People keep talking about a “recovery.” The rest of us wonder what they are talking about.
Perhaps a “recovery” means the successful inflation of housing prices. “The value of homes has recovered.”
Right. So now no one can afford them.
Ryan McMaken addresses the issue at Mises.org: “Thanks, Janet Yellen: Homeownership in US Falls to 25-Year Low.”
I do not regard homeownership rates as a proxy measure of economic prosperity. But, in the United States, increasing homeownership has long been a goal of federal policymakers, and Federal Reserve policy is often defended on the grounds that it makes homeownership more affordable through its efforts to force down interest rates. Moreover, homeownership does remain broadly popular in the United States as a common life goal and as an indicator of having achieved the so-called “American dream.”
However, in recent years, years of federal stimulus and accommodative Fed policy has done a terrible job of making housing more affordable. In fact, thanks to the Fed’s efforts to prop up asset prices, housing has become exceptionally unaffordable as both rents and home purchase costs have risen to new highs and outpaced wage growth.
Here’s a graph:
A real recovery would have looked completely different with homeownership recovering while prices sank and then rose only modestly due to greater demand. Most importantly wages would have recovered too. Homeownership rates sinking to the level of the early 1990s is an indication that something is wrong with our economy.
It’s not hard to see what’s ahead.
While there was a significant tightening of lending standards from 2009 to 2012, standards have continually loosened over the past two years. So while it’s still not as easy to get a home loan as it was during, say, 2005, its still getting easy to get a loan even if one doesn’t have money for a meaningful down payment, and has few assets. Indeed, sub-prime lending is making a quick comeback as Washington, DC turns the screws on banks to keep the money flowing.
The need to keep the easy money flowing stems from these relentless increases in home prices. If asset prices continue to climb, the thinking goes, we just need to keep shoveling more money to borrowers to get them in a house. And then, once they have a house, they’ll spend a bunch of money and the economy will take off.
Unfortunately for the borrowers, however, this line of thinking means that the next time a recession comes along, they’ll quickly become underwater on their home loans and find themselves trapped. The drive toward low down payments and subprime lending makes it far more likely that borrowers will find themselves with a house they can’t sell for as much as they owe. Or, the homeowner may simply continue living in a home where he’s making payments based on inflated values.
For borrowers who milk the system and just “walk away” from their homes, that’s no big deal. The ones who will be punished the most, however, will be the people who play by the rules and try to make good on their mortgage payments. Yes, the lenders will suffer too, but they’ll get bailed out courtesy of the taxpayers. The borrowers won’t be so lucky.
Yes, the banks are gambling with our lives again with loose credit. I don’t think that we have the political will or economic strength to make another bailout happen.
At least I hope not.