Price reduced? Good news for one third of Americans, but not for Peter Dreier
From the NYT: What Housing Recovery?
In the New York Times Opinion Pages Peter Dreier (Professor of Politics, Urban and Environmental Policy at Occidental College) bemoans that not every area of the U.S. is seeing the housing price increases he feels Americans deserve and he implores the government to step up and help push things along.
His argument relies on several assumptions that I think are both invalid and harmful:
Assumption #1: Rising Housing Prices Are Good for Everyone
Two-thirds of Americans own their own homes. Sure, rising housing prices benefit this group, but what about the other, poorer, third of Americans who still rent? They’re watching purchase prices rise even further out of reach. Why is he cheering on increasing unaffordability for poorer Americans?
Why should government even be in the business of trying to change market prices at all?
Assumption #2: Foreclosures Are Always Bad
Foreclosure occurs only after three things happen: First, someone hands over a property deed as collateral for a loan, explicitly agreeing that in non-payment the title can be seized. Second, the borrower fails to make the agreed payments. Third, the borrower refuses to move out and sell when it’s obvious they can’t uphold their end of the deal.
If we don’t allow lenders to enforce their contractual rights then being a borrower will become such a good deal no one will let you become one. Foreclosure may be unpleasant, but if you speculated on a house in the middle of an obvious bubble and then refuse to move out when you stop making payments, there has to be a civilized and efficient way to drag you out of it and put it back on the market to be bought by someone who will honor their obligations.
To put it more simply: If you can’t afford to make the payments on a house, you’re the wrong person for that house and you need to leave.
Delaying foreclosures means keeping the wrong people in houses, preventing the market from clearing, and it gives speculators squatter’s rights that harm investors.
Assumption #3: Banks, Not Borrowers, Are At Fault for Failing Mortgages
For most people their mortgage agreement is the largest and most important financial contract of their lives, obligating them to repay a debt greater than several years’ gross earnings. Lawyers and advisors are always available. If borrowers chose to sign without fully understanding the details, or signed anyway because they were blinded by the prospect of flipping the house for a profit within two years, they can’t apportion blame to anyone else.
If we allow home buyers to back out of a contract then by Adverse Selection (Wikipedia) only those investors who lost money will demand relief, and through Moral Hazard (Wikipedia) we’ll be encouraging the next group of borrowers to march into their escrow closing with their eyes wide shut, confident they’re getting a Heads-I-Win-Tails-You-Lose opportunity. No good can come from this.
Assumption #4: Housing Market Recovery Means Returning Prices to Near the Top of the Bubble, Not Helping the Market Clear
When people talk about “housing market recovery”, they almost always mean “housing price recovery to near the previous peak”, a level high enough to bail out everyone who gambled and lost.
What’s needed is for this market to clear and for prices to reflect the resolution of the forces of supply and demand.
Assumption #5: The Way to Help the Situation Is Through “Principle Reduction” on Underwater Mortgages
For every debt on someone’s balance sheet somebody else has an equal and opposite asset. “Principle reduction” on the debt by definition means “Asset reduction” for the investor and is really just a forced transfer from the lender to the borrower.
As soon as word of this possibility gets out, no one with an underwater mortgage will ever pay more than the minimum monthly payment, preserving their eligibility for this hand-out. Those who worked hard and made the best of a bad situation and made sacrifices to pay down their mortgages were suckers.
Assumption #6: Increased Homeownership Is Always Good for America
While its true increased home ownership strengthens neighborhoods (“nobody ever washed a rented car” and all that), there are some disadvantages. First, it reduces liquidity in the labor market as it’s more difficult to move to where the work is. Second, it supports a whole class of real estate parasites whose revenue depends upon housing turnover and massive amounts of campaign contributions and lobbying, and third, it breeds more inflation-friendly voters.
The author is so pro-homeownership he’s willing to advantage those who speculated recklessly at the top of the bubble, disadvantage renters, asymmetrically enforce contracts in favor of speculators and squatters, discourage those with underwater mortgages from paying them down, freeze the housing market until the last round’s gamblers are made whole and create a new generation begging for the addictive poison of inflation. He wants a rising tide to lift all boats, but only if lenders and renters are left standing on sinking land in rising water.
Professor Peter Dreier, You’re Not Helping.