Recently I had to find a new apartment, and in my particular New York City neighborhood, that task is especially unpleasant because it requires dealing with apartment brokers. There are dozens and dozens of them in my square-mile vicinity; once I needed a place I was shocked to see just how many brokers there were, seemingly waiting for this opportunity like vultures. Minimal barriers to entering the apartment-brokering “profession” means that brokers can proliferate virally wherever they sense opportunity, and opportunities abound for them in Astoria, an area rife with absentee landlords and paranoid non-English speaking homeowners who probably don’t want the hassle of vetting strangers to see if they’ll make suitable tenants.
Apartment brokers don’t seem to want much hassle, either. Once you enter an office (where you’ll typically see cheerful framed cartoons about couples growing old and decrepit while waiting for properties to get cheaper) and fill out interminable and mostly unnecessary paperwork probing far deeper into your financial history than they have any reason to go, they will drive you out to apartment buildings and show you what’s on offer. At that point, it’s pretty much take it or leave it. Beyond posting a few ads on Craigslist to drum up business, that’s about all the brokers seem willing to do.
Following up with clients to show them new listings? Nah. Take the edge off of any of the unavoidable friction between tenants and landlords? Hardly. That’s how they make their money, by intensifying that natural distrust. And on top of all that, the brokers often invent bogus charges for credit checks, they require you to conduct all your dealings with them in cash only, and they typically waste your time by first showing apartments that manifestly don’t meet the criteria they’ve had you elaborate at length.
For all this nuisance, you pay them a month’s rent as a fee—typically around $1,300. The whole experience was almost frustrating enough to make me consider trying to buy a place to live. Then I’d be through with the rental brokers once and for all, done with the hassle and uncertainty, and I would be able to circumvent something that seems just as awful: rent.
Of course, I can’t afford such a thing. But over the past few years, that hasn’t stopped my suburban home-owning friends from routinely telling me that renting is for suckers. The sentiment has become almost a truism. When you rent, you have to give your hard-earned money to landlords, those deadbeats who do nothing to earn what they get from you.
Even in economics, the term rent has become demonized; it’s used pejoratively (in the phrase “rent seeking”, for example) to describe ways to make money without doing anything productive. Renting is just “throwing your money away”, when instead you should be investing that money in property and building up an equity stake. Everyone should have their own little castle, where they reign supreme and take pride in their possessions.
Having a property seems to grant the right to do whatever you want, and it’s almost an entitlement in a society that tends to pretend that everyone’s middle class and everyone can afford it. The dramatic expansion of subprime lending in the past few years was this ideological fantasy made manifest. It’s the essence of what George W. Bush dubbed the ownership society, in which we all have a stake in the prevailing system of private property and will defend our fief tenaciously against the grasping arms of government and community. The ownership society is that uplifting vision that holds that only when something is ours and belongs to us personally will we give a damn about it.
Championing ownership serves to disguise what rent really is: just another term for the cost of that inescapably necessary good of shelter. And this, too, is what mortgage payments are: consumption spending. Because of all the sentimentality in the US about owning a home, it’s easy to lose sight of the fact that shelter is a kind of commodity, like food. It’s not really a form of savings, and it’s certainly not a source of income, as it had been regarded during the housing bubble, when it became customary to use home equity loans to fund other kinds of consumption.
Paying off a mortgage instead of rent seems to offer the promise of someday reaching that debtfree moment when our homes begin to pay us back, and in those halcyon days not long ago, when home values were almost doubling by the year, it was easy enough to imagine retiring early and living off the mountain of cash that selling one’s home would supply.
Now, with house prices caught in a downward spiral, it’s clear that there is no automatic pot of gold at the end of that rainbow. When property taxes, upkeep costs, and debt servicing (talk about throwing money away) are taken into account, renting in some cases ends up being a better deal than owning. As this post at eFinaceDirectory explains, a house just isn’t an especially good way to grow your savings.
The reality is that housing is not an investment. It’s shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn’t be further from the truth…. The average person investing in stocks between 1987 and 2007 would have made more money than the average person who bought a new home in 1987.
The home-buying frenzy of the past half-decade was great for those mediators who profit off the fiendishly complicated process of brokering and financing real estate sales, but it hasn’t necessarily been any good for the actual purchasers, who were, in the words of apologists for the subprime lending explosion, given a chance to live the American Dream. Those families, many of whom now find themselves in negative equity, may be questioning that dream at this point, and they probably don’t take much solace in the fact that they are making mortgage payments on a $400,000 loan on a house that can’t sell for $300,000, instead of “throwing their money away” on rent.
“Moral Hazard Made Visible”
As it turns out, the myths about home ownership have been extremely harmful to the US economy in recent months. Regardless of whether the mass of subprime loans were doled out optimistically, in a spirit of spreading the American Dream, or predatorily, to exploit both gullible borrowers and a poorly regulated niche of the financial world (the esoteric realm of derivatives, securitizations, and structured investment vehicles), the borrowers in over their heads are directly responsible for the chaos that has frozen the credit markets and already done in one major Wall Street investment bank, Bear Stearns. It has also kept the Federal Reserve extremely busy.
On 11 March, the Fed announced that it would lend $236 billion to banks by swapping Treasurys (whose value is guaranteed by the credibility of the US itself, and its ability to collect tax revenue from Americans) for a variety of dubious mortgage-backed securities (which have no value right now, because they are dependent on the overeager, cash-strapped home buyers’ ability to pay off their loans). The problem with these securities is no one wants to buy them, and no one else but the Fed will accept them as collateral, anymore.
It’s now becoming clear that far more subprime borrowers are unable to keep up than banks’ risk managers ever anticipated. And that has made the legion of securities derived from these loans highly toxic. Whether the risk managers were overwhelmed by the complexity of their own concoctions, deluded by negligent triple-A ratings assigned by ratings agency (who, because they were paid by the firms creating the securities, had plenty of incentive to rate them generously), or were clouded by bubble thinking that assumed—like the cartoons in my apartment brokers’ offices—that houses prices would never fall, they grossly misjudged the risk of a bulk of subprime loans going sour at once, which they have. As a result, many of the banks face a liquidity crisis—too much of their balance sheet is tied up in assets that can no longer be priced. That’s why the Fed has charged to the rescue.
But the $236 billion wasn’t enough. On 17 March, after brokering the Bear Stearns sale at a bargain-basement price to J.P. Morgan Chase to prevent a run on investment banks and total financial implosion (think Great Depression II), the Fed decided to let “primary dealers” in mortgage securities—the big investment banks mainly—borrow as much as they needed to stay solvent from its discount window, a privilege heretofore only available to commercial banks (which had been regulated much more carefully as a consequence), and moreover, it would accept as collateral as much of the bum securities as the banks want to put up. In other words, the government (translation: “taxpayers”, you and me) would assume the risk on all those loans to the delinquent borrowers while the Wall Street traders who basically failed at their jobs get to keep all the bonuses they made while amassing their untenable positions.
Financial stocks responded positively to the Fed’s actions, as investors assumed these constituted an implicit guarantee that the government wouldn’t let investment banks fail, no matter how negligent they’d been about risk assessment. Apparently, the Wall Street firms could take extravagant risks (from which shareholders could profit if they paid off) without having to bear any of the dangers of failure. Martin Wolf, in his column for the Financial Times called the stock-price jump “moral hazard made visible” (“The rescue of Bear Stearns marks liberalisation’s limit”, 25 March 2008). And in the Wall Street Journal, David Wessel contemplated these moves by the Fed and declared the past week “The 10 Days That Changed Capitalism” (27 March 2008; Page A1). It’s as if capitalism had been transformed into a curious kind of socialism, where governments appropriated money from citizens and redistributed it to investors. Capitalist enterprise may be free, but it’s no longer free to fail, at least not in the financial sector.
In its effort to contain the damage the financial industry has done to the economy, the government is throwing taxpayer money at bad bankers. Economist Dean Baker, in a recent post on these moves, elaborates the consequences:
The Fed’s actions are keeping banks from having to write down large losses and quite likely go into bankruptcy. The result is that the bank executives, whose inept management pushed them into bankruptcy, get to keep their jobs and their salaries, which run into the tens of millions a year. Stockholders will also have more time to unload their stock before the day of reckoning, and the banks themselves may be able to unload some of their junk if they find enough suckers.… Does the bailout do anything for the tens of millions of homeowners who have seen their life savings disappear because house prices collapsed—in spite of the fact that all the experts said house prices never fall? How about the families who are now tapping their retirement accounts in a desperate effort to prevent foreclosure, is the Fed bailing them out?
The short answer to that: Not yet.
While foreclosures rise, anger is building about the Wall Street bailout. But as it has been reported in the press thus far, it is a bit inchoate. Business Week’s recent recession roundup touches on this brewing unrest, only to make them seem a bit like wild-eyed radicals, albeit with a distinctly unradical stance:
The airwaves and blogosphere are alive with people who say nothing should be done. They argue that intervening now would only delay the inevitable liquidation of credit-fueled excesses. “Under proposed bailouts, responsible people lose and have to give their money to gamblers, liars, and sleazy lenders,” says the widely followed Patrick.net housing blog.
(“Recession Time”, Peter Coy, 13 March 2008)
This fury makes for the possibility of an otherwise unlikely shift in political orientation for the non-homeowning chumps (including me) who are going to end up being punished for their circumspection during the housing bubble’s inflation. Latte-sipping liberals like myself are ordinarily unlikely to pay much attention to the government-hating complaints of libertarians, but this passage from economist Arnold Kling at Econlogstruck a chord:
You have inexperienced amateur real estate speculators getting financing from Rolex-wearing mortgage brokers who sell the loans to 24-year-old Beamer-driving Wall Street investment bankers. Why can’t the rest of us just sit back and watch them all get what they deserve? Instead, we get the Treasury and Congress coming up with “plans” to rewrite mortgages. These brilliant solutions contribute to making the mortgage securities market totally illiquid, because now nobody has any idea what the cash flows are going to be under the (make them up as you go along) rules.
The state, the media, and business all linked arms to tout home ownership as the only legitimate path to bourgeois security and fulfillment of the true American dream, and then aflame with that ideology, eventual subprime borrowers scrambled to get themselves some of that sweet home equity. Who could blame them? It seemed absurd to accuse them of “predatory borrowing” as some conservatives have done. The abuses of the lending industry were so egregious, it was easy to overlook the overreaching by borrowers who were just trying to live the dream that had been foisted on them.
Seemingly everyone endorsed subprime lending—the state, the banks, the press, your friends and neighbors—so now the sentiment appears to be that everyone should pitch in to clean up now that the program has been revealed to be a total mess. The housing bubble was a shared social problem that derived from people with laudable intentions but misguided methods. That angle is pursued in the BusinessWeek article:
There’s a social aspect, too. Concentrated foreclosures, voluntary and otherwise, can destroy neighborhoods because abandonment increases decay and crime. And the housing crash undermines the social compact. “Talk about the rich vs. the poor was to some extent buffered by rising house prices. Now all you have to do is stare at your paycheck and your negative home equity,” frets University of Chicago Graduate School of Business economist Raghuram G. Rajan.
McMansion in Salinas, California - photo (partial) by Brendel posted on Wikipedia.org
But I am having a harder and harder time worrying over that lost “social compact”, or maintaining sympathy for borrowers in over their heads, many in homes that have far more space than they need. (So I grumble to myself, lugging my boxes into my three-room apartment. They were under ideological pressure to keep up, but somehow I resisted.) If the housing problems exacerbates tensions between rich and poor, that might even be a good thing for seeing some measures pushed through Congress to ameliorate income inequality in general. But instead we are getting measures that will likely worsen it.
In his Wall Street Journal column, Wessel sums up the conventional wisdom about the bailout’s likely course: “So the next step, no matter how it is dressed up, is likely to involve the government’s moving in ways that put a floor under prices, hoping that will limit the downside risks enough so more Americans are willing to buy homes and deeper-pocketed investors are willing, in effect, to lend them the money to do so.” In other words, an explicit guarantee that house prices won’t fall, my apartment broker’s cartoon made into policy. So for obvious reasons, I agree with Kling about this:
The people who most deserve to be in homes now are the people who decided in 2005 and 2006 that they could not afford the then-prevailing house prices or who decided to at least wait to accumulate a down payment.
Sadly, there is little solace at this point in feeling like a smarty-pants for staying out of trouble and being resistant to the dominant ideology of the ownership society, when those in trouble are still getting the love and attention from the government in the form of tax breaks and handouts and, now, most likely, bailouts. But what have they done to deserve this? Owning a home was once the reward for a long period of careful saving, but no one in the subprime era bothered to save. According to Business Week American households owe nearly $3 trillion more than they would have if they had adhered to 1990s savings patterns. “It could take three to four years for Americans to work their debt down,” the authors note, “unless the government steps in to help.” (“The Fed’s Revolution”, Michael Mandel and Peter Coy, 20 March 2008)
It’s becoming easier and easier to lump the borrowers in with the brokers and bankers who exploited the dream at the expense, it turns out, of skeptics and habitual rule followers who thought twice about liar loans or prudently thought it would be insane to expect home prices to continue to double every 18 months. The borrowers fueled the fire that is now burning through my money, and the state is diverting it from public investments that might help me much more directly. As far as I’m concerned (as a renter), it would be better to hand the $10 billion the Senate wants to commit to underwater mortgages to our landlords as rent subsidies. Why should home owners be rewarded merely for trying to own a home when they really were in no position to afford it?
Yes, preventing Great Depression II is a worthwhile cause, but one that should have been forestalled by all the regulatory checks and balances in place to manage the economy. Instead, we had a Fed and treasury Department also wrapped up in ideology during the bubble-building years: they refused to regulate the exploding lending industry and kept rates unreasonably low for too long to keep lenders awash in cheap money, which inevitably found its way into hyperinflated home values. And if the expected bailouts come through, moral hazard will reign supreme, as will the underlying fantasia about the importance of owning homes.
In this climate, the Democratic Presidential hopefuls are trying to make a potential homeowner bailout into a campaign issue. Both Hillary Clinton and Barack Obama support government intervention to restructure loans to prevent foreclosures. No one likes foreclosures—everybody involved loses. But no one likes deadbeats, either. And no one likes ridiculously unaffordable prices for residential real estate. And homeowners who can’t afford the mortgages they signed up for—whether they were gullible or not—are not automatically victims.
The real victims are the renters, who are seeing their rents increase with inflation while jobs become scarcer. That pool includes a lot of urbanites who you’d expect to lean Democratic, and they are probably more vulnerable than they would be ordinarily to some clever rhetoric from the Republicans. John McCain seem to have had them in mind when he spoke about the housing crisis on 26 March. “I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers. Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.”
But just when McCain might seem to be making a common sense appeal to the believers in fiscal responsibility, the people who see the farce of an “ownership society” when the savings rate is negative, debt levels unsustainable, and the credit markets tanking, he does what all upstanding politicos in the G.O.P. do: seize upon a crisis as an opportunity to push tax cuts and corporate welfare.
More important than the events of the past is the promise of the future. The American economy is resilient and diverse. Even as financial troubles weigh upon it other parts of the economy hold up or even continue to grow. I have spoken at length in other settings about the need to keep taxes low on our families, entrepreneurs, and small businesses; … to improve the ability of our companies to compete by reducing our corporate tax rate, which today are the second highest rates in the world; to provide investment incentives….
So enemies of the ownership society have no place to turn.
Enjoy Rob’s Marginal Utility column? See also his Marginal Utility blog.