— Sam Heppell (@HeppellSam) April 17, 2014
Some of the vituperation is coming from the usual gang of housing justice fairness activists incensed that anybody (let alone a majority of homeowners and experts) would oppose the practice of giving public assistance to people who borrowed money with no intention of paying it back. But a lot of the abuse stems from a sentiment I agree with — that declaring victory on mortgage defaults means you have to ignore how bogus the “recovery” of the real estate market is.
There are three main claims: 1. Banks are sitting on a massive number of non-performing loans and putting off foreclosure starts because that would mean realizing big losses on their balance sheets. 2. For years the “shadow inventory” of hopelessly distressed homes was said to be in the multimillions, and since it’s not clear what happened to those (estimated) numbers, there are still second, third and fourth shoes waiting to drop on the market recovery. 3. The short-term recovery of the market is the result of massive public expenditures, government support for real estate inflation, and outright deception; so the whole house of cards must eventually collapse.
I agree with the general idea here, and in fact I find the whole concept of the real estate “recovery” infuriating. But facts is facts, and there just isn’t a lot of support for the idea that a second coming of the real estate correction is imminent. The Wall Street Journal had bank-owned property at only 309,000 units in October. Also in October, CoreLogic had the full shadow inventory, including REO and other seriously distressed property, at just1.9 million — about three months of inventory even if it all hit the market at once.
It’s certainly true that banks dragged their feet on foreclosures in the past, through a combination of swamped processing infrastructure, general reluctance to own real estate, and probably an effort to disguise how dire their balance sheets were. But in fact, the reinflation of real estate increases the bank’s incentive to foreclose on a bad loan. In most cases, foreclosure is just a way of minimizing losses: you lose the value of the loan but you end up with an asset you can unload in order to make up some of what you lost to the deadbeat. But foreclosing on a bad loan in a rising market can be an attractive deal: The lender can potentially end up owning a property that is worth more than the amount of the remaining principal. For the same reason, bad borrowers in rising markets will try to avoid default and foreclosure. That happens more often than you might think: A Boston Fed report [pdf] from 2009 — a time when house prices were still plummeting — found that a third of bad borrowers managed to “self-cure” without any loan modification or outside help. That portion can only go up as the incentive to hang on to the property increases.
That said, I fully agree that the 2006 crash was only a partial correction that was interrupted, less than midway through its healthful work, by massive fiscal, monetary and regulatory interventions. As a function of income, real estate began 2006 outrageously overvalued; it hit the trough of the downturn only noticeably overvalued; and today it is stunningly overvalued. This is an imbalance that began in the 1990s and has gotten more pronounced, and it is well outside of historic norms.
For most of postwar history, a house cost about 1.5 to 2.5 times more than a person earned in a year. Today, even after the much-whined-about correction, it is more than four times as much. In 1940 the median U.S. income was $1,368; and the median house price was $2,938, a little more than double the income figure. In 1960 the income figure was $6,200, while the house price was $17,200, 2.77 times as much. In 1980 the ratio was 1/2.62, with income at $18,000 and house price at $47,200.
But by 2011, supposedly the bottom of the correction, a house cost more than four times what an American earned in a year: income $50,054; house price $212,300. It is a massively unfair situation, and like most contemporary unfairness, it is directed against the young, who are looking at an ever-growing chasm between what they earn and what it takes to buy a house.
The standard explanations for this imbalance are laughably inadequate. Does anybody believe this is all the result of low interest rates (which by the way are an artificial phenomenon that can’t be sustained indefinitely), or that houses today are that much more valuable because they have bigger bathrooms and granite countertops? As Edgar Guest might have said if he were a certified financial planner, it took a heap o’ swindlin’ to make these houses into overpriced homes. Land-use policy, relentless Realtor propaganda, heedless pro-homeowner lawmaking by both parties, and maybe most of all the IRS’s unjust mortgage-interest deduction (which indirectly encourages real estate ownership by directly encouraging real estate debt) all had a hand in creating this monster.
As 2006 proved, some parties can come to an end even though they have massive political, business, financial and popular buy-in. Like many of you, I long for the second coming of the real estate crash, and I’m encouraged that RealtyTrac estimates there are still 9.1 million homes underwater. But I also remember how intense the reaction was during the recession, when all the masters of the universe got together to “rescue” us from the threat of reasonably priced homes. All those same people are still working overtime to keep the so-called recovery alive. Fear them.
Never doubt that a large group of panicking idiots can prevent the world from changing, especially when they have all the guns, all the money and all the microphones.