Truth Before Dishonor

I would rather be right than popular

The housing market and the editors of The New York Times

Posted by Dana Pico on 2011/08/22

Once again, the editors of The New York Times prove that they do not understand the problem:

Editorial: Homeowners Need Help

Published: August 21, 2011

Neither Congress, nor federal regulators, nor state or federal prosecutors have yet to conduct a thorough investigation into the mortgage bubble and financial bust. We welcomed the news that the Justice Department is investigating allegations that Standard & Poor’s purposely overrated toxic mortgage securities in the years before the bust. We hope the investigative circle will widen.

Translation: Standard & Poor’s downgrades the United States sovereign credit rating, so they will be criminally investigated. Got it!

But a lot more needs to be done to address the continuing damage from the mortgage debacle.

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.

You can follow the link to read the whole thing, but it’s a case study in the editors not understanding the problem!

The editors note that sales of existing homes fell by 3.5% in July 2011 (over July 2010), and housing prices have declined 4.4% in that time. More, overall housing prices have declined by a third, with an equity loss of $6.6 trillion in five years. 3.5 million homes are in some stage of foreclosure and another six million homes have already been lost; 14.6 million homeowners owe more on their homes than what they are now worth.

What the editors want is for the banks and mortgage companies to reduce owed principle, to refloat those people who are “underwater.” That would sure be nice for those people who bought more home than they could really afford, taking money for those of us who borrowed responsibly and are paying our mortgages on time, every month — my mortgage payment is automatically deducted from my checking account on the 10th of the month — but it doesn’t address the problem the editors defined, of lagging home sales and the impact of that on the residential construction industry.

That problem is not the result of people not being able to afford the homes that they already own. Indeed, foreclosures and evictions and declining housing prices ought to help the housing market: people still need places to live, and a foreclosed home in which the previous owners have been evicted is a home that is now available for sale. That increases the supply of housing, and has contributed to bringing down housing prices to make them more affordable. Yeah, it sucks to be one of the families that can’t pay its mortgage, but that doesn’t hurt housing sales.

The real problem is the lack of demand for housing on the low end of the market. That lack of demand is caused by two things: uncertainty about people keeping their jobs, and greatly tightened credit restrictions, compounded by the number of houses in foreclosure. The federal government tried to address part of the problem with the $8,000 first-time homebuyer tax credit: if you are not a current homeowner, and have not been for at least three years, Uncle Sam will give you an $8,000 tax credit if you buy a home.

The trouble with that is that, if someone actually needs that tax credit to buy a house, then he can’t afford the house in the first place, and shouldn’t be buying it. The people who benefit from this are those who can afford to buy a house without the tax credit; they get an unwarranted $8,000 present from the government.

The problem of tightened credit is not a problem at all: it is a return to rationality! It’s absolutely true that many mortgages were written for borrowers who really should never have been given mortgages, at least not for the amount they borrowed. But the glut of foreclosed and in foreclosure homes means that mortgage lenders have to be even more cautious: since the home itself is the collateral for the loan, if the mortgage lenders cannot have a reasonable expectation of being able to sell the home at a price which covers their costs if the borrower cannot pay, it’s only natural that they’d be more cautious in lending money for homes.

The editors’ proposed solution — lowering the amount of principle owed on existing “underwater” mortgages — might help a little bit with the reticence of mortgage lenders to see the home as sufficient collateral for the loan, but it will not and should not have any impact on whether lenders see mortgage loan applicants as good credit risks.

The housing market in the United States depends on population growth and homeowners upgrading to better homes. But it is the problems that first-time homeowners face which hurts everything else up the ladder. In my profession, I’ve seen plenty of excellent homes, now at real bargain prices, go unsold not because people don’t want to buy them, but because they are afraid that if they do buy the better house, they’ll be unable to sell their smaller home.

Local anecdote: I know of an absolutely perfect house, a large, 100-year-old home, with period interiors and original woodwork, that would have sold for $350,000 five years ago, right next to the high school. Now the owner, a retired lady whose children have all moved away and for whom a large four bedroom home is simply too much, has dropped the price to $205,000, and has had several people who wanted to buy the house, but all of them have backed out because they were afraid that they couldn’t sell the homes they already owned.

I pick up the local (free) real estate magazines every month; there are homes advertised in there which have been on the market for at least two years.

The solution to the problems of the housing market boils down to one thing: economic growth which stabilizes and improves the job market. Until people begin to have confidence again that they’ll be able to keep their jobs and pay their bills, the first home market is going to be depressed, and until that changes, the depressing effects will be felt throughout the entire housing market.

President Obama is coming up with yet another job growth proposal, one which will, if passed, be just as ineffective as all of the other job growth proposals he has made. But even if some new stimulus plan is passed, and even if it does create some new jobs, they will be, by definition, temporary jobs, jobs which would be likely to disappear after such stimulus plan was over . . . and that means they wouldn’t be the type of jobs on which someone could reasonably anticipate being able to pay for a 30-year mortgage!

It will be painful, and painful for me, since this is my industry, but the real solution is the natural, not stimulated, growth of the economy. That will produce businesses and jobs which are based upon the natural demands of the public, rather than the guesswork of the well-meaning lawmakers and bureaucrats, guesswork which is inevitably wrong. This will take time, and there will be people hurting as the economy adjusts naturally, but given that the attempts to artificially stimulate the economy have been no more successful, there’s no reason to not be patient.


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