who can't pay investment grade prices on these dwellings.
ReplyDeleteThat's un-American. You're supposed to trade up.
ReplyDeleteSays the German exile.
ReplyDeleteIt's interesting that in your example the potential bad guy already owns the 500k home but the good guy is little and just want's a place to call their own. I'm sure the investor capable of paying 500k would have no interest in taking advantage of depressed market values to increase investment holdings.
ReplyDeleteSo you're saying the person with a spare $500k now would simply buy two $250K houses? Possibly. And if that's what they want to do, fine. I just don't want the government stepping in to protect those two $250K investments--to keep them from falling to, say, $200K.
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