Housing as "forced savings"

by Rob Horning

8 April 2008


Yes, I know, enough with the housing market already. Once upon a time, this blog was about criticizing consumer culture, and how it had become, for all intents and purposes, popular culture. But in my defense, housing is a consumer good, is the consumer good in the American economy right now, and the most important thing going on, consumerism wise, is how we have propped up various irrational ways to go about securing shelter (owning rather than renting, as I went on about in this column last week) with ideology and fantasy and predatory opportunities. The recent “innovative” use of housing to anchor massive borrowing (via home equity lines of credit, etc.) is a prominent manifestation of the shifts in attitude that have led to consumer spending enlarging so dramatically (while saving has plummeted to less than zero). Without easy credit, there is no spending revolution, perhaps there is no cultural move toward compulsive shopping and there is more space for other aspects of life, or other approaches to coping with life’s flux than buying things.

Anyway, Yves Smith links to this interview with Joshua Rosner, a financial risk analyst. (If you don’t read this sort of thing often, you might be surprised by the skepticism, verging on contempt, both the interviewer and interviewee have for the mainstream media and politicians and credulous ordinary folk in general. This haute banker tone of arrogant cynicism can be a selling point for me, depending on my mood.) What ensues is a discussion of further trouble on the credit-market front, with the housing-market problems front and center. They agree that the housing market has to a large degree become nationalized, and the justification for this is less practical than ideological:

Rosner: ... I continue to believe that we are going to see further downward pressure on home prices—regardless of what the Congress believes or intends or manipulates. Unless we actually nationalize the housing industry, there is not much we can do to avoid the downward correction in home values.
The IRA: But haven’t we already largely nationalized the home market already? ... During the Joint Economic Committee hearing last week, when Chairman Bernanke appeared prior to the BSC session, Senator John Sununu (R-NH) talked about the various federal government programs already in place for housing. It took him almost five minutes of soliloquy to go through them all.
Rosner: That’s right. We have a universe of government programs to encourage home ownership, but we need to reconsider the benefits of getting people into homes and how to craft government policies to make these markets more rather than less stable. Historically home ownership was seen as a way to make better neighbors and stronger communities. We need to go back and look at what aspects of home ownership were responsible for conferring these benefits. Since the late 1930, home owners generally took out 30-year fixed rate mortgages which were illiquid instruments tied to illiquid assets, namely the home, which required the borrower to make monthly payments of principal and interest into what was effectively a forced savings plan.
The IRA: You’re talking about our grandparents. And they basically could not modify the mortgage or even move easily.
Rosner: Correct. Other than moving, they could not extract equity. And when they purchased the house, they could not do so without having a substantial amount of equity going into the transaction. I would argue that it was those features that benefit society and support, from a Washington policy perspective, the social importance of home ownership.

Back in the old days, this was the plan: A family makes a longterm investment in a house, builds up equity in it over a lifetime and uses that as the bedrock of their retirement nest egg. The government fostered this vision as a companion to Social Security. Buying a house, committing to a long slog of mortgage payments, was a way of forcing yourself to save in the face of all the blandishments and temptations of a consumer society. But this wouldn’t do, especially after the stock market bubble popped. Hence, a policy of low interest rates and easy credit in the aftermath, leading to a speculative bubble in home prices—the rapid rise of which made a house anot a lifetime investment but something to flip, or at the very least refinance.

Rosner: There is an aspect of this that nobody in Washington is talking about. Let’s go back to the prior model of home ownership. Typically a family bought a home around the time of family formation. So you got married and then you and your wife bought a house. You had your kids in that house. And you had a 30-year fixed rate mortgage and every month you made a payment of principal and interest. That process usually began in the late-twenties to early thirties of a person’s life. That meant that at about the age of 60, the home owner was able to have a mortgage burning party. So as they retired, their expenses fell and the value of their unencumbered assets had risen. They had a real asset to supplement their pension, pay for grandchildren’s college, etc. Because we have allowed this model to change, the U.S. faces a huge burden in the future that we have not yet even begun to talk about in Washington.

But the political proposals to aid the housing crisis are not focused on restoring this kind of sobriety to the market. (The Institutional Risk Analyst calls the political discussion “idiotic rhetoric coming from political candidates from both parties about ‘restoring the American Dream.’ “) Instead, they are efforts to protect prices from falling, which does preserve the forced savings of traditional homeowners but also vindicates the speculators, all at the expense of taxpayers, either directly or indirectly. The underlying issue is that home prices are way out of line with economic growth generally, and that fictitious growth has already been consumed. Now, home prices must fall back in line with growth (with economic pain distributed in proportion to that earlier overconsumption) or the government will have to continue to prop up the illusion (by nationalizing the lending industry, for example) and divert funds to sustain it. That pain will be felt nationwide—whether through a worthless dollar, rampant inflation, tax increases, or pared social services.

Update: At Slate, Daniel Gross also hates the tax-benefit proposals to help the housing industry.

The proposal to give new tax breaks to homebuilders and banks is yet another example of the pernicious trend of privatizing profit and socializing losses, which is gnawing away at faith in the system.

Amen to that. Gross really deplores the tax-loss carryback extension, which lets now-failing homebuilders backdate their losses to recoup tax payments they made when the business was booming. It’s the same story over again; those who were prudent during the bubble are shafted while speculators are protected:

The proposed tax break is hard to justify for several reasons. It does nothing for slow and steady companies that keep their heads and simply rack up profits year after year—and pay their taxes accordingly. Rather, it rewards the most reckless participants in the bubble.

The lesson our government is trying to teach us? Be as reckless as possible lest you miss out. Recklessness is what keeps America on the economic cutting edge, after all.

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