Problems with preventing foreclosures
I have this sense that I should be cheering on the efforts of FDIC chair Sheila Bair, who is seeking to ensure that more TARP bailout money goes toward helping prevent foreclosures. I am probably supposed to be glad that she’s fighting for the little guy against Wall Street bankers and other undeserving beneficiaries of socialism for the rich. But instead, the idea of helping homeowners out with their mortgages makes me angrier than helping out irresponsible industries. Haven’t home buyers had enough help already on their mortgages in the form of tax breaks and Fed-orchestrated interest rate adjustments? Helping keep or put people into homes they couldn’t afford is what has caused much of the economic mess we’re in to begin with. Continuing down that road seems foolhardy—solving the problems of a burst bubble by reinflating it.
And mortgage modification programs—hard enough to implement since securitization has made it near impossible to figure out who owns the loans—often don’t work. People who have their mortgage rejiggered to prevent foreclosure often end up redefaulting.
But what stokes my anger about foreclosure prevention is that I can relate directly to the decisions that got underwater homeowners where they are. Many of them were making poor decisions at my level, accepting the sorts of deals that were available to me but that I didn’t pursue. They took advantage of the housing bubble while prudent (or timid) people like me didn’t, and now that they are facing consequences, part of me—the vindictive, reptilian-brain part—wants them to suffer. Instead society is poised to reward them for their poor decisionmaking at the expense of chumps like me who didn’t follow the herd into McMansions in the exurbs.
Thanks to an apotheosis of various ideological strains prevalent here—rugged individualism, fetishized private property, the freedom of open space, the need for consipcuous consumption and identity display through possessions—American society has a tendency to make homeownership seem like the ticket to legitimacy and adulthood, as if it’s the only way to mark a seriousness about belonging to your community. This tends to discourage other forms of community organization as well as making homeownership appear more of a boon than it often proves to be. Felix Salmon cites recent research into the pleasures of home ownership that yielded results that seem almost unbelievable, considering the prevailing attitudes:
I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home. Several factors might be at work: homeowners derive more pain (but no more joy) from both their home and their neighborhood. They are also more likely to be 12 pounds heavier, report lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships. She is also less likely to consider herself to enjoy being with people… The results are robust after controlling for reported financial stress.
Homeowners use their homes to retreat from society and lessen their awareness of their true interdependence with it. To a degree, people focus on their houses to the exclusion of the surrounding community—building good fences, making good neighbors, that sort of thing. This apparently can become an unhealthy withdrawal. So maybe I shouldn’t be so angry—resisting the mantra of homeownership has saved me a lot of psychic misery.
Anyway, I completely agree with Salmon’s reaction:
It’s idiotic. I don’t expect Americans to all go to Germany and realize how happy people are when they don’t need to worry about all the stresses which accompany homeownership. But I do think that substantially all of the upside to homeownership in recent years has been a function of rising house prices. Now that’s come to an end, it’s hard to see why anybody would want to buy.
In fact, if Americans could be persuaded that rent payments aren’t “wasted money” and that owning often makes less financial sense than renting, I think the rate of homeownership might, happily, drop substantially. But it’s not going to happen. The ideal of homeownership is deeply embedded in the American psyche, and any datapoints which don’t fit into that ideal are automatically discarded.
Rent is not “throwing money away” anymore than buying food at the grocery store is “throwing money away” since you didn’t plant your own garden and raise your own livestock. Shelter is something you consume; it’s not an investment. Bailing out homeowners is rewarding the people who treated housing as an investment and not a consumption good, a fulfillment of personal need. Preventing foreclosures is often a matter of rescuing people from their failure to properly assess risk, not from some unforeseen natural disaster. Let’s not pretend this is any different from bailing out imprudent or inept investment bankers.
Comments
Home ownership made a great deal more sense when people could be assured life time employment at a single company. In a more dynamic economy home ownership is actually an impediment to labor mobility and thus actually hurts the economy.
Comment by sanjay sathe from burlington vt — December 15, 2008 @ 4:12 pm
Interesting take. The fact is, however, that the United States, through our tax code and other policies has long adhered to the exaltation of home ownership, as well as the goal of making it accessible to as many people as possible.
While I agree that a balance that would recognize the advantages of renting might be helpful, I don’t know that we ever could or would want to totally negate homeownership, either as an institution or a goal.
Also, I have a hard time buying into the notion that shelter is a consumer good, like food. The notion of a consumer good is that it is consumed. Once you eat an apple, it can’t be eaten again. A shirt might last longer, but most shirts last for only a fraction of the lifespan of its owner. A home is the one concrete purchase we make that often outlives us, that is as likely to increase in universally recognized worth over time as to decline.
We invest nothing into the eating of an apple and precious little even into the eating of an elaborate meal. But every bit of money or labor we pour into a house bears the potential to deliver benefits long beyond the monthly term of a rent payment or the yearly term of a lease.
Now maybe that’s a good thing and maybe it’s a bad thing, but it is definitely a thing.
Comment by Seth from Los Angeles — December 15, 2008 @ 4:53 pm
Very well put. It’s incoherent to imagine that something which, at the end of the day is just a structure, is destined to appreciate in value in perpetuity. If housing prices are ever much greater than costs + enough profit to keep people building them, it just means that supply of houses is too small. If a house can be built for $60,000 and building employees and owners payed for $40,000 above that, why would anyone pay $200,000 for it? Wouldn’t you just build a new house?
Personally, I’m an individualist who “fetishizes private property” but simultaneously deplores identity display and conspicuous consumption. My individualism is partly behind my skepticism of house buying - who would want to be enslaved to the whims of the real estate market and banks for the next 30 plus years?
Comment by Pendulum — December 15, 2008 @ 5:37 pm
Mr. Horning, I find your condemnation of those with houses in foreclosure to be too sweeping and judgmental in its conclusions. Many of those who are losing their homes have been forced into bankruptcy by medical bills, which a Harvard study (2005) found to be the greatest cause of personal financial collapse. Further, the draconian bankuptcy act of 2005 exacerbated the situation of those in desperate financial straits. From CBS Market Watch:
“At least part of the blame, says the report, lies with a bankruptcy law passed in 2005. The law raised the bar for people to qualify for Chapter 7 “fresh start” bankruptcy proceedings. Chapter 7 can enable individual filers to wipe away debts such as credit-card and medical bills so they can continue to make their mortgage payments. With access limited, more subprime borrowers are forced into Chapter 13, where some can’t maintain their payment schedules for more than a couple of months.”
Further, not everyone can afford to hire an attorney to go over the terms of real estate contracts that are often written in a deliberately misleading or confusing fashion. Any number of people may have been victimized in this way.
I would also point out that my wife and I, upon our deaths, will be able to bequeath a very substantial estate to our children in the form of our house and land. We have played the housing market shrewdly, but we’ve also been lucky. Others simply haven’t been. It is fundamentally misguided to see most foreclosures as the result of avarice gone awry. There is still such a thing as sheer bad luck.
Comment by Joseph Miller from Kapaa, Hawaii — December 15, 2008 @ 7:17 pm
Mr. Miller:
While, as you say, the bankruptcy laws and lack of social safety nets are a major problem, people simply entered into objectively horrific financial agreements. If you can’t afford an attorney to review your housing contract, then you have no business putting down the 20% for your home. What’s that? You put down NOTHING for the home? Well, then, you haven’t really lost anything when you foreclose, have you?
Housing is, at best, a commodity investment, where your property will maintain its value relative to inflation and other nearby properties. No amount of governmental regulation is going to change that fundamental. You cannot have a stable situation in which the average starter home in a neighborhood is unaffordable* for the average household income in that neighborhood. Either income has to go up or prices have to come down.
As a native New Yorker, I’m getting sick of seeing every new development being “luxury” living. By my thought process, “luxury” defines the top 10-20% of the market. Why, then, are 90+ percent of all new developments catered to this market? The sheer greed and financial ignorance that caused this debacle need to be halted, and the sooner the better.
I’ll accept widening of the social networks (unemployment, government-guaranteed health benefits, etc.) for the individuals who have no where to go, but the government does not owe homeowners a guaranteed equity on an overpriced home.
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* “affordable” being defined as having annual payments no more than 25% of annual income after 20% down payment; at recent interest rates, no more than 3x annual income. This is pretty much the historic definition of affordability for the entire post-Depression era up until the mid-90s.
Comment by efrex — December 16, 2008 @ 6:29 am
I don’t disagree with the broad strokes of much of what you write; your observations about both moral hazard in the housing market, as well as the socio-cultural neuroses that American attitudes about homeownership come clustered with seem to me pretty cogent and accurate. But, like Joseph Miller I worry that your conclusions are a bit too sweeping and judgmental, particularly now, when the accelerating economic meltdown is putting more and more “timid” homeowners—people who “played by the rules” so to speak, and didn’t buy more than they could afford, eschewed too-good-to-be-true loans, and continue to regard their houses as homes, places to raise families and grow old in, rather than financial arrangments or status symbols—at risk. It’s all well and good to suggest that such people may have been better off renting, but they didn’t buy because they wanted to live in monster homes; they made a rational choice between being at the mercy of banks and being at the mercy of landlords. As unemployment and underemployment escalate, and just as importantly, the duration on average of un- or underemployment lengthens in the current climate, more and more people living modest homes, will start see their financial safety margins diminish Middle class families can generally plan for 4-6 months of one or both major breadwinners being jobless, but what about 8-10 months, or more? The nasty irony is that this meltdown, which started with the bad loan made to bad risks, but it now threatens those who, wisely, never got into the game in the first place.
Comment by Thorfinn — December 16, 2008 @ 8:53 am
foreclosure prevention is bad for the economy and the real estate market, this will just keep the bubble alive. Homeownership “dream” is just another way they keep the poor people poor while the rich are getting richer. What’s wrong with renting? Like most of us are renting our cars, oh but that’s called “leasing”...
Comment by Ruben — January 9, 2009 @ 10:51 am
I agree with your points, and it’s definitely frustrating to have to bail out these ...idiots. They bought homes they couldn’t afford, and should have to suffer the consequences.
Unfortunately, the home buyers were not the only complicit ones in this whole mess. The mortgage brokers, and realtors all were in on it and often tricked or confused hapless, uneducated people into buying homes they couldn’t afford.
Government’s role is to protect the people from each other, and for the same reason that old people have to pay for schools (even though they don’t use them), this is an investment in our society, and the educated must enlighten the uneducated, or at least attempt to do so.
Comment by Andrew from Florida from Gainesville, FL — February 12, 2009 @ 6:05 am
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