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Mickey & The Housing Crisis



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Many readers take exception. A few examples:

Kaus is right, cheaper homes are good.

He misses the significance of a 6.5% drop.

Say you bought a house for $500K and put 5% down. You
also paid 2% in closing costs. So you paid $510K and
put $50K of your money in.

Now prices have fallen “only” 6.5%. Your house is
worth $467K. You pay 6% realtor commission and another
2% closing costs. You end up with $430K.

You lose 100% of the equity and still are $20K in the
hole.

That is a crisis.

And 6.5% is nationally. In Florida it is more like
15%. And it is not even close to being over. Look for
35% losses by 2009.

Ahh how nice it is to have seen this all coming, sold
my house and rented for the past year. I was called a
chicken little and a doom and gloomer. Now I believe
the word I am looking for is RIGHT.

And:

Jonah,

I’m not trying to be your mortgage guys here, but Kaus is way off base.

He’s actually significantly underplaying the problems in housing. While it isn’t a “crisis” it’s not a non-problem. Since the Case Schiller index started, a 6.3% drop is the biggest in the history of the index. It did not return to the 1989 peak (unadjusted for inflation) until 1997. It’s a short history, but matching the biggest drop in history is pretty bad, especially considering the effect the last housing bust had. The problem is people are used to the stock market which is far more liquid than the housing market. Busts in the market tend to be slow deflations. When there are declines in housing, people are reluctant to sell when they’re underwater and buyers are content to wait it out, which puts a further drag in the market. Since most homeowners use their equity to buy houses, the significant loss in equity from the current bust combined with the reluctance of banks to lend at low rates with low money down actually makes home ownership more difficult today than a year ago. Because of the 1990 bust, housing has only had a 6.9% annual return from 1987 to the recent peak, compared with 10.4% in the stock market. The recent run-up was largely making up for a decade of stagnation. I wouldn’t be to blase about the current issues.

And a few get his back:

 

Wasn’t it the “un-affordability” of housing several years back that lead
many lenders to invent ways of loaning money to people who were otherwise
unqualified? I vaguely recall calls from the left to fix the discriminatory
lending practices which were preventing low income families from owning
property. Guess they overfixed it…

And:

It’s now considered a crisis because, as the argument goes, people have been tapping their home equity to sustain consumer spending, which drives the economy. But that violates nother traditional argument of the press: consumer debt is a bad thing. Now it’s suddenly a good thing.

Probably this, as much as anything, reveals the geographic and class biases of the press: they disproportionately live in expensive housing markets and have watched as they and their friends home values have nosedived.

For those of us looking to buy a home and start families, however, this is no “crisis” – it’s great news. The spike in home values made it seem as if owning a decent home would always be out of reach. That the press doesn’t pick up on this explains why they don’t seem to be too enthused about any other populist arguments making the rounds (immigration, tax rates, and so forth). They buy whole-hog into arguments to start yet another brand spanking new government program to help the poor/middle class. But no one in the middle class who I know wants another government program to “help.” We’d just prefer to watch market forces turn our way, for a change. Less immigration and lower home prices, among other things, would have a big affect on that.



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