Home prices

Our leaders and central economic planners continue to destroy our economy and currency in what will be a vain, and monstrously expensive, attempt to sustain unsustainable home prices.  Back in 2002 and 2003,  politicians and central bankers lowered interest rates to well below the rate of inflation, and implemented policies intended to increase “home ownership.”  This bit of central economic planning and social engineering lit a fire of malinvestment.  For the next few years these masters of the economy poured gasoline on that fire, until it was an uncontrolled blaze of greed, irresponsibility and insanity that would eventually make the dotcom craze look tame by comparison.  The whole country, with few exceptions, bought into the notion that one could get rich by borrowing money, and that as long as one had a heavily mortgaged home (or two), it wasn’t necessary to save or exercise any fiscal prudence.  The market was ablaze, and everyone was dancing in the flames of home equity loans.    Semantic abominations like “starter home” and “flipping” were on the lips of seemingly everyone in America.  Folks who couldn’t afford rent a year earlier, were suddenly real estate tycoons.

Of course it was all nonsense. It ended just the way free market economists predicted it would end.

As long as the human spirit craves something for nothing there will be asset bubbles. We’ve had many in the history of capitalism. We’ll probably have more.  When asset bubbles burst, the asset prices return to sane levels, and those who bought into the notion that sanity wouldn’t return, or that they’d grab their money and be out before that happened, have to pay the price for having gambled and lost. Obviously those who gambled and lost shouldn’t look to their government, or their prudent neighbors, to make good their losses, or to re-inflate the values of the deflated assets.

But that is just so old-fashioned. This is 2009. And in the USA in 2009 evidently that is exactly what we do.

I’ve been blogging about this a long time, as long-time readers know. But it still baffles me that we have adopted a national economic policy designed to try to keep home prices as high as possible, and at any cost. For a moment just stop and dispassionately think about that. We are bankrupting our nation, and compromising essential components of our national character and form of goverment, to try to keep home prices high. Home prices?? Keep them high?? Why on earth would anyone in their right mind want to keep home prices high?

It is undeniable that during this bubble home prices were inflated absurdly. The average person couldn’t possibly afford the average house, absent crazy lending practices. Otherwise sane people were borrowing obscene amounts of money to buy houses, because they had come to believe that the houses would appreciate so much that they’d get rich, notwithstanding the fact that they couldn’t possibly afford to repay the loaned amount.

If our economy is to ever begin functioning normally, such malinvestment must be liquidated, and asset prices must reset to reflect reality.

Professor Robert Shiller of Yale developed the Shiller Home Price Index and correctly identified the housing bubble long before it burst. (Others who notably called it, and were dismissed as kooks at the time, included Peter Shiff and Ron Paul). According to Professor Shiller’s analysis, home prices are still way too high and will continue to drop.

Case-Shiller U.S. National House Price Index

 In fact, here’s an interview with Professor Schiller in late February in which he says that home prices have only fallen one half of the way to their true fair value.  http://finance.yahoo.com/tech-ticker/article/190712/Shiller-House-Prices-Still-Way-Too-High?tickers=%5Egspc,%5Edji,hd,kbh,tol,ctx,xhb

And for my fellow data-lovers: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_033114.xls

So why are we risking the future of our nation on seemingly crazy economic policies, hoping to prop up vastly overvalued home prices?

It seems that millions of Americans just refuse to accept the fact that their homes are worth less than they paid for them, or, more often, the amount that they’ve borrowed with the home as collateral. They demand that the government do something to make that not be true. They can’t let go of their dream of wealth through mortgage borrowing, and cannot accept the idea that they may have just made a bad decision.

But I don’t get it. Let’s assume a hypothetical borrower took out a mortgage to buy a house for $300,000 and a year later the resale value of the house has dropped to $200,000. So what? Americans buy depreciating assets with installment loans all the time. Most cars bought in America, for example, are worth less than what’s owed on them the moment they’re driven off the sales lot. If my hypothetical borrower pays his mortgage off, he gets exactly what he bargained for, and at exactly the price he agreed to pay. What’s the problem with that? Some answer that question by saying that the borrower is trapped and can’t sell the house. I respond, so what? It’s a house. Live in it if you can’t afford to sell it. And those who are forced to sell because they have to move, for example, get the benefit of the fallen home prices when they buy a new home in their new community at the newer lower prices. They lose on the sale, but gain on the buy. And consider a first time buyer. Perhaps now he or she can actually afford a house without having to borrow a ridiculous amount of money. My niece and her husband just bought their first home. They paid about half what the prior owner paid. They simply could not have afforded that house at its prior inflated price.

The free market sets prices where they belong. Falling home prices are a good thing, not something to be prevented. The government needs to get out of the way and let the market work. And it needs to forget the ridiculous idea that the way to make homes affordable is to make credit cheap, rather than to let prices drop.



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