There is an affordable housing crisis in the United States, one that the Congress is struggling to address. The so-called crisis is that housing is getting more affordable. The generations now in power consider this a crisis because they were counting on being able to sell their homes to younger people at inflated prices, consigning them to a life of poverty, to finance a retirement that hasn’t saved for. The wealthy consider it a crisis because they are taking losses on mortgage bonds, and those who manage their money might receive somewhat less inflated pay packages next year. And those in some suburbs consider it a crisis because housing in their neighborhood might become affordable to someone no wealthier than they were when they first purchased, and different from them in other respects. So after 15 years of reductions in subsidies for the poorest, with public housing and Section 8 vouchers a perennial target of scorn, we now see desperate calls for the government to take on hundreds of billions of dollars in future liabilities to subsidize the past purchase of McMansions, and the hocking of houses to buy SUVs and plasma screen TVs and settle gambling debts for the ever-growing casino industry.
What everyone seems to be forgetting, is that housing becoming more affordable is a huge benefit to most current Americans, and all future Americans. And what everyone seems to be forgetting is that many if not most of those who will be forced to pay back those billions of dollars in future liabilities have probably been worse off, on average, than those who borrowed, spent, and are now facing foreclosure, and those who lent to them.
To begin with, 30% of all Americans rent. In New York City, that would be 70%. Renters generally fall into two categories – those too poor to be able to own a home, and those who hope to own a home someday. The use of government funds extracted from the former group to prevent better off borrowers from also becoming renters is immoral. After a 20-year crusade against extracting taxes from the better off to subsidize the worst off, can’t we stop doing the reverse for a change? Those who aspire to own, who tend to be younger, would benefit from lower prices. What business does the government have in trying to keep prices high, as some are calling for, when affordability has been at all-time lows?
Then there is the one-third of all homeowners who own their homes free and clear, some extremely wealthy, but most just thrifty. Do we really need to sock them with a new mortgage to reduce the burden on those who borrowed too much, and those who lent to them? And there are all those homeowners, out of step with the “democratization of credit,” who took out a conventional loan after honestly reporting their income on their mortgage application, and have been paying it off since. Eventually, they too will own their home free and clear. Their only debts will be the federal, state and local debts past generations have foisted upon them. The generations ever in favor of making those debts bigger have no intention of paying them back.
For all these homeowners, those who bought a home and didn’t use it as a source of cash to live large, it really doesn’t matter whether housing prices go up or down. They’ll either sell high and buy high, or sell low and buy low. But many of those homeowners have children, who they might like to see live independently in the area where they grew up some day. In that sense, the old-fashioned homeowners also benefit from low prices, if there are younger people they care about.
So for whom is affordable housing a crisis?
There are certainly those who got swept up in the upside panic in housing, the way my generation did in the 1980s bubble. “Buy now or be priced out forever” people were told, then as now, so people stretched to the maximum to buy housing at high prices. In this bubble, the high prices were abetted by “affordability” mortgages with payment levels that started low and then exploded. Rather than reduce monthly payments in reality, these mortgages merely allowed prices to be bid up further – up to and then beyond the maximum people could pay. Those mortgages should never have been allowed, and after all the lost investments and bankruptcies, it will be a long time if anyone is willing to make them again even if they are allowed.
While I feel sorry for people who overpaid, the only way they can sell for what they paid is to put someone else in the same position they are in – overstretching to overpay for housing. Many of them, moreover, purchased with little or no money down, and in reality have very little to lose. The best thing they could do is get out from under their onerous cost of housing through foreclosure, go back to renting a smaller housing unit for a lower cost, save a more substantial downpayment in the years required to restore their credit rating, and then buy a home at a more reasonable and affordable price. In non-recourse states such as California (where a bank merely gets back the house and cannot go after other assets if a mortgage borrower defaults), the over-payers are increasingly walking away on their own and renting housing at a much lower cost, because that is what is in their interest. In some cases they are buying a new house at half the price while their credit rating is intact, and then defaulting on the old one.
As the media has caught on to the mortgage crisis over the past two years, I have read hundreds of articles on people caught up foreclosure. Virtually none, however, were people who just overpaid for their first home. Most had other, less sympathetic stories upon closer examination.
A less sympathetic group is small time real estate speculators who sought to “get rich without working,” as a thousand schemes and seminars promised, by buying and flipping properties with no money down. Many of those facing foreclosure, the articles show, own not one house but two or more, with the additional homes purchased for investment. Either the owner planned to flip them at a time when prices were rising, or planned to rent them out. Since these novice speculators often overpaid, the rent isn’t high enough to cover the monthly mortgage payment, and the possible sale prices isn’t high enough to cover the mortgage balance.
The characteristic that allows people to “get rich quick” in real estate is leverage. Put down 10%, borrow 90%, have the value of the building go up a mere 10% while the mortgage balance doesn’t change, and voila, you’ve doubled your money. Leverage, however, also makes real estate a “get poor quick investment,” as in the same circumstance a mere 10% decline leads to a 100% loss, and a 20% decline means you lost double than you put in.
The question is how can Congress justify having those living paycheck to paycheck, and those who accepted lower rates of return on lower risk investments, to subsidize those who speculated? And many of those who speculated wrote on their mortgage applications that they intended to occupy all the housing units they purchased, to qualify for lower “homeowner” rather than “investor” mortgage rates. That, like much else that happened during the housing bubble, is fraud.
There is one final group of people facing foreclosure that could be considered either sad or unsympathetic: those who were in homes with mortgages they could afford, and in many cases had been for years, but were seduced into borrowing more and spending it as housing prices rose. After a few years of living large, or larger than they would have otherwise, these debtors are facing the same exploding payments as those who purchased at the peak, and being driven into foreclosure. They are often older, and in past decades they would have been able to count on living debt free in a paid off house when old age reduced their incomes. Now they can’t – unless the government subsidizes them at the expense of those who never lived large to begin with.
Frankly I’m shocked both by how greedy and shortsighted millions of Americans have turned out to be, and how unethical those who lent to them were. It’s enough to make me think it isn’t an accident that the same future-destroying SOBs are re-elected to Albany every two years. In addition to the four or five credit card solicitations I received each day for years, I also received checks in the mail that, had I cashed them, I would have been agreeing to an additional mortgage on my house. “Go ahead,” the checks said. “Take a vacation! Buy a new car! You deserve it!” I tore up those checks, but a lot of people cashed them. In New York City some, no doubt, were working poor people the value of whose homes was theoretically inflated far beyond their modest mortgages by the housing bubble. Why did they blow their future for a short term party? Well, why do people play the lottery?
The cash-out mortgage mania was merely the final phase of two decades of Americans living beyond their means and borrowing the difference, individually and (through the national debt and public retirement benefits among other things) collectively. This mania has drastically reduced the future standard of living in this country, but it was politically useful for those in power, Republicans and Democrats alike. Even though some generations and types of people have been getting more are more of the nation’s cash, others didn’t’ complain because their absolute spending was artificially supported by rising debts and cheap, planet-destroying oil. Now the debtholders, many overseas, many wealthy, are demanding repayment, and the oil isn’t so cheap anymore, and Americans are going to have to get back to spending what they get in cash. And those who are getting less, and facing a future with less still, are gradually becoming aware of that fact.
The characteristic of this final phase has been fraud. Mortgage borrowing has been governed by specific ratios borrowers have to meet, ratios that kept a reasonable relationship between housing prices and incomes. The mortgage could be only three times the borrower’s income, the debt service could only consume 28% of that income, and the loan could only cover 80% of the value of the house, or somewhat more with FHA guarantees or private mortgage insurance. In order for those unaffordable mortgages to happen, everyone had to lie — borrowers about their income, often at the suggestion of mortgage brokers, appraisers about the value of the house, securitizers about the expected default rate on pools of mortgages, and rating agencies about the credit rating of the bonds that funded them. All made out, at least in the short run.
In a riot so many people are stealing that there is no way the authorities can stop it, and knowing they can get away with it, people who would ordinarily to steal do so. What we have had is a white collar riot. And since it is a white collar riot, a suburban riot, a Wall Street and homeowner riot, it is the non-participants who everyone is looking to punish. And in a particular twist, Congress is looking to divert to McMansion bailouts money previously designated for “affordable housing,” something no one seems to be in favor of anymore. If that doesn’t say everything about today’s America, what does? Each year I voluntarily give money to charity to benefit those worse off than I am, and involuntarily pay taxes to benefit many people who are better off than I am, but who have a greater sense of entitlement.
That’s the bad news.
The good news is affordable housing. Because in the United States (as opposed to New York City) Americans are over-housed, not under-housed. The housing hype and public subsidies have induced Americans to spend more and more money on more and more square footage that has to be heated, cooled and maintained. Absent the hype and subsidies, many would have spent less on housing and more on other things, or saved the difference, or given it away. People have already started to move in that direction, and much of the country has a housing surplus as a result – one that will drive down prices, relative to inflation, for years. And since there is a limit to how much more people will spend to live here versus there, that will hold down New York’s housing prices as well.
The most important thing state and local government can do to make ordinary people better off in the long run is to put that housing and people together. Rather than prevent – or rather delay – foreclosures until the copper can be stripped out of the walls, governments should be working to make sure housing gets recycled at lower prices as soon as possible, and intact. Rather than passing laws slowing the ability of banks to take delinquent properties from borrowers, state and local governments should be passing laws to speed the ability for local governments to take delinquent properties from property tax payers and those who fail to maintain properties — often the banks themselves. Make the mortgage servicers sell rather than let the properties remain abandoned, and sooner or later all that housing will be made available, providing affordable housing for those who lost homes to foreclosure, and everyone else.
Some foreclosed houses may be purchased by first time homeowners at lower prices, other by investors who will be able to profitably hold them while charging lower rents. Some 6,000-square-foot McMansions with four full bathrooms may end up recycled into four 1,500-square-foot apartments with one bathroom each, or senior citizen rooming houses with live-in attendants. The key is to prevent the buildings from sitting and rotting in limbo, and help the foreclosed find new housing, not to keep them where they are.
In New York City, it may be more difficult to find new, affordable housing for those losing homes to foreclosure, because the market here is still tight. But prices are dropping much faster in the rest of the metropolitan area, and the rest of the country. There is, I’ll say it again, a brewing surplus of housing in this country not a shortage — and a good thing too, because there is a shortage of and rising prices for everything else. Housing can be had somewhere, probably for much less than people have been paying. And if a former mortgage borrower has no choice, due to their place of employment and other ties, but to stay in New York City, there situation would be no different than that of hundreds of thousands of others who do not benefit from public housing, Section 8, $400 property tax checks, the mortgage interest deduction, and other subsidies in the difficult housing market of New York.
So who, in the end, would benefit from taxpayer-funded bailouts? Those who would have profited the most from the ever-rising housing prices, and ever-falling housing affordability, they expected. The housing will be there and the people will be in it either way. The difference is who will take the losses — today’s investors, or tomorrow’s Americans. The investors privatized the profits, now they want to socialize the losses. Let’s keep the losses privatized, too.