The median price of homes sold in the San Fernando Valley (northern Los Angeles) dropped from $655,000 last June to $500,000 in January. Now, lots of people think that's the worst tragedy ever, but to my mind, half-a-mil is still way too high for the typical SFV house, which is about 35-55 years old, 1600 square feet, on a one-fifth acre lot, and with a lousy school. (But the weather is nice). Who can afford these prices without having Cousin Aram, his wife, three kids, mother-in-law, and her maiden sister move in with you and yours?
Yet, everybody who counts wants to bail out the speculators who drove the prices up to ridiculous levels.
If I were Obama or Clinton, I'd love to have a recession in 2008, so that after I win, prosperity will be back in time for my re-election bid in 2012. The last thing I'd want is to artificially postpone a correction now so that something worse comes along in three or four years.
I guess they all know something I don't know, because this Holman Jenkins column in the WSJ makes a lot of sense to me. What am I missing?
Any debate about a housing bailout can be put aside -- the bailout is underway, even in advance of specific plans being shopped around Washington by Bank of America to prop up home prices with direct subsidies to homeowners whose debt exceeds the value of their houses. No, the perverse effect won't be a replay of the '30s, or even Japan's decade of stagnation in the '90s, but the latter is your model, with a little inflation thrown in. The goal: avoid foreclosures and slow the fall of home prices to market-clearing levels.
Notice that today's bailout will be the opposite of the misnamed S&L bailout of the '80s. Then, only depositors, whose money was guaranteed under federal law, were bailed out. The federal government closed down thrifts, wiped out their shareholders, seized loan collateral and dumped it back on the market, even at firesale prices.
But this time, the liquidationist school has been routed -- so named for Herbert Hoover's Treasury secretary, Andrew Mellon, who said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rottenness out of the system."
Making the hole even harder to climb out of in tough-love fashion, government policy itself played a big role in creating the bubble, on the bipartisan theory that homeownership begets "social stability."
Like all good things, when converted to a slogan, this idea became our road to perdition. Charles Kindleberger, the late MIT economist who wrote the classic handbook "Manias, Panics, and Crashes," noted as early as 2002 an emerging housing bubble. In an interview with this newspaper, he pointed a finger first of all at Fannie and Freddie, whose channeling of government subsidized capital into the housing market helped turn housing into a leverageable, tradeable asset class.
Result: The minting of new homes and home loans as speculative chits, which in turn has made housing more susceptible to the ups and downs of other speculative markets.
So here's the question: Do the people who would be bailed out want to be bailed out? Do they benefit from being bailed out?
For starters, many homebuyers in the last two years were rank speculators, taking out zero-down subprime loans, then walking away when the bet didn't pay off. A careful study of recent Massachusetts foreclosures by Federal Reserve Bank of Boston economists suggests that the key factor wasn't an inability to pay, but an unwillingness to pay, once falling house prices made homeownership no longer a winning speculation. These people are already skipping out, because that's their best option.
Next up, what about the low-income homeowners who (unlike speculators) were the intended beneficiaries of homeownership expansion policies? Both President Clinton and President Bush championed such initiatives, and now 69% of households own their homes, up from 64% in 1992.
My published articles are archived at iSteve.com -- Steve Sailer
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22 comments:
"I guess they all know something I don't know": oh, not much that matters. But their incentives are different.
The amazing thing about the housing price discussions is that they never take into account the future buyers, who are screwed over by high housing prices. When the price for a decent house goes from $300K to $400K, the people who already own houses benefit, but the people who will be buying houses in the future lose, and this is almost never mentioned in coverage of the housing bubble. In general, the folks who already own houses are established and better off than the young families who are buying their first house, so you'd think the right policy would be one that pushed prices lower, and thus helped the poorer people at the expense of the richer ones.
Of course, homeowners, builders, and real estate agents are a visible interest group, whereas future home buyers aren't. Thus, the concerns of the first group are likely to be heard in the media and addressed in Congress, while the second group's concerns won't.
Steve,
There are several problems with any bailout by the government. First is the size of the problem. Several trillion dollars worth. Second, any bailout by the .gov would spike interest rates into the double digit range, thereby putting a final stake in the heart of the credit markets. Finally, a bailout doesn't fix the underlying fraud in the banking sector that got us here. Supplying NINJA (No Income, No Job or Assets) loans is just plain stupid.
There's going to be a purge of the financial system and the government isn't going to be able to stop it. The problem isn't just sub-prime and it's not contained. Large numbers of ARM resets will continue through 2011. All major housing markets are in decline and it will be impossible for homeowners to get refinanced if their LTV is greater than 80% in most areas and currently 75% in California.
But the weather is nice
Meh. The valley is too far from the coast - it gets too hot in the summer.
Personally, as a non-homeowner I'm not thrilled with the idea my government is taking part of my paycheck to keep the price high on an asset I may want to buy.
Is this really the proper role of government?
the bipartisan theory that homeownership begets "social stability"
Or, golly gee whiz, do you suppose maybe it's the other way around: Do you suppose that maybe social stability begets homeownership?
The Romans owned plenty of houses back in the day, but the Huns & the social instability they brought with them didn't exactly do wonders for the Roman homeownership numbers.
Next up, what about the low-income homeowners who (unlike speculators) were the intended beneficiaries of homeownership expansion policies? Both President Clinton and President Bush championed such initiatives, and now 69% of households own their homes, up from 64% in 1992.
Why does the excerpt cut off right when it gets to the good part?
The piece of Holman's article I don't get is the tax effects which no one seems to be talking about.
Imagine I, Jose Loserez get a loan for 750K to buy a house. Its value drops to 350K. I leave the keys in the door and walk away. The bank writes off its mortgage to me as a dead loss and sells the house for 300K. They have lost 450K on the deal. I on the other hand, have just made 450K by not paying off my debt.
The IRS treats this 450K as income to me and requires me to pay maybe 150-200K in taxes -- which I can't, never having owned doodley-squat.
SO OK the banks don't get me, but what about the IRS? Are these people so deadbeat that the IRS doesn't even bother collecting all their money?
What's up with this?
Bush didn't see fit to compensate daytraders when the market took a dive from which it has still not recovered (remember the qqq's at 115, anyone?), why should taxpayers subsidize the "daytraders" of housing who are now choosing to walk away from their "margin call."
I think being allowed to walk away from a large fiscal responsibility is subsidation enough for these morally corrupt "homeowners."
Let the market have some time to drain the fiscal sewage organically, or we will end up gaming the dollar until there is nothing left to game.
The real estate predators got away with their skins. They deserve no more consideration.
Clinton, Obama, and Bush all understand that the homeowners, not speculators, want their dream protected. Having homeowners at a higher percentage makes the nation more conservative. You can't just move. You're sunk. Crime, real estate values, corruption in local government all matter.
To the extent that a candidate is on the side of invested and sunk homeowners, he'll get their vote. But these homeowners are also sensitive to taxes, and that could be the Achilles Heel of Obama/Clinton. Prop 13?
Big Bill,
That is no longer the case. The IRS does NOT tax you for capital gains if you "short sell" your house. You can walk away, scott free.
I tend to agree with Steve on this, except for the pension problem. People were encouraged to buy homes not only for "social stability" and short-term profitability but as an investment for their retirement. That's a big movitation in a society where employers no longer provide secure, generous pension benefits.
The problem - or, rather, one of the problems - with this approach to old-age income planning is that people keep taking equity out of their houses in order to live above their means. It's a good object lesson for those who oppose mandatory public pension schemes like Social Security or a reformed version thereof: Given every chance to save for the future, millions of Americans will spend every penny they have and then some.
So, anyway, at least some of these people supposedly needing bailouts have invested everything they have in their homes, leaving them with nothing for retirement unless they get help. It's a tough problem because clearly a bailout rewards both foolish behavior and rank speculative greed,* but in a society with such a thin social safety net, it's difficult to look the other way when large numbers of citizens lose their only security for the future.
*And, as none of the above and eric said, a bailout keeps housing prices very high, which is tough on newcomers to the market.
In California, the homeowner is NOT liable for a loan deficiency judgment if:
the mortgage is on the principal residence and used solely to purchase the house (sometimes known as a first mortgage or purchase money mortgage - not refinanced mortgages, equity lines of credit or second mortgages)
OR
the lender chooses non-judicial foreclosure (an auction by a trustee not involving the courts) [Cal. Civ. Proc. Code Sec. 580(d].
This is quite common.
Under the one-action rule, banks in California, which normally choose a non-judicial foreclosure under a power of sale clause (it’s faster and easier), are not permitted under law to start a second action to collect the deficiency debt from the homeowner borrower.
In most other states, where you are liable for a deficiency judgment, or where a judicial foreclosure is available, there are time consuming and costly legal hurdles to jump and many banks chose not to come after the homeowner for any deficiency. But banks won’t tell you this. Therefore, you may be able to walk away from the mortgage without declaring bankruptcy to escape the deficiency judgment.
And thanks to the "Mortgage Forgiveness Debt Relief Act" in September of 2007, a homeowner is forgiven for any tax debt incurred by capital gains from short selling the property:
http://www.house.gov/apps/list/press/mi12_levin/hr3648_summary.pdf
So, it's happy days in Asshole Land.
lucious at the time of the fall of the Western Empire, it had been around 300 years since freeholders characterized the Roman Empire. There were a few big landowners, many slaves/serfs, and not much else. Which is why the Visigoths, Vandals, etc. were able to do as they please.
Note: Visigoth kings cooperated with one of the very last Emperors to push back Atilla. Since it was their land they'd damn well fight for it.
When Napoleon gave French peasants land he squelched rebellion in the countryside. Urban riots, no. But landowners aren't keen on revolutionary regimes eager to seize land and turn them out.
There are a lot of "fringe suburbs" or whatever the heck Rove called em. Places like Temecula where families fled after being priced out of the market in more desirable areas. Whoever helps those folks hang on to their houses wins votes.
This is why Libertarians never win anything: "Yes there is a shakeout coming so you MUST lose your home for the sake of financial stability." I can see THAT being a winner.
I presume there will be a political bidding war between McCain and Obama for those homeowners votes.
I'd just like to know why forgiven debt for a mortgage is not taxable income when forgiven debt for a profitable business is taxable income.
It is almost like the government wants you to speculate in houses. Capital gains - tax free, forgiven debt tax free.
steve wood:
I am much more comfortable with bailing out homeowners who made dumb decisions (for many of the reasons you listed) than investors/banks. I'm not surprised that some random people got into loans whose terms they didn't quite understand, or even (as I think was common) bought a house they couldn't afford on the theory that their income would probably go up enough to cover it, and if not, they'd be able to sell it and at least break even.
But I think this highlights a big problem. If you do something uniquely dumb (like lose your life savings investing in collectible stamps, or build your house in a spot where a mudslide will destroy only it), you can't expect much help. But if you're dumb in some way that joins million of other dumb people (like buying a house you couldn't afford on the theory that housing prices were guaranteed to go up and you'd always be able to refinance, or building your house right in the middle of some floodplain inhabited by millions of other people), the government will likely step in and help you out. And this is even sensible, since a single tragedy doesn't damage a community or state or country, but a million such do.
Steve,
That WSJ column is a good one; I posted a link to it on Megan's blog at The Atlantic on Wednesday.
There's something you might find interesting in the WSJ today: a front page article on the Weekend section features a photo of a smiling blond child along with a headline questioning why Finland's school children are so smart, despite starting school later and doing less homework than their American counterparts. What could be the reason?
-- Fred
I'd just like to know why forgiven debt for a mortgage is not taxable income when forgiven debt for a profitable business is taxable income.
It is almost like the government wants you to speculate in houses. Capital gains - tax free, forgiven debt tax free.
Because the banks and government are terrified of "walk aways".
Walking away from your home and letting it foreclose kills your credit record, but usually prevents any more money being taken out of pocket. Only a few states are "recourse", where the lender can go after the borrower's other assets. Even those states rarely go after borrowers.
In the old way of doing a short sale, the taxable income as to be paid to the Feds and usually the state. In California, ground zero of the housing crisis, that would amount to roughly 30% federal plus 10% local on the amounts we are talking about. That's a lot of cash when you're already tapped out, and the government will squeeze you dry trying to get paid.
With the tax relief the banks are trying to keep even more foreclosures piling up on the books, people making payments while the short sale is worked out, squatters out, and people from gutting the house of appliances, fixtures and copper wiring.
It really isn't working all that well but it is better than the alternative.
What ever happened to the old fashioned wisdom of living within one's means?
American consumerism really is out of control. The 1950's boom happened because the rest of the world was in smoldering smithereens. Now we have Europe, China, India, lots of places to compete with and we can't be so spendthrift.
How long until we go to war with the EU?
none of the above: The amazing thing about the housing price discussions is that they never take into account the future buyers
The amazing thing about the housing price discussions is that they never take into account whether there will be any future buyers.
Or, if there will be future buyers, then who those future buyers will be:
Statistical Abstract of the United States
Section 1, Population
census.gov
Of U.S. Children Under 5, Nearly Half Are Minorities
washingtonpost.com
U.S. Fertility
corner.nationalreview.com
JPG: johnderbyshire.com
If you look at Table 8 [page 11] of Section 1 of the Statistical Abstract, then you'll see that [in 2006] the Caucasian population peaks at 16.2M in the 45-49 year old age group, and then plummets down to a mere 11.2M in the 0-4 age group.
So in about 25 or 30 years, when that bulge of baby boomers is in their mid-70's, looking to cash out of their houses and into retirement communities, you will have essentially 16 sellers for every 11 buyers.
Which, I think, is what you might call a "buyers' market".
Of course, in 25 or 30 years, I'm not convinced that we will even have a nation anymore, much less a society.
I'm of the opinion that dysgenic fertility, combined with the demands of the welfare state, will have [one way or another] simply torn our country apart at the seams long before then.
Prepare accordingly.
Anonymous: lucious at the time of the fall of the Western Empire...
You're missing my point completely.
Let me try to make it a little less circuitously.
Spend an afternoon at this site, reading and contemplating all the stories documented therein:
The Fabulous Ruins of Detroit
http://detroityes.com/home.htm
Then ask yourself why those structures in Detroit no longer have any value.
And then ponder the question: Does homeownership beget social stability, or does social stability beget homeownership?
And beyond that, ask yourself: What sorts of qualities do you need in a populace before you can expect social stability in the first place?
[And finally back to the first question: Were the Huns capable of building a civilization, or were they only capable of destroying a civilization?]
This is why Libertarians never win anything: "Yes there is a shakeout coming so you MUST lose your home for the sake of financial stability." I can see THAT being a winner.
Likewise for Establishment Repubs who think that income tax cuts are a top priority for most voters.
Hint: most voters or potential voters don't never earn enough to owe the IRS much.
... To the extent that a candidate is on the side of invested and sunk homeowners, he'll get their vote.
That is also correct. As long as the voting franchise is universal for all Americans, fiscal conservatives and Lib Lib Libertarians won't get elected. Vox populi, vox dei.
What's going to happen? Some version of Barney Frank 'n' Furter's bailout plan is likely to pass. A goverment-supported entity will end up buying many distressed mortgages. The original mortgage holders will get to stay in their houses as long as they pay rent.
This will tend to stabilize the soical order, just as feudalism helped stabilize Europe after the Western Empire was kaput.
The US has been dealing with an out of balance social order for some time now, which might now be correcting. We are now seeing hints of a shakedown of what has become an unnatural social order.
The Indians were virtually wiped out by disease, leaving unimaginably large tracts of unused real estate (starting with empty cultivated farmland in New England). Lots of game too since Indian hunting went down in the wake of multiple plagues. The remainder were cordoned off to undesirable land where they have been practically absent from the public consciousness (except in cultural mythology).
Another imbalance was the postwar economic world order. The top countries were reduced to rubble, leaving the US with little economic competition. Hence the massive move to suburbias and high general affluence. Massive over-compensation for blue collar work. This has led widespread education among whites and a "trickling down" of college educated people to state bureaucracy, high end service industry jobs, etc.
White-Black segregation in the south gave way to institutionalized welfare bribes ("please don't riot again" payments) and de facto re-segregation in an unnatural urban-black (unemployed, partially employed, and service class / somewhat blue collar) and suburbian-white (white collar) social structure.
More or less Hispanicized Indian peasants (better able to eat European foods and cope with European diseases) are moving back in everywhere but especially the southwestern states. Whites are finding it more and more difficult to compete for lower/middle end white collar jobs due to the re-emergence of Europe and the rise of some Asian economies. Urban "black containment zones" are being displaced and gentrified by a generation of whites who can no longer afford suburbian sprawl. Whites are starting to feel the dual pinch of the bloated welfare state and their collective inability to afford the artificially high standard of living that has prevailed. The mortgage crisis is early fallout of this tumbling process.
Remember, we do have a strong military (which is also a potential employer) and we have an increased need to compete internationally. Not with terrorists so much (although oil is a nice global bargaining chit), but with the EU and other more developed countries with significant English speaking white collar workforces. And there are going to be issues with our neighbors in Mexico and Canada.
If I were Obama or Clinton, I'd love to have a recession in 2008, so that after I win, prosperity will be back in time for my re-election bid in 2012.
The recent past is not always a guide to the present. Recent recessions have been brief because they've lacked problems we now have in spades:
1) An ever-growing number of immigrants, legal and illegal, to keep wages down and driving up frustration among young white working families.
2) A mass of baby boomers that will be moving onto social security at almost exactly the same time that the next election occurs.
3) The price of oil climbing with no apparent ceiling in sight, and with sprawl (thanks to immigration) only increasing our dependence on it.
4) The US reaching the ceiling on how much other nations are willing to lend to us, and consumers unwilling/unable to borrow and spend in increasingly tight times.
5) An increase in the number and costs of entitlement programs, especially if the Dems get elected.
6) Growing multicracialism that just makes it harder to address issues like education and home mortgage practices honestly.
7) Growing competition from China and India that will only be worse come 2012. China, which holds huge amounts of American debt, will also have greater sway over America in 2012 than it ever had.
All of these are structural problems that neither party, especially the Dems, is likely to seriously address (except maybe for free trade). The recent, short recessions of the early 80s, 90s, and naughties are simply not a prelude to what's happening this time around.
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