This argument is fine as far as it goes; but I think it trips over a conflation of two separate motives for "investing" (by which I mean the commitment of financial resources, whether "hard" or "soft," as in loaned or promised). The simpler motive is "acquisition for use;" and the other is "speculation." Most of us by real estate because we want to live in it, which has been a normative practice for about 50 years.
Speculative investing, on the other hand, is a gamble. It thrives on the premise that "anyone can play;" and those who run the gambles profit because, when anyone plays, most of them are going to lose. In other words investing in real estate for its future value is no different than buying stock for its "anticipated growth." It is risky, but it is promoted by those who do everything they can to get you to ignore the risk.
The real problem is that Blodget's "dreamworld" was imposed by predatory lenders, who forced homeowners into a speculative investment to support acquisition-for-use. Our Administration argues that the victims should have remembered CAVEAT EMPTOR; but does this really work for those who are being force-fed under pressure with deceptive information? I suspect that economic recovery is going to depend less upon a readjustment of housing prices and more on a general readjustment of the "rules of the game" under which the majority of our population can engage in acquisition for use.
When will our economy begin to recover? Not until US homeowners wake up and realize that their houses are worth what all assets are worth: what someone will pay for them.
The NYT's David Leonhardt chronicles the dreamworld inhabited by most US homeowners, a bright cartoon-land in which the value of their neighbor's house has dropped by 30% but theirs is still worth more than they paid for it at the 2006 bubble peak. These homeowners refuse to move or sell until they can "at least break even," which means they'll stay in their depreciating assets for years while skyrocketing inflation reduces the value of whatever they eventually get by about 4% a year.
Of course, those who inhabit only the digital world shouldn't cackle too loudly: As Fabrice Grinda observes on Silicon Alley Insider, start-up owners behave just the same way--refusing to sell a dollar of equity as prices drop...right up until they run out of cash.
In any event, our economy won't truly recover until house prices adjust. And in the housing market, at least, price-to-income and price-to-rent ratios suggest that that "adjustment" is likely to be down.
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Yup, and that's what the problem with the housing bubble was. Not that people were getting screwed on the subprime, but the fact that the housing COSTS rose so much that people who otherwise would have been able to afford a house under a regular mortgage COULDN'T, and so they were forced into subprime just to buy a house!
And THAT (housing costs) was driven by the Fed interest rate as put into practice by Greenspan--lower, lower, lowest, and so fed (pun intended) the greed at the very top for that cheap money that now needed a "home," so to speak. Inflation in home values was driven from the top down and for the benefit of the big financial corps who needed to churn billions in new debt to stay ahead of the house of cards they had created.
That's true, the reason for the MASSIVE inflation in housing prices was driven by a combination of low interest, coupled with greedy corporations. However, the people started paying ridiculous amounts for a house that they were buying. When you can walk into a 1500 square foot home, and consider $200,000 to be cheap, something is wrong with EVERYONE!
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Posted March 26, 2008 | 09:38 AM (EST)