From happy homeownership to the end of our economy (9 Oct 2008)

Promoting homeownership remains a bad idea, as Felix Salmon reminds us here.

The last thing we need right now is a resurgence in homeownership. Too many people own their homes already, including a lot of families who really shouldn't. Let's start thinking in terms of affordable housing, and not in terms of home equity.

Houses are not investment vehicles, treating them as such is pretty foolish and potentially destructive. And the economy as a whole is far less flexible when too many workers are tied down in one spot with a home. And when fringe exurbs are developed to allow for more lower-income families to own, it leads to enormous inefficiencies and a massive amount of energy wasted on extreme commuting. Etc.

Conservatives seem to want to blame Fannie Mae and Freddie Mac for the crisis, but though they went broke in part by facilitating the mistaken ideal of the "ownership society," they did not cause the current economic turmoil. Along with a choice quote from President Bush from 2004 in which he promotes "agggressive lending" to first-time borrowers -- how surprising that this hasn't worked out well -- Barry Ritholtz has a good concise explanation of what did cause the crisis:

To repeat my prior arguments, the proximate cause of the Housing crisis were (1) Ultra-low rates; and (2) Abdication of traditional lending standards, thanks to (3) originators ability to resell mortgages for securitization purposes, and hence, (4) not have to worry about loan defaults.
The credit crisis was caused by (1) the above securitized mortgage paper, that was (2) rated triple AAA by Moody's and Standard & Poors, which then (3) Which was then "insured" by credit default swaps (CDS) -- the unreserved for, shadow insurance products (4) whose exemption was made possible by the Commodities Futures Modernization Act. That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance.

Encouraged by the society-wide celebration of home ownership, mortgage lenders believed that their business was exempt from ethics or rational due diligence about the way funds were being distributed. So they lent to people without verifying whether they had any chance to pay off the loan, because that repayment was basically someone else's problem. (In some instances, Fannie Mae and Freddie Mac, which would repurchase mortgages from the negligent bankers who originally made them as long as they "conformed", i.e. were not "jumbo" loans for McMansions and the like, or subprime loans. These restrictions were supposed to protect Fannie and Freddie, only many borrowers turned out to be subprime, in effect, once house prices began to drop and they couldn't refinance. When these people began to default in high numbers, Fannie and Freddie were on the hook, having resold the mortgages as high-rated securities to other, mainly institutional investors who expected them to be guaranteed by the U.S. government -- hence bailout.) All these loans were made into securities, and they were rated highly because the rate of default was presumed to be low, and defaults were supposedly protected by the default-swaps, which provided for some other company to basically pay the mortgages if the lenders didn't. But defaults were much higher than expected, and no funds were reserved to cover the losses by those who provided the insurance -- instead, those insurers were leveraged to the gills. Hence A.I.G. gets nationalized, and banks stop lending to one another (aka Libor jumps astronomically), because they don't know which ones will go broke next. Lots of consumer rates, unfortunately, are pegged to Libor, which ordinarily tracks the Fed Funds rate closely. Right now, though, it's off the chart. So consumers can't afford to borrow anymore, which means the rest of the economy scales down for a recession. Welcome to Great Depression redux, according to economist Nicolas Bloom:

So why is this banking collapse and rise in uncertainty likely to be so damaging for the economy? First, the lack of credit is strangling firm’s abilities to make investments, hire workers and start R&D projects. Since these typically take several months to initiate the full force of this will only be fully felt by the beginning of 2009. Second, for the lucky few firms with access to credit the heightened uncertainty will lead them to postpone making investment and hiring decisions. It is expensive to make a hiring or investment mistake, so if conditions are unpredictable the best course of action is often to wait. Of course if every firm in the economy waits then economic activity slows down. This directly cuts back on investment and employment, two of the main drivers of economic growth. But this also has knock-on effects in depressing productivity growth. Most productivity growth comes from creative destruction – productive firms expanding and unproductive firms shrinking. Of course if every firm in the economy pauses this creative destruction temporarily freezes – productive firms do not grow and unproductive firms do not contract. This leads to a stalling productivity growth.

But at least people got to live in their "own" homes for a few years. It really gave us such a sense of pride while it lasted.

Fanny and Freddie Got Fingered (14 July 2008)

Okay, that entry title makes no sense for a post about the impending Freddie Mac/Fannie Mae bailout, but I just wanted to make a pun referencing the funniest movie of the 1990s.

Freddie Mac and Fannie Mae are in the business of guaranteeing residential mortgages, and not an inconsiderable amount of them -- more than half, as economist Jared Bernstein notes here. Freddie and Fannie masquerade as independent companies, but investors have always assumed that they are really government agencies and therefore can never go broke. If a spate of mortgages they had guaranteed went bad, taxpayer money would simply be requisitioned to allow the firms to continue operating, since they clearly don't have the capital on hand to deal with any significant problems. The wisdom of that assumption is now being put to the test, as Fannie and Freddie are spirialing into oblivion.

As mortgages became more and more subprime, they chose to keep up their market share, as Tanta at Calculated Risk details in this comprehensive post. Because of restrictions in their charters, they managed to avoid the worst of the housing bubble's excesses, but, as Tanta argues, they therefore missed the opportunity to use their clout to impose some discipline on the subprime business, and instead it remained the wild west of financing, a place full of dupes, dishonest brokers, and fat profits to reap -- as long as housing prices continued rising. That didn't happen, as many housing bubble skeptics including Dean Baker and Nouriel Roubini had predicted at the time. To ease problems the credit crunch brought to the private-lending market, legislators pushed to expand Fannie and Freddie's operations, a idea that investors are now seeming to recognize is a pretty bad one, likely to make their loan portfolios -- already threatened by sinking home prices everywhere -- become even worse.

With the companies' insolvency looming, the government has to do something (without them, buying and selling houses in America could become well nigh impossible), but the Republicans in charge are loath to admit the necessity of nationalizing them, nor are they eager to stick it to Wall Street by letting all of Fannie and Freddie's investors burn. So Treasury secretary Hank Paulson, confronted by a kind of ideological zugzwang, tried to gain a tempo by making an ambiguous speech (admirably parsed here by Felix Salmon). And that's where things stand currently.

At the FT site, Willem Buiter has the best explanation of what's wrong with all of this: it's "dishonest socialism":

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.
Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican administrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.
The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification. The creation of the Delaware SPV that houses $30 billion worth of the most toxic waste from the Bear Stearns balance sheet (with only $1 billion of JP Morgan money standing between the tax payer and the likely losses on the $29 billion committed by the Fed to fund the SPV on a non-recourse basis) is the clearest example of quasi-fiscal obfuscation I have come across in an advanced industrial country. The decision by the Fed to ‘invite’ the primary dealers and their clearers to collude in the (over) pricing of illiquid collateral offered by the primary dealers to the Fed at the newly created TSLF and PDCF (by the Fed accepting the pricing/valuation by the clearers of the illiquid collateral) is another example of the abuse of the Fed as a vehicle for channeling taxpayer-financed subsidies to the primary dealers. This form of socialism for the rich is therefore well-established.

This is how oligarchs prefer the economy to operate: Privatize the gains, socialize the risk. And it seems to me that the obfuscation brought on by the sacredness attributed to homeownership -- that anything is excusable as long as it helps "families" experience the indelible blessing of owning property -- is what enables it.

The homeownership cult (19 May 2008)

Tanta at Calculated Risk does us the service of dismantling the bizarre recent NYT editorial fretting over the "psychological scarring" brought on by foreclosure by economist Robert Shiller, once a stern critic of "irrational exuberance" who seems to have become an apologist for the homeownership cult and the property buyers who went in over their heads.. Foreclosure is no doubt painful, but I vigorously disagree with the idea that people skeptical of bailouts are "cynics". And this preposterous piece of ownership society propaganda made my eyeballs melt: "Homeownership is fundamental part of a sense of belonging to a country." Really? "People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it." Owning a home is "instinctual"? Aarrrgghhh. Not only am I not a real citizen, but I have faulty human instincts. Perhaps I should be interred somewhere to protect the ownership society at large. Then, Shiller wries,

The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”
Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

Apparently Shiller thinks we should adjust laws to help men's Selves feel sure of all their possessions, not just their houses but their women as well. If he owns her, he will feel at one with her, and isn't that a recipe for a good marriage?

As Tanta says:

I'm actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.
It is undeniably true, I assert, that not everyone was a speculatin' spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class "homeowner." But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.
It's worse than odd -- it's downright reactionary -- to then go on to that evocation of homeownership as good citizenship and good citizenship as "feel[ing] at one with [the] country." This puts a rather sinister light on Shiller's earlier insistence that we need to make sure people don't get too "cynical."

Amen.

At Naked Capitalism, Yves Smith also mocks this ludicrous editorial:

This piece illustrates much of what is wrong-headed about the "rescue the homeowner" concept. First, attempting to prop up assets at levels not supported by the underlying economics (in this case, incomes) does not work (see here for an illustration). The prices will in the end revert to a sustainable level, if not trade below them for a while in some (perhaps even many) markets. Japan is an extreme example of the consequences: low growth due to good capital being thrown after bad and delays in clearing out bad loans and recapitalizing the financial system so it could get back to its job of funding productive enterprise.
Second, keeping housing expensive hurts first-time buyers, such as the young and the lower income. It not only makes it more difficult for them to engineer a purchase, but in communities which participated in the housing boom, assures that their housing investment will be lousy, if not a loser. It's unlikely to appreciate from an inflated level; the best outcome would be for it to hold its nominal value for a long time while its real value gets eroded by inflation.

Then, in response to Shiller's call for a salve on the wounded psyches of distressed homeowners, she adds:

Moving if you are a kid sucks. But Shiller wouldn't argue that government intervention is called for to prevent family relocations due to getting a new job, divorce, deciding to be closer to aging parents. Note that other forms of financial trauma that might lead to a residential downsizing also fail to merit government subsidies, such as a renter having to move into even smaller digs (or moving in with parents or children) due to a job loss, high medical bills, or overspending. No, thanks to the sanctity of homeownership, giving up a house you can't afford is a tragedy deserving of Federal aid, while other forms of psychological or financial loss don't cut it.

That's it in a nutshell. Homeownership is seen as something we must protect at all costs, even for people who overreached; poverty, homelessness, health insurance, etc., etc., etc. -- not so much. The cult of homeownership has too many people brainwashed. Economist Tim Duy, looking at how out of whack home prices have become in Bend, Oregon, puts it succinctly in a very concrete context: "the magnitude of the misalignment in Bend is quite remarkable, and in my mind represents a complete failure of social policy. This is especially the case when policy has turned homeownership into a moral imperative, creating a culture that equates renting with failure and granite countertops with success."

Homeownership ideology (24 April 2008)

In a recent editorial for the Guardian, CEPR economist Dean Baker makes a point I was struggling to make in this column. Baker does a good job of explaining how irrational, economically speaking, it was for people to jump into the housing market over the past decade.

only an ideologue would view homeownership as an end in itself. One of the reasons that millions of families face foreclosure and/or the loss of their life savings is that the ideologues of homeownership continued to promote homeownership even when it was clear that buying a home would be financially detrimental.
Recognising the risks of homeownership in a bubble wasn't a matter of rocket science - it was simple arithmetic. The ratio of house sale prices to annual rent soared past 20 to 1 in the bubble markets, approaching 30 to 1 in the most inflated markets.
If a homeowner takes out a 7% mortgage (very low for a subprime buyer), pays 1% of the value in property tax each year, and another 1% for insurance and maintenance, then ownership costs are equal to 9% of the sale price. If the house sells for 20 times its annual rent, then this family is paying 80% more in housing costs as homeowners each year than they would pay as renters. If the house were selling for 25 times the annual rent, then the family would be paying 125% more as homeowners as they would as renters.

And the dropping prices and HELOCs assure that no equity was amassed either.

That all makes for good support for the point I was getting at in the column, which is that the pleasures of ownership are noneconomic, they are ideological and they cost extra, above and beyond what shelter you get out of the deal.

Only weirdos rent (3 April 2008)

Further evidence for the insanity of the "ownership society." Just about everyone in the econoblogosphere has weighed in on this NYT article by Louis Uchitelle about how the housing market is affecting the labor pool.

Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer.... Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people ... are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring.

Moving is a transaction cost in the labor market, and the housing bubble aftermath has made that cost exceedingly high. This is leading to more of what economists call frictional unemployment, raising the jobless numbers and undermining economic confidence and reinforcing the cyclical factors that sustain recessions. As Calculated Risk notes, "Less worker mobility is kind of like arteriosclerosis of the economy. It lowers the overall growth potential."

One way to ensure a more mobile labor pool is to encourage people to rent rather than own, so nothing ties them down to moribund regions like, say, Detroit, where the housing problems are perhaps the worst. Instead, the government does what it can to discourage renting, subsidizing interest payments made on real estate purchases. (David Leonhardt examines the foolishness of this in this NYT piece.) As Tim Harford pointed out in a Slate piece, "English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of unionization don't explain unemployment nearly as well as the tendency to own houses. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do." (He also notes that some people don't care about interesting work or don't believe they'll find it, and would rather have a cheap home with no job prospects; this creates sinks of discouraged workers in certain regions.)

Yves Smith adds this excellent point: "Uchitelle fails to acknowledge that home ownership has been discussed in the economic literature and found to inhibit labor mobility even in good times. Guess we can't question that American dream." The point is that Uchitelle's story is about the hardships of selling and owning homes in downturns, as if there were no alternative to home ownership. There is one: renting. But in America, it seems taboo to mention in a normative fashion. Only weirdos rent.

Gimmie Shelter (21 March 2008)

Lots of people think renting is for suckers. Part of this is because of landlords, widely reputed to be deadbeats who collect rent for doing nothing. But rent is just another way of consuming the necessary good called shelter; homeownership is simply an alternative that masks the consumption process as depreciation and mortgage payments. For some reason people don't mind paying bankers rent in the form of interest payments on the money they borrow to buy housing, perhaps because of the tax breaks on this expense. But mostly it is because people fetishize ownership and misconstrue homes as investment instead of consumption. This list of five home ownership myths (via Ezra Klein) makes this point very succinctly.

The reality is that housing is not an investment. It's shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn't be further from the truth.
Although home prices can go up (and down), the rate of appreciation on housing does not surpass inflation levels over the long-term. Between 1890 and 2004, the real return on housing was a pathetic 0.4 percent per year over the last 100 years, according to Robert Shiller, a housing expert and Yale economist.
Real estate investments aren't that much better over the short-term. The gain in new home prices over the last 20 years has been a mere fraction of the Dow's gain. The average person investing in stocks between 1987 and 2007 would have made more money than the average person who bought a new home in 1987.

The homebuying frenzy sustained a lot of people in the parasitical industries that surround the fiendishly complicated process of real estate sales, but that doesn't mean it was necessarily any good for the people making the purchases. Those now in negative equity are probably finding that out, and I wonder how much solace they have in the fact that they are making mortgage payments and not "throwing their money away" on rent.

Enemies of the ownership society (18 March 2008)

Anger seems to be building about the imminent government bailout of the players and institutions caught up in the burst housing bubble. BusinessWeek's recession roundup piece this week touches on the brewing unrest (though only to make them seem a bit like wild-eyed radicals):

The airwaves and blogosphere are alive with people who say nothing should be done. They argue that intervening now would only delay the inevitable liquidation of credit-fueled excesses. "Under proposed bailouts, responsible people lose and have to give their money to gamblers, liars, and sleazy lenders," says the widely followed Patrick.net housing blog.

This fury makes for the possibility of an otherwise unlikely shift in political orientation for the non-homeowning chumps who are going to end up being punished for their circumspection during the bubble's inflation. Latte-sipping liberals like myself are ordinarily unlikely to pay much attention to the government-hating complaints of libertarians, but this passage from economist Arnold Kling at Econlog seemed to strike a chord with me:

There was some predatory borrowing going on in addition to predatory lending. And the worst lending mistakes were made by the least regulated segment of the market. So you have inexperienced amateur real estate speculators getting financing from Rolex-wearing mortgage brokers who sell the loans to 24-year-old Beamer-driving Wall Street investment bankers. Why can't the rest of us just sit back and watch them all get what they deserve?
Instead, we get the Treasury and Congress coming up with "plans" to rewrite mortgages. These brilliant solutions contribute to making the mortgage securities market totally illiquid, because now nobody has any idea what the cash flows are going be under the (make them up as you go along) rules.

Earlier in this crisis, when the Fed was not handing out billions to investment bankers, I would have scoffed at the phrase predatory borrowing as a conservative sophism designed to conceal how ignorant but hopeful first-time buyers were led into deep water by unscrupulous mortgage brokers. The state, the media, and business all linked arms to tout home ownership as the only legitimate path to bourgeois security and fulfillment of the true American dream (the "ownership society"), and then aflame with that ideology, eventual subprime borrowers scrambled to get themselves some of that sweet home equity. Who could blame them? The abuses of the lending industry were so egregious, it was easy to overlook the overreaching by borrowers who were just trying to live the dream that had been foisted on them.

Seemingly everyone endorsed this program -- the state, the banks, the press, your friends and neighbors -- so now the sentiment appears to be that everyone should pitch in to clean up now that the program has been revealed to be a total mess. The housing bubble was a shared social problem that derived from people with laudable intentions but misguided methods. That's BusinessWeek's view:

There's a social aspect, too. Concentrated foreclosures, voluntary and otherwise, can destroy neighborhoods because abandonment increases decay and crime. And the housing crash undermines the social compact. "Talk about the rich vs. the poor was to some extent buffered by rising house prices. Now all you have to do is stare at your paycheck and your negative home equity," frets University of Chicago Graduate School of Business economist Raghuram G. Rajan.

But I am having a harder and harder time accepting that "social compact", or maintaining sympathy for borrowers in over their heads in homes (which incidentally have destroyed the countryside in which I was raised) that have far more space than they need. They were under ideological pressure to keep up, but somehow I resisted. If the housing problems exacerbates tensions between rich and poor, that might even be a good thing for getting some measures through to ameliorate income inequality in general. But instead we are getting measures that are worsening it.

So I agree with Kling when he writes this:

The people who most deserve to be in homes now are the people who decided in 2005 and 2006 that they could not afford the then-prevailing house prices or who decided to at least wait to accumulate a down payment. If you can sort out the predatory borrowers from the victims of predatory lenders sufficiently well to identify the latter, then the best thing that you can do with taxpayer money is to write checks for those victims.
The way I see it, government has served primarily to prolong and exacerbate the problem.

Sadly, there is little solace at this point in feeling like a smarty-pants for staying out of trouble and being resistant to the dominant ideology, when those in trouble are still getting the love and attention from the government in the form of tax breaks and handouts and, now, most likely, bailouts. It's becoming easier and easier to lump the borrowers in with the brokers and bankers who exploited the dream at the expense, it turns out, of skeptics and habitual rule-followers who thought twice about liar loans or thought it would be insane to expect home prices to continue to double every 18 months. The borrowers fueled the fire that is now burning through my money and the state's diverting it from investments that might help me much more directly.

Yes, preventing the Great Depression II is a worthwhile cause, but one that should have been forestalled by all the regulatory checks and balances in place to manage the economy. Instead, we had a Fed and treasury Department also wrapped up in ideology during the bubble-building years: they refused to regulate the exploding lending industry and kept rates unreasonably low for too long to keep lenders awash in cheap money, which inevitably found its way into hyperinflated home values. And if the expected bailouts come through, moral hazard will reign supreme, as will the underlying fantasia about the importance of owning homes.

In this climate, the Democratic presidential candidates seem to be saying the wrong things and the Republican candidate the apparently sensible thing:

In the Presidential race, Republican Senator John McCain doesn't want to bail out either side, favoring private workouts between borrowers and lenders. Here's how he summed up his feelings on Mar.11: "It is not the government's role to bail out investors...or lending institutions who didn't do their job." Democratic Senators Barack Obama and Hillary Clinton both tilt toward homeowners, but Clinton is more aggressive, calling for a voluntary 5-year freeze on subprime mortgage rates and a 90-day moratorium on foreclosures.

No one likes foreclosures -- everybody involved loses. But no one likes deadbeats either. And no one likes ridiculously unaffordable prices for residential real estate. And homeowners who can't afford the mortgages they signed up for -- credulously or not -- are not automatically victims. The real victims are the renters, who are seeing their rents increase with inflation while jobs become scarcer. That pool includes a lot of urbanites who you'd expect to lean Democratic, and they are probably more vulnerable than they would be ordinarily to some clever rhetoric from the Republicans. But then again, nothing about the current politicos in the G.O.P. leads me to believe that the party has the savvy or the inclination to make the pitch.

So the enemies of the ownership society have no place to turn.