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From my friend
Jeff Scott, a link toGretchen Morgenseon's column in the New York Times Why
Treasury Needs a Plan B for Mortgages :
Of course, cries
of moral hazard will erupt if borrowers get large cuts in their principal
balances. Rightly so. Why should those who took on too much debt to buy too
much house get rescued when those who were prudent go unrewarded?
But doing nothing
also has hazards, the most obvious being continuing foreclosures, which
nobody wants, and further declines in real estate prices that will hurt
homeowners as well as investors.
As Jeff wrote to
me, this article embodies the general consensus that rising home prices are
some kind of a public good: "Can the Times editors think of any other
market where they can complain about the general harm that comes about as an
effect of falling prices? The real estate lobby seems to have won a permanent
propaganda victory over economics journalists on the dangers of falling
prices in real estate."
I believe that
there is a widespread perception that rising housing prices "create
wealth". This is of course a fallacy of
composition: if the prices of a good that you own rise relative to other
prices, then you benefit. But this rise in prices does not represent a
magnitude of new wealth created, only a shift in the distribution of existing
wealth. People who do not own the good and wish to purchase it are worse off.
Rising housing
prices as a public policy -- through mechanisms such as the GSEs and
preferential tax treatment -- only cause resources to be shifted to house
construction. These resources must come from somewhere; as a result we have
less of something else.
As with any other
price, a lower price benefits buyers while a higher price benefits sellers.
There are a few prudent folks out there who chose to rent rather than overpay
for a home, and would like to have the chance to buy a home at a bargain
price.
Would investors
be hurt, as Morgenson says, by more foreclosures? Investors are not a single
homogeneous class with uniform interests. Older investors who rely on their
investment properties for income may may not intend to sell any time soon;
these investors care more about rents than resale prices. Flippers who bought
at high prices, intending to resell at a profit, would suffer losses.
Morgenson ignores
an important class of investors: people with cash who do not (yet) own
properties but would like to do so. These investors-on-the-sidelines are
waiting for a lower price to buy. Also, younger investors who are seeking to
build a property portfolio would take a loss on their existing homes, but
given their long time horizon would benefit more from the ability to augment
their portfolio at bargain prices than the capital loss on their existing
portfolio.
One final point:
the "nobody" who wants more foreclosures must be the same nobody as
in "nobody saw this crisis coming".
Robert Blumen
Also
by Robert Blumen
Robert Blumen is
an independent software developer based in San Francisco, California
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