Government efforts to prop up house prices are in effect mandating unaffordable housing and forcing the next generation to transfer wealth to the current one.
Irvine Home Address … 103 ORANGE BLOSSOM #97 Irvine, CA 92618
Resale Home Price …… $199,900
Just another lesson learned
Wear a scar, a bore repeating
Take a simple fateful turn
Opened up to stop the bleeding
Feeling like you never could
Been the disconnected frying
Hit the vein and struck a nerve
Seeing through a self that's blinding
Nowhere to buy in
Most of us hiding
Alice in Chains — Lessons Learned
The agents of denial seem bent on failing to learn the lessons of the housing bubble, or worse yet, they want to learn the wrong lessons. We are setting up a system where actions have no consequences, money is for the taking, and the bills get passed on to the prudent and law-abiding. All under the watchful eye of our bought-off politicians who will tell us the plundering of our nation's wealth was for our own good.
In my opinion, government has no place in setting market prices. We need regulations to ensure markets are transparent, contracts are enforceable, and our notions of justice are maintained. Even that level of regulation seemed burdensome to many prior to the meltdown of 2008.
Now the same people who wanted free markets and deregulation are looking for government policy to set prices in the housing market through any and all policies necessary. They can't have it both ways.
Affordability is at the heart of the problem. Lower house prices benefit new buyers who will be putting less of their income toward housing or obtaining better housing for their money. Affordable housing benefits the local economy because people have more disposable income they can spend on goods and services. Expensive housing is a drag on the economy that can only be temporarily masked by mortgage equity withdrawal. Contrary to popular belief, appreciation is not income.
Why Does The New York Times Want Government to Make Housing Unaffordable?
May 26, 2011 — Dean Baker
The lead New York Times (NYT) editorial tells readers that it is surprised and upset by the deflating of the housing bubble. It tells us:
“At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.”
Actually no; it never looked like “things were improving” to people who follow the housing market. It looked like the tax credits were temporarily delaying the deflation of the housing bubble. This delay allowed banks and investors to have hundreds of billions of dollars in mortgages, which would be underwater today, taken off their books and replaced by Fannie and Freddie guaranteed loans, through sales or refinancing.
That is exactly what happened. With the previous profits properly privatized and the losses put on the backs of taxpayers and ordinary citizens, banks may have averted the need for nationalization. This policy undoubtedly preserved the bonuses of the idiots who lead us into this disaster. Are you still convinced this was necessary to save the economy? I'm not.
Prices are still close to 10 percent above their trend level, based on either the 100-year long-term trend in house prices or the current price to rent ratio. Neither the NYT, nor anyone else, has provided an explanation as to why we should expect prices to settle above trend.
Dean Baker will have to be forgiven for not reading the astute observations on the IHB. He would find plenty of reasons offered for prices to remain elevated above any measurable historic norm. Some of those reasons are more plausible than others, but as the ongoing decline in prices will attest to, they are all wrong.
It is not clear why the NYT would view any delay in the bubble's deflation as a positive development. People who buy houses at prices that are still inflated by the bubble can anticipate losing money on their house. Does the NYT have some reason for thinking it is good policy to get new homeowners into homes where they can anticipate capital losses.
realtors maneuver buyers into homes where capital losses are likely in order to generate commissions for themselves. They endorse the same failed policies designed to keep prices inflated, partly out of their perceived function as the voice of buyer manipulation, and partly out of a desire to feel less guilty about their previous deceit when they told people to buy during the bubble. To realtors, every problem is solved by more buying at ever-higher prices, affordability be damned.
More generally, high house prices amount to a transfer of societal wealth from people who don't own homes to those who do. Since the latter group is much wealthier on average than the former group, why should it be public policy to promote this sort of upward redistribution of wealth?
Each house that sells for a bubble price represents a current buyer paying off the debts of a previous one. When a new buyer is compelled to overpay by artificially restricted supply, the excess is a direct transfer from the new buyer to the former owner. Since banks are now owners of large amounts of REO, they are happy to join forces with other owners and lobby for policies that promote higher prices and greater indebtedness being passed on to the next generation.
The NYT's failure to seriously think about the housing market demonstrates an extraordinary laziness that prevents it from clearly understanding the policy implications. The economy will have adjust to a situation where prices return to trend levels. This will mean lower consumption. (Isn't this what everyone wants — higher savings?) The lost consumption must be replaced in the short-term by government spending, in the longer term by more net exports. The latter will require a lower dollar. This is all Econ 101.
Lower consumption! The horror of it. What would happen to Orange County if people had to consume less and live within their means? i guess they would have to cancel the Real Housewives of Orange County and bring back Kung Fu.
As far as the housing market, a little clearer thought would get policy to distinguish between markets where the bubble is still deflating (e.g. Seattle, Los Angeles, Boston)
and markets where prices are likely overshooting on the low side (e.g. Los Vegas and Phoenix).
It might make sense to have policies to boost prices in the latter set of cities. It makes no sense to have policies to boost prices in the former.
Sacrilege! Everything possible must be done to preserve Irvine's home prices! If something isn't done to keep coastal California real estate prices inflated, the bank losses are going to be astronomical. Who cares about Las Vegas? They're a lost cause, right?
The common sense nature of Mr. Baker's commentary will not be popular in the inflated housing markets that remain.
Finally, the simplest and cheapest way to help homeowners facing the loss of their home is to give them the right to stay in their house as renters paying the market rent. This requires no taxpayer dollars and no new bureaucracy and would immediately help all the homeowners affected. For these reasons, it is a non-starter in Washington.
The real reason his right-to-rent idea is a non-starter is because it would flatten coastal California, and it would strongly encourage strategic default which would wipe out the banks.
The real answer is to let the process go forward unimpeded. Borrowers who cannot afford their homes will vacate them either through short sale or foreclosure. Many of those people will need to declare bankruptcy and start over. Once all the excess debt has been purged from the system, house prices will be lower, less income will be diverted to debt service, and the economy would improve as people saved money and had more disposable income.
The only problem with the best solution is the pain. Ponzis and loan owners aren't big on austerity, and they seek out bogus government solutions that amount to handouts and support politicians who endorse these bad policies. Ultimately, cooler heads will prevail, and despite the unnecessary diversion of resources to hold back the floodwaters, the market will flow and find it's own course. That's why prices are falling again now.
Left or Right?
I am a left-leaning libertarian who finds myself being pulled in both directions by what I observed in the housing bubble. I have become far more conservative about issues of personal responsibility, yet I have become far more liberal about getting out from under debt through strategic default. Some decry my hypocrisy. So be it. I believe personal responsibility to one's family outweighs one's responsibility to a lender.
I have become far more liberal about economics and regulatory issues. I have lost faith in the workings of unfettered capital markets to avoid Ponzi schemes and cycles of booms and busts, yet I have become far more conservative in what I perceive as sensible solutions for market regulation that take a minimalist approach.
The New York Times article mentioned above is one of the finest examples of empty-headed liberalism I have read in a while. After the author makes his bogus contentions that falling house prices are bad, he follows with this jaw dropper:
Since the problems in housing are not self-curing, a government fix is in order.
What? No. a government fix is not in order. Enforcement of government regulations and an improvement in those regulations is in order, but some makeshift bailout program designed to prop up house prices at the expense of the next generation is a rip off. it's government facilitated theft.
It's the ideal issue for a politician to pander to the middle class. Of course, such a position is giving the bird to renters and future buyers who would benefit from lower prices, but perhaps bailing out the middle class and baby boomers at the expense of their children will help someone get elected.
I hope not. People need to learn their lessons eventually.
Another long term owner that went Ponzi
My records don't go back far enough to say exactly when these owners bought, what they paid, and what they borrowed. However, it looks as if they purchased at the peak of the previous bubble in 1990. If that is accurate, they lost their home to foreclosure from excessive borrowing after 20 years of ownership. Very sad.
My records pick up with a $163,500 first mortgage on 4/1/2003. The bounced back and forth between Washington Mutual and World Savings Bank with various HELOCs until on 5/9/2005 they obtained a new first mortgage for $250,000.
The pinnacle of stupidity was Bank of America that gave them a $20,000 HELOC three months after the final refinance.
Apparently Wells Fargo got the servicing on this loan from World Savings Bank, and since they weren't on the second mortgage, they proceeded with foreclosure.
Foreclosure Record
Recording Date: 08/12/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 05/13/2010
Document Type: Notice of Default
Irvine House Address … 103 ORANGE BLOSSOM #97 Irvine, CA 92618 
Resale House Price …… $199,900
House Purchase Price … $186,454
House Purchase Date …. 10/12/2010
Net Gain (Loss) ………. $1,452
Percent Change ………. 0.8%
Annual Appreciation … 10.5%
Cost of House Ownership
————————————————-
$199,900 ………. Asking Price
$6,997 ………. 3.5% Down FHA Financing
4.56% …………… Mortgage Interest Rate
$192,904 ………. 30-Year Mortgage
$42,184 ………. Income Requirement
$0,984 ………. Monthly Mortgage Payment
$173 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$42 ………. Homeowners Insurance (@ 0.25%)
$222 ………. Private Mortgage Insurance
$275 ………. Homeowners Association Fees
============================================ 
$1,696 ………. Monthly Cash Outlays
$0 ………. Tax Savings (% of Interest and Property Tax)
-$251 ………. Equity Hidden in Payment (Amortization)
$12 ………. Lost Income to Down Payment (net of taxes)
$45 ………. Maintenance and Replacement Reserves
============================================
$1,502 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$1,999 ………. Furnishing and Move In @1%
$1,999 ………. Closing Costs @1%
$1,929 ………… Interest Points @1% of Loan
$6,997 ………. Down Payment
============================================
$12,924 ………. Total Cash Costs
$23,000 ………… Emergency Cash Reserves
============================================
$35,924 ………. Total Savings Needed
Property Details for 103 ORANGE BLOSSOM #97 Irvine, CA 92618
—————————————————————————— 
Beds: 1
Baths: 1
Sq. Ft.: 819
$244/SF
Property Type: Residential, Condominium
Style: Two Level, Contemporary
View: Creek/Stream
Year Built: 1976
Community: Orangetree
County: Orange
MLS#: P781272
Source: SoCalMLS
Status: Active
——————————————————————————
Amazing price for this Orangetree condo with creek/stream views. Upper level end unit with 1 bedroom + Loft, 1 bath, approx. 819 sq. ft. that has: NEW interior two tone paint. NEW exterior paint. NEW carpet. NEW kitchen counters/sink/faucet. Eating area/living room/kitchen all overlook each other. Neutral colors throughout. Central heat and a/c. Laundry area in kitchen. Vaulted ceilings. No one above you. THIS IS NOT A SHORT SALE. Seller will assist owner occupied buyer with closing cost assistance-Call for details. Come on by and take a look today!
Have a great weekend,
Irvine Renter
It appears as if your “pre-bubble projected values” still say the same thing as all the kool-aid drinking realtors.
“Real estate only goes up. It may go up slower than the during the bubble but rest assured, it ONLY goes UP! No, Really. Can’t you see? The long term projection is up Up UP!!! Trust Me!”
Yes, I wonder about that too. There are any number of lines that can reasonably be drawn through that data, and a much flatter one makes as good a fit or better than the one drawn. There seems to be an at least inflation+ bias built in.
I’ve been pointing out the generational problem to anyone who will listen in the past year or so. It’s mostly fallen on deaf ears, but good to know I’m not the only one who has come to this conclusion.
We’re almost to the point that the only way the housing market in some areas will see pricing corrections to historical levels are once baby boomers start flooding the markets with. First the banks foreclose, when the sooner one decides to do so, the better off their individual balance sheet will be. The longer they wait, the lower prices from short sales will be. Same goes for boomers looking to retire somewhere cheaper. It’s just going to be another race to the bottom.
What happens if we have QE2.5, QE3, QE4, etc.
I have come to the conclusion that there is too much debt out there and not the will to pay it back. So the fed will print enough money over the next 5 – 10 years to make the debt go bye bye.
This time around there may not be a race to the bottom. Yes prices declines will happen to some degree, but when they do, look for the fed to “stimulate the economy to create American jobs” – AKA print money and screw savers.
At some point nominal prices will increase, but real prices, inflation adjusted, will continue to decline. Why is this important as long as it looks like people are increasing equity in their home? Because they will have less of their income to spend on housing as necessities become more expensive than homes. The equity in homes, although increasing in dollar terms, will be worth less in comparison.
I agree. But I still don’t see a “It’s just going to be another race to the bottom.”
I see the gov doing the best it can to burn off the debt and prop housing with extra dollars, even if savers get screwed and as you say “necessities become more expensive than homes”.
There is no doubt in my mind that the gov and the Fed will do everything in their power to, and will be successful “burning off the debt” with electronically printed money. But, cancellation of debt through the printing of money only transfers the burden onto someone else. At it’s most basic level, money represents productivity and no amount of magic, debt creation, credit creation, or fractional reserve can change that. The piper must and will be paid, in this case through devaluation of the currency. The losses of the banks will be transferred to the citizenry.
I can not speak to any “race to the bottom.” I am not sure what that even means.
My “race to the bottom.” comment was in response to the original post. I think they are thinking that RE values in OC are going to drop 30% – 50%. I have given up on that.
“The losses of the banks will be transferred to the citizenry.”
Perhaps. Those with long term bonds won’t do so well if the fed devalues the $. For me, I am moving my cash into hard assets and borrowing as much 30yr sub 5% fixed rate money as I can. I have 3 mortgages, looking to get more on rentals that cover my cash payments. If the fed devalues, I pay off the loans with cheap dollars, if they don’t, I sit and wait for the loans to pay down.
Just trying my best not to be the sucker paying for the idiotic behavior of the banks.
Exactly. IR’s title is backwards because the main method to boost housing prices is money printing. More dollars make a dollar with less which licks the pockets of the retired & about to retire by devaluing their bonds, and chipping away at social security tied to a too lowly stated inflation rate.
Meanwhile, the value of real goods (like an hour of a younger productive workers time) will increase. So it’s a transfer of wealth from the old to the young (and debtors).
Another 30% to 40% sounds about right, but it will not be in nominal dollars.
“flooding the market with homes”
Hey, government price controls are the norm in the USA – we really are a pseudocommunist state…
Food: price supports for dairy, corn, grains… we pay people not to produce
Medical: Medicare (US gov sets prices, doctors, hospitals are not permitted to set their own charges, in many cases, fees set by your government are at or below cost)
Why should housing be any different, quit complaining or do something about it!!!!!
IR is a blog writer, not someone that has cornered you in the employee break room and is complaining, drowning on and on.
If you don’t like his expressed views, why are you reading his blog?
Sorry for this late reply… Didn’t know that my comment would upset you so much…
IR (don’t get me wrong) is a blog writer, but the wording of the title “unaffordable” implys the writer is against this policy, otherwise the writer (IR) would have used neutral phrasing (e.g. maintaining high price support level)instead of unaffordable.
I am mearly pointing out the the Feds interfere with supply and demand all over the economy. I didn’t even get into unemployment benefits. I know people who would like to go back to work but can’t becasuse they make more on unemployment and got free health insurance courtesy of the Feds stimulus program..
Actions of the Feds must be viewed as a whole when retorical existential questions are posed..
“Why should housing be any different, quit complaining or do something about it!!!!!”
I am not upset. Your comment sounded as though you expect IR to change the gov or stop blogging.
IR’s blogging is his version of “do something about it!!!!!”
Agree with you about unemployment benefits. I know small business owners that have entry level openings but applicants respond with a “that is only a dollar or two more an hour then I get on UE and spending my days at the beach and gym, no thanks”
The unemployment rate would be lower without the gov paying people not to work.
Not new news (OK that’s redundant), but worth restating:
Foreclosures are 45% of sales in California (and Arizona, and 53% in Nevada). And there is a 3-year supply of foreclosures for sale nationally.
Source: RealtyTrac, CNNMoney
As for the featured home today, I could see some young buyer scooping it up at $187K and thinking they got a deal. They won’t make any money off of it unless they stay in the thing more than 10 years (5 years being the usual break-even), but it’s arguably better than the 1br, 2ba, 2 car garage 900sqft job featured last time. The price on a unit like this will probably bottom in the $160-175K range. Just a guess.
The current buyer won’t stay because they can’t stand living in 819sqft of stucco any longer, with no kids anymore to justify the costly Irvine lifestyle. They want to move, and they want to move now… and before prices drop any further.
IR,
looking at your graphs, I wonder why you chose the doubling time for nominal prices at 14 years in “nicer” markets, but 18 years in “lesser” markets?
The calculation would be based on income growth. In markets where income grows faster, prices would double sooner, assuming differential income growth can be sustained indefinitely.
The line I drew was somewhat arbitrary based on my eye, but I maintained the same general slope to reflect the same dynamics are at work in each market.
Looking at NAR’s affordability index was quite relevatory for me. Up until 2008.04, OC affordability tracked that of California. But since then, OC has flattened out at around 33% while California represents a genuine opportunity with affordability at unprecedented levels of 50+ %. It is remarkable how little OC has corrected this time in terms of affordability compared to the last cycle. My 2006 estimates worked out on average, but just not in Irvine. In such an environment of unprecedented affordability levels for CA and nationally, I find it hard to see big drops for Irvine, much to my disappointment. I think we will just see more of the same – slow deflation and perhaps lagging inflation when things turn around.
The thread question is “Should unaffordable housing be a government policy?”.
The obvious answer is “no”, but if any level of government has a significant portion of its revenues linked to housing prices then like it or not they are going to do whatever they can to keep those prices high. Regardless of political orientation, and regardless of stated policy.
I live in Australia, where median prices today are much higher than the California peak and still rising. We continuously get politicians crying crocodile tears over unaffordability for first-home buyers, but in 30 years I have NEVER seen a single proposal (let alone action) that would significantly change matters.
FCB’s (the type I have experience with – Canadians) to provide a floor to Vegas pricing?
Low prices, low taxes strong lures for Canadians buying in Las Vegas
Can a distant landlord make money in LV? How’s the upkeep cost for rental property. I found that rents in the midwest can cover typical regular cost, but it’s the high use of the HVAC, hard weather and high insurance cost that eats way at the profit. The lawn care cost is more costly and of lower quality than in CA.
“banks may have averted the need for nationalization” The banks have gotten the best of both worlds — nationalize the loss and privatize the profits.
“they are happy to join forces with other owners and lobby for policies that promote higher prices and greater indebtedness being passed on to the next generation.” Not only this but stack the youngin with staggering student debt/loans and send them off to wars to preserve the above against even a worse system that the US support to destabilize the USSR, the “evil empire” to hot war agaist whole scale evil system.
“I am a left-leaning libertarian”
WTF is that? So you are pro-abortion, gay marriage, and drug use, but you want to take others’ tax dollars to pay for it? Libertarians are low tax, pro-gun, drive, eat, and drink what you want, pro-school choice, anti-regulation, and anti-Fed and anti GSE.
How anyone can look closely at this credit and real estate bubble-and-burst, and not see it was largely the result of *too much* government interference, as opposed to not enough, is astounding. The Fed keeping rates low and Fannie and Freddie buying up every FICO mortgage over 600 they could find (biggest lie ever: Fannie and Freddie didn’t buy subprimes – WTF do you call a 620 FICO with no down?) were public enemies #1. This would have just been a minor-to-moderate subprime crisis had they stayed out of the way. Instead, it has been the worst catastrophe since 1929.
Thanks, government.
Having lived in other countries, this whole USA “Ownership Society” concept that requires govt. susbsidization is bizarre.
Other countries, like Canada, actually have a higher percentage of home ownership than the USA,
(68.4% in Canada in 2006 vs. 67.4% in USA in 2009 and falling) yet no mortgage interest rate deduction.
Should unaffordable housing be a government policy? In a word, no.
It just distorts prices.
http://www.statcan.gc.ca/daily-quotidien/080604/dq080604a-eng.htm
http://en.wikipedia.org/wiki/Homeownership_in_the_United_States
“I believe personal responsibility to one’s family outweighs one’s responsibility to a lender.”
The responsibility comes before making the biggest purchase in your life, not when you make a bad bet and want a mulligan. The only thing you’re doing for your children at that point is teaching them to be deadbeats.