Karl Denninger nails it in his post today about the housing market, responding to Bill Gross's recent comments (Gross said that as a private investor, he'd require purchasers to put 30% down, which, he clarified, isn't feasible for most first time homebuyers).
I could cut and paste and blah blah blah, but hey - go read Denninger's post. Here's the bottom line (my words, not Denninger's):
The reason that people can't afford to make real (that is: in the neighborhood of 20%) down payments is because, and I've said this many times before, home prices are too high - not because home prices need more stimulus/support/propping up.
Ok, now I'll give you the Denninger cut & paste:
Ok, now I'll give you the Denninger cut & paste:
"In point of fact the government should encourage prices to contract to affordable and stable levels, from which they should not vary materially on a forward basis. This then turns homes into a place to live, instead of a speculative asset class.
Bill Gross says that the "cost" of a private system could be 300 basis points over Treasuries. So what?
He says this makes housing "unaffordable." My retort is at what price?
Notice what's not being talked about here: actually deflating the bubble, and returning homes to a price where Americans can actually afford them."
Now, why don't we do this? Why don't we let home prices fall to lower levels? Why do we want home prices to stay inflated? Well - that's another question, and I think it gets back to the whole issue of pretending that the Big Banks are still solvent. If home prices fall, borrowers walk away, and banks get hosed on the loans they've written against bad collateral... Hence, policy is designed to prevent this reality.
disclosure: long a home
-KD
9 comments:
I think we continually prop up housing for three reasons, in no particular order: banks, property taxes, and homeowners are regular voters.
Another reason for low/no down payments is that there is very little real money in the economy (for whatever reason).
High prices for land (housing) are what makes our economy sclerotic. Workers need to earn higher wages to afford housing, which chokes off risk-taking and innovation. New enterprise is stifled. Who benefits? The older people who happened to live in the right place at the right time, and can now sell and move somewhere cheaper.
Private mortgages, not taxpayer/printing subsidized mortgages. Get rid of the absurd zoning regulations that grant a de facto oligopoly to expensive home builders. The 1000 sq ft homes common in much of the rest of the world are perfectly adequate. Let citizens build homes the size they can afford. Don't build only homes that the top 20% can afford, and then expect taxpayers to subsidize them.
KD:
Your disclosure provided me much needed comic relief. I too am "Long: A Home," although I feel like a sucker, especially since my lender Wells Fargo keeps sending me junk mail about doing a refi, but then when I call them they tell me that I have a 1:1 loan to value ratio so I can't refi. I just have not developed the cojones/chutzpah/spine to tell them "Better that you allow me to refi than for me to just strategically default and leave you with a $40,000 loss." Must be my antiquated bourgeois values - I guess I'll never be a banker, Treasury Secretary or a Chair of the Fed ;-0
"disclosure: long a home"
Hardy har har.
disclosure: long a home
classic!
"Now, why don't we do this?"
Well, you know the answer to this. Because the whole ponzi scheme would collapse. We've cornered ourselves.
1) Much of the middle class relies on their home for most of their Net Worth. When net worth is high, people spend more, driving the recovery. (While this is true, i say nothing about it being an appropriate policy goal.) 2) Many retirees are dependent on the value of their home (see item 1) to fund their retirement and decide their spending levels. 3):1) and 2) comprise a majority of participating voters.
right Anon @ 2:37am - but don't you think that's a more recent phenomenon - a result of the "treat the house as an ATM" syndrome that developed during the bubble in the middle 2000s?
We need to get back to how it used to be... where a house was a home and not a paper indicator of net worth.
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