Feb162017

Low house prices provide an economic boost

Low house prices make for lower debt service payments that benefit the economy as money is liberated to circulate and buy goods and services.

Low house prices benefit everyone because low house prices make for low loan balances and less debt-service. When borrowers carry excessive home debt, the excess comes directly out of disposable income. Since consumer spending is such an important component of the economy, the excess interest payments drain the economy (and enrich lenders).

It’s really that simple.

Legislators, existing homeowners, and bankers all want rapidly rising home prices. Legislators want to see home equity rise because it provides free money to homeowners reducing government dependency. Bankers like rapidly rising home prices because it reduces their exposure if a loan goes bad. Existing homeowners… well, they get rich, so obviously, they like rapidly rising home prices. With all that pressure, it isn’t surprising that none of those parties recognize when they have too much of a good thing.

There is no free lunch. For home prices to rise more rapidly than wages, then future homebuyers endure higher payments and less of the benefits — unless the pool of greater fools is enabled with toxic financing options. When homebuyers must overextend themselves to buy a home, they often become dependent upon mortgage equity withdrawal to make ends meet. When large numbers of people come to rely on this money, a Ponzi scheme takes off.

During the housing mania of the 00s, the California economy depended on Ponzi borrowers raiding the housing ATM machine to stimulate growth. Lenders ostensibly didn’t have a problem with this practice, despite the fact it was a Ponzi scheme. Apparently, no lender believes they will be the one holding the bag at the end — and with endless can-kicking they may be right.

Sustainability is key

Rapidly rising house prices are not sustainable, and the HELOC dependency it creates provides an unsustainable economic stimulus sure to result in a painful crash. Financial market implosions purge irresponsible and unsustainable habits from the populace. HELOC dependency serves no one, not even the sheeple who got to enjoy it for a time. The unceremonious fall from entitlement is inevitable, and although the fall is emotionally devastating, getting off the HELOC heroin is better for borrowers in the long term.

Falling prices bring affordability to the prudent who understand valuation and their cost of ownership. Many people have put off their purchases because they understand the power of rental parity. Those people will be rewarded with lower debts, and the ability to move without feeding a black hole on their family balance sheet. The lower debt service payments will benefit the economy as money that used to go to a lender is now circulating to buy goods and services.

Why Falling Home Prices Could Be a Good Thing

Conor Dougherty FEB. 10, 2017

Suppose there were a way to pump up the economy, reduce inequality and put an end to destructive housing bubbles like the one that contributed to the Great Recession. The idea would be simple, but not easy, requiring a wholesale reframing of the United States economy and housing market.

The solution: Americans, together and all at once, would have to stop thinking about their homes as an investment.

(See: House poor: when the house fails as an investment)

The virtues of homeownership are so ingrained in the American psyche that we often forget that housing is also a source of economic stress. Rising milk prices are regarded as a household tragedy for some, and spiking gas prices stoke national outrage. But whenever home prices go up, it’s “a recovery,” even though that recovery also means millions of people can no longer afford to buy. …

High rent and home prices prevent Americans from moving to cities where jobs and wages are booming. That hampers economic growth, makes income inequality worse and keeps people from pursuing their dreams.

(See: Potential homebuyers can’t save for down payments with high rents)

So instead of looking at homes as investments, what if we regarded them like a TV or a car or any other consumer good? People might expect home prices to go down instead of up. Homebuilders would probably spend more time talking about technology and design than financing options. Politicians might start talking about their plans to lower home prices further, as they often do with fuel prices.

Can you imagine that actually happening?

In this thought experiment, housing prices would probably adjust. They would be somewhat cheaper in most places, where population is growing slowly. But they would be profoundly cheaper in places like super-expensive San Francisco. …

The only real solution is to build enough houses to accommodate population and job growth. House prices wouldn’t necessarily stop going up, but the rate of price increase would be less than the rate of wage growth. Over time, even expensive areas like San Francisco could be brought back to much more manageable levels of affordability.

Over time, the accelerated pace of building could lead to a long-run deflation in home values. But for the most part that would be limited to a few coastal cities. And while the older homeowners there would most likely be resentful of all the new apartments, condos and townhomes that caused their home equity to shrivel, younger people would have an easier time getting started.

The nimbys wouldn’t be impressed by the changes.

Of course, our view of homeownership is so entrenched in our economy, our political system and our tax code that it would be impossible to change in a short time, and probably even in a long time. But there could be political and societal benefits. …

The point of this thought experiment isn’t to embrace it full-on, but to open our eyes to the negatives of the national obsession of owning a home, expecting its value to rise, and using the levers of local government to keep neighborhoods as they are.

I’ve dreamed about this for years.

High house prices that keep rising higher certainly don’t benefit buyers who must pay higher and higher prices to own their homes. They bear all the costs but obtain none of the benefits — at least until future buyers push prices even higher. Recent homebuyers are impoverished in order to enrich those who came before them.


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