Jun062012

Low, stable house prices key to consistent economic growth

Low house prices are good for the economy because low house prices make for low loan balances and less debt-service. When borrowers have 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 are a direct financial drain. As long as the debt on real estate is excessive and capital is tied up in non-performing assets, the economy will suffer. It’s really that simple. The solution is equally simple: foreclose on delinquent borrowers, wipe out the debt, and extract the remaining capital value. With the excess debt removed, borrowers can use their wage income to buy goods and services rather than giving it to the bank. When the mis-allocated capital is returned to the market, new investment will be spurred in areas where capital is most needed. Right now, we don’t need more real estate.

Right now the California economy in particular is completely dependent upon Ponzi borrowers going to the housing ATM machine to stimulate growth. Lenders ostensibly don’t have a problem with this practice, despite the fact it is a Ponzi scheme. Apparently, no lender believes they will be the one holding the bag at the end — and they may be right. Currently, the US taxpayer is on the hook for the fiscal imprudence of California loan owners.

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.

I want to believe

The promise of ever-increasing house prices and unlimited HELOC spending money is seductive. Everyone wants to get something for nothing, and despite the too-good-to-be-true obviousness of the fallacy of free money from housing, it happens often enough that the sheeple fall for it every time. Like the gambler in Las Vegas feeding a slot machine, the California loan owner will buy any real estate they can to get their shot at HELOC booty. It’s only a matter of time before we inflate another housing bubble and unjustly enrich another generation of useless Ponzis. I want to believe it won’t happen, but those who want to believe in California housing gold will likely make another run at it.

Low, Stable Housing Prices: What’s Not to Like?

By Edward Glaeser May 29, 2012 4:35 PM PT

The Case-Shiller Housing Price figures for March were released Tuesday, and they reveal a second month of modest price increases.

These slightly rising prices don’t portend a housing comeback. Instead, the seasonally adjusted figures illustrate that since March 2009, we’ve been bumping along the bottom of the housing market, just as we did for six years after the last housing bubble burst in 1991.

Although a new surge in housing prices might improve the macroeconomy, there is plenty to like in low and stable housing prices, and that’s what we should now expect in a world free from bubbly delusions of constant price appreciation.

Any surge in house prices that improved the macro-economy would be false and unsustainable.

… Let’s hope that U.S. homebuyers will never again believe the lie that housing is a fail-safe investment strategy.

Encouraged by NAr bullshit, the sheeple will forget the devastation of the housing bubble, and they will once again accept the lie that housing is a safe investment.

On average, the Case-Shiller cities have housing values that are 90 percent of their values in May 2009, when the market hit its first bottom. After that, prices began rising, abetted by the homebuyer tax credit. But when the credit expired in May 2010, prices fell again until February of this year, with the exception of a one-month uptick in April 2011. The homebuyer tax credit may explain the extra gyration in this downturn that was missing from the price drop of the early 1990s.

Yes, the tax credit explains the first bear rally, and the artificial withholding of inventory will explain the second we are seeing now.

Homebuyers Benefit

…. Homeowners, like myself, have lost from the drop in prices, But homebuyers have benefited an equal and offsetting amount.

Everyone pandering to loan owners overlooks this simple fact. Any benefit offered to loan owners is a detriment to future buyers and everyone else who has to pay for it. As a renter and a future buyer, I am being harmed two ways. First, I am being asked to pay more than I should for a home in order to bail out a loan owner and a stupid bank, and second, I am being forced to pay tax dollars to bail out both of those parties who entered into a foolish private transaction.

In the long run, we should expect to see prices stay low in most of the U.S. We have an abundance of land. The U.S Census reports that there were 117 million households in 2010. So every U.S. household could have more than an acre of land and we’d all still fit into Texas.

So much for realtor’s arguments about running out of land.

Meanwhile, building technology continues to improve, which should push down the cost of construction and housing. Housing prices can only stay high in areas that limit construction and that enjoy hypercharged economies and attractive amenities — which is why San Francisco and New York remain so expensive.

Not really. San Francisco and New York maintained such high prices because the plethora of delinquent mortgage holders have been allowed to squat so lenders could avoid foreclosures. The current pricing in both of those markets is an illusion.

… I may cheer for affordable housing in the long run, but there is little doubt that falling housing prices played a crucial role in creating the recession. Too many of our financial institutions were long on housing-related assets, and when prices dropped, the entire system neared the edge of collapse.

The main reason for the recession was not primarily bank insolvency. With most of the economic stimulus in the 00s coming from borrowed money — much of that tied to bubbly real estate prices — the consumer credit crunch caused the recession.

Low housing prices today trap homeowners who would like to sell and move to greener pastures, but can’t because they’ve lost their down payments. It is hard to move past the mortgage default crisis when so many homeowners are underwater.

The move-up market will be frozen for a decade or more. With so little equity dispersed among so few owners, houses prices above the conforming limit will languish for a very long time.

Thriftier Households

The work of Karl Case, Robert Shiller and John Quigley (who sadly died this month) demonstrates that there is a housing wealth effect on consumption. High housing prices in the early 2000s may have mitigated the macroeconomic effects of the Internet bust. Low housing prices today mean thriftier households that consume less than they might otherwise.

No kidding? The “wealth effect” is a nice euphemism for HELOC abuse and mortgage theft. Spending one’s real estate “wealth” requires either a sale or increased debt loads. Unless our already low mortgage interest rates are going to decline forever, tapping that “wealth” will get more expensive in the future, and fewer will chose to do so.

The 1990s offer us one upbeat message. Housing prices stayed static for six long years after 1991, and in real terms, housing prices were no higher in 1998 than they were in 1991. Yet real GDP grew an impressive 28 percent between 1991 and 1998. It’s a myth that the housing market must recover before the larger economy can surge.

In fact, the economy can surge if house prices never recover. A resurgent economy needs disposable income to drive it. Since the issuance of new debt is obviously not the answer, low home prices and the associated low mortgage balances leaves borrowers with more income to spend on goods and services. That will stimulate the economy.

The one sector that will not boom until housing markets come back is construction. From 2003 to 2008, the U.S. added 9.3 million units to its housing stock, and the number of vacant homes increased by 3.4 million. Construction can only come back when we work through that excess housing inventory, and that process has been slow. The rate of household formation was incredibly modest during the downturn, as young people increasingly chose to live at home. Eventually, though, construction will return to the level needed to satisfy the still growing U.S. population.

It isn’t just excess inventory that’s the problem. Construction is being held back by the recycling of the homes they built in the 00s that were sold to people who couldn’t afford them. Construction will not fully recover until we absorb the shadow inventory plaguing every market.

I see no reason to think that this period of housing-price stagnation will be shorter than the six-year stagnation of the 1990s.

In fact, I see every reason to think this period of stagnation will continue to creep lower and go on much longer than the six-year stagnation of the 90s. This bubble was much larger. The foreclosures and shadow inventory is much, much larger. And with so many people with bad credit, demand is much lower. We will see lingering effects of this disaster a decade from now.

I hope that housing prices continue to be modest for decades so that ordinary Americans can afford to buy, and I see little good in government policies, like the homebuyer tax credit, intended to artificially boost housing prices.

I agree with that idea. House prices subsidies only benefit bankers who get to underwrite larger loans.

My greatest hope, however, is that prospective buyers have learned the lesson of the past decade: Housing prices go down as well as up. The right reason to buy a home is not as an investment, but as a place to live a fulfilling life.

Sound advice. However, I think most “sophisticated” borrowers learned other lessons from the housing bubble — like how to game the system.

Good Stoploss Management

The Ponzi Scheme in California went on for too long. There are adults whose entire financial life is an illusion sustained only by lender greed and stupidity. Many California borrowers believe a money-rentership position in real estate can provide them sustainable productive income they can extract through mortgage equity withdrawal.

To them, periodic trips to the housing ATM is simply good cash management. It’s like getting a paycheck. But is also serves one other useful purpose; by periodically extracting all the equity available in real estate, borrowers can shift any risk of loss to lenders and maximize their gains.

One of the most perplexing issues with trading is management of exits and getting back into cash. If you don’t take profits as they accrue, you risk losing them when prices reverse; however, if you sell and take profits, you miss the remainder of the upward price move. Fortunately, lenders make it very easy to manage cash exits with HELOCs.

By periodically removing all profits through mortgage equity withdrawal, very little potential cash profit is left to the market. Also, since this is a loan and not the reduction in an equity position like selling part of a stock holding, the borrower gets to obtain the full cash advantage of owning real estate while prices were rising.

Of course, the best part of the system is getting to pass all losses on to the lender. When prices go south, the lender is holding the bag.

So far the only potential downside is a negative credit report and the potential for a lender to go after other assets. This is probably not a big concern for sophisticated borrowers because the spendthrifts no longer have any assets, and the clever ones probably figured out some tax shelter to hide them.

Lenders are going to get crushed again after the next housing bubble. I hope taxpayers don’t have to backstop that one as well.