Friday, October 28, 2011

Housing: A Modest Proposal

Face facts, there's plenty of blame to go around.

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We are all responsible for the current crisis in housing – we just need to accept it.  Consumers borrowed too much, the government subsidized those loans, lenders told consumers they could borrow more, banks took on troubled loans, builders kept building, and realty agents sold us an "investment" that couldn't ever possibly decline in value. Guess what?

The issues are quite simple:  too much household debt and a single illiquid immobile unproductive  asset that is a bad investment.  Time to face the facts and change the game.

Homeowners:  Face it – You were greedy and bet that your house's value would never go down.
  • The mortgage interest deduction on your income taxes has to end.
  • The U.S. Government can no longer afford to subsidize your "American Dream":  the subsidy drove up demand which in turn drove up prices, making houses less affordable and wiping out any assistance from the mortgage interest deduction.
  • If you stay in your house and you owe more than the house is worth, you have lost money that's not coming back.
  • Seek refinancing or debt relief; get on with life and look at relocating.
Government:  Face it – Your bad policy of subsidizing debt created undue systematic risk.
  • The mortgage interest deduction has to end.
  • Pay for debt relief and relocation assistance to people who find work elsewhere:  locales with many upside-down mortgages and few employment prospects need help.
  • Encourage people (notice I didn't say assist or subsidize) to stay mobile, rent, and look for work where it's available.
Lenders:  Face it – You were greedy and made too many loans to people of insufficient means.
  • If you can't regulate yourself and make responsible loans, the government will regulate you and tell you what loans you can make.
  • Make loans transparent and disclosure complete for housing consumers and purchasers of mortgage-backed securities.
Banks:  Face it – You were greedy and bought bad paper that you're going to have to eat.
  • You must understand the true value and risk of the mortgage-backed securities you purchase.
  • Your shareholders must take the hit for past mistakes.
Builders:  Face it – You were greedy and your business is not diversified.
  • There are too many houses on the market; there won't be a building boom for many years.
  • Diversify:  buy foreclosures, fix them up, and get them on the rental market.
Realty agents:  Face it – You were greedy and sold overpriced assets.
  • Stop selling houses to people that can't afford them; be honest and upfront.
  • Diversify into the rental market and manage rental properties.
If you want to own a house – great!  But go in with your eyes open to the costs and your ability to pay the bills.  For policy makers, know that high homeownership rates are not – by themselves – indicators of prosperity.  German homeownership is less than 50 percent; it's about 66 percent in the United States.

It is more important to be well housed than to own a house.  Maybe renting and staying liquid are not bad things after all.