From WSJ.com
BUSINESS WORLD
By HOLMAN W. JENKINS, JR.
DOW JONES REPRINTS
This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:
www.djreprints.com.
• See a sample reprint in PDF format.
• Order a reprint of this article now.
Let Houses Find a Bottom
February 27, 2008; Page A16
We have nothing to fear but fear itself, a president once said, and thereupon embarked on a series of ad-libs some of which deepened and prolonged the country's depression.
Any debate about a housing bailout can be put aside -- the bailout is underway, even in advance of specific plans being shopped around Washington by Bank of America to prop up home prices with direct subsidies to homeowners whose debt exceeds the value of their houses. No, the perverse effect won't be a replay of the '30s, or even Japan's decade of stagnation in the '90s, but the latter is your model, with a little inflation thrown in. The goal: avoid foreclosures and slow the fall of home prices to market-clearing levels.
Notice that today's bailout will be the opposite of the misnamed S&L bailout of the '80s. Then, only depositors, whose money was guaranteed under federal law, were bailed out. The federal government closed down thrifts, wiped out their shareholders, seized loan collateral and dumped it back on the market, even at firesale prices.
But this time, the liquidationist school has been routed -- so named for Herbert Hoover's Treasury secretary, Andrew Mellon, who said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rottenness out of the system."
Making the hole even harder to climb out of in tough-love fashion, government policy itself played a big role in creating the bubble, on the bipartisan theory that homeownership begets "social stability."
Like all good things, when converted to a slogan, this idea became our road to perdition. Charles Kindleberger, the late MIT economist who wrote the classic handbook "Manias, Panics, and Crashes," noted as early as 2002 an emerging housing bubble. In an interview with this newspaper, he pointed a finger first of all at Fannie and Freddie, whose channeling of government subsidized capital into the housing market helped turn housing into a leverageable, tradeable asset class.
Result: The minting of new homes and home loans as speculative chits, which in turn has made housing more susceptible to the ups and downs of other speculative markets.
So here's the question: Do the people who would be bailed out want to be bailed out? Do they benefit from being bailed out?
For starters, many homebuyers in the last two years were rank speculators, taking out zero-down subprime loans, then walking away when the bet didn't pay off. A careful study of recent Massachusetts foreclosures by Federal Reserve Bank of Boston economists suggests that the key factor wasn't an inability to pay, but an unwillingness to pay, once falling house prices made homeownership no longer a winning speculation. These people are already skipping out, because that's their best option.
Next up, what about the low-income homeowners who (unlike speculators) were the intended beneficiaries of homeownership expansion policies? Both President Clinton and President Bush championed such initiatives, and now 69% of households own their homes, up from 64% in 1992.
Do the poorer households that were the targets of these initiatives actually benefit from homeownership? Carolina Katz Reid, then at the University of Washington, looked at the question systematically, using subjects who bought houses between 1977 and 1993. For most low-income households, homeownership proved a bad bet, even in a rising market. Mortgage costs ate up their incomes and tied them down in subpar neighborhoods with bad schools and inferior job opportunities. Their capital gains were subpar or nonexistent even if they managed to hold onto their houses for a decade. Lacking much income, they didn't benefit from the mortgage-interest deduction.
So much for subsidizing our way to greater "social stability" by luring marginal borrowers into debt to own a home. The truth today is that politicians are rushing to prop up house prices not to rescue the poor from the ignominy of renting, but to get past the next election without affluent voters having to confront a realistic decline in the market value of their main assets.
Most of these homeowners are still above-water in their home equity; though job changes or the prospect of job changes may make them sensitive to current market prices, many are not in need of selling.
In the meantime, drawing out the correction prevents the market from finding a bottom. It prevents owners and shoppers alike from having confidence to judge what houses are worth. It bails out lenders and investors who incautiously or fraudulently financed home purchases for speculative buyers, which can only encourage more of the same behavior in the future.
As piles of money shoveled out in the wake of 9/11 and Hurricane Katrina showed, even with untold trillions of dollars in unfunded entitlement liability hanging over the federal government, there is little resistance to contracting vast new liabilities whenever large numbers of voters are in distress, even if (as now) their own choices played a role. A more honest use of taxpayer money at least would be to buy up houses at foreclosure auctions and demolish them, especially in neighborhoods likely never to recover. The true fillip to "social stability" right now would be to nip in the bud the blighted, suburban slums of the future.
BUSINESS WORLD
By HOLMAN W. JENKINS, JR.
DOW JONES REPRINTS
This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:
www.djreprints.com.
• See a sample reprint in PDF format.
• Order a reprint of this article now.
Let Houses Find a Bottom
February 27, 2008; Page A16
We have nothing to fear but fear itself, a president once said, and thereupon embarked on a series of ad-libs some of which deepened and prolonged the country's depression.
Any debate about a housing bailout can be put aside -- the bailout is underway, even in advance of specific plans being shopped around Washington by Bank of America to prop up home prices with direct subsidies to homeowners whose debt exceeds the value of their houses. No, the perverse effect won't be a replay of the '30s, or even Japan's decade of stagnation in the '90s, but the latter is your model, with a little inflation thrown in. The goal: avoid foreclosures and slow the fall of home prices to market-clearing levels.
Notice that today's bailout will be the opposite of the misnamed S&L bailout of the '80s. Then, only depositors, whose money was guaranteed under federal law, were bailed out. The federal government closed down thrifts, wiped out their shareholders, seized loan collateral and dumped it back on the market, even at firesale prices.
But this time, the liquidationist school has been routed -- so named for Herbert Hoover's Treasury secretary, Andrew Mellon, who said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rottenness out of the system."
Making the hole even harder to climb out of in tough-love fashion, government policy itself played a big role in creating the bubble, on the bipartisan theory that homeownership begets "social stability."
Like all good things, when converted to a slogan, this idea became our road to perdition. Charles Kindleberger, the late MIT economist who wrote the classic handbook "Manias, Panics, and Crashes," noted as early as 2002 an emerging housing bubble. In an interview with this newspaper, he pointed a finger first of all at Fannie and Freddie, whose channeling of government subsidized capital into the housing market helped turn housing into a leverageable, tradeable asset class.
Result: The minting of new homes and home loans as speculative chits, which in turn has made housing more susceptible to the ups and downs of other speculative markets.
So here's the question: Do the people who would be bailed out want to be bailed out? Do they benefit from being bailed out?
For starters, many homebuyers in the last two years were rank speculators, taking out zero-down subprime loans, then walking away when the bet didn't pay off. A careful study of recent Massachusetts foreclosures by Federal Reserve Bank of Boston economists suggests that the key factor wasn't an inability to pay, but an unwillingness to pay, once falling house prices made homeownership no longer a winning speculation. These people are already skipping out, because that's their best option.
Next up, what about the low-income homeowners who (unlike speculators) were the intended beneficiaries of homeownership expansion policies? Both President Clinton and President Bush championed such initiatives, and now 69% of households own their homes, up from 64% in 1992.
Do the poorer households that were the targets of these initiatives actually benefit from homeownership? Carolina Katz Reid, then at the University of Washington, looked at the question systematically, using subjects who bought houses between 1977 and 1993. For most low-income households, homeownership proved a bad bet, even in a rising market. Mortgage costs ate up their incomes and tied them down in subpar neighborhoods with bad schools and inferior job opportunities. Their capital gains were subpar or nonexistent even if they managed to hold onto their houses for a decade. Lacking much income, they didn't benefit from the mortgage-interest deduction.
So much for subsidizing our way to greater "social stability" by luring marginal borrowers into debt to own a home. The truth today is that politicians are rushing to prop up house prices not to rescue the poor from the ignominy of renting, but to get past the next election without affluent voters having to confront a realistic decline in the market value of their main assets.
Most of these homeowners are still above-water in their home equity; though job changes or the prospect of job changes may make them sensitive to current market prices, many are not in need of selling.
In the meantime, drawing out the correction prevents the market from finding a bottom. It prevents owners and shoppers alike from having confidence to judge what houses are worth. It bails out lenders and investors who incautiously or fraudulently financed home purchases for speculative buyers, which can only encourage more of the same behavior in the future.
As piles of money shoveled out in the wake of 9/11 and Hurricane Katrina showed, even with untold trillions of dollars in unfunded entitlement liability hanging over the federal government, there is little resistance to contracting vast new liabilities whenever large numbers of voters are in distress, even if (as now) their own choices played a role. A more honest use of taxpayer money at least would be to buy up houses at foreclosure auctions and demolish them, especially in neighborhoods likely never to recover. The true fillip to "social stability" right now would be to nip in the bud the blighted, suburban slums of the future.
possibly good intentions gone awry. Few could have seen how catastrophic this law would be for the economy even though it wasn't fundamentally sound. Makes sense how and why housing prices have risen without justification for the past decade. 
