It leaves out the fact that the
“homeowners” who are in trouble simply don’t make enough money to pay for their mortgages. What is needed is good paying productive work for those homeowners so they can make the money to pay for what they bought.
Grapple,
You are exactly, absolutely right on the money. Home prices have far exceeded buyers ability to pay those prices. The wave of "Financial Innovations" has caused most of this disconnect.
In general, the housing bubble was created by enabling homebuyers to purchase progressively more expensive homes than their incomes would have previously allowed. Historically, there has been a consistent, long-term relationship between inflation-adjusted wages and inflation-adjusted home prices. In the past, as incomes rose, home prices rose the same percentage. When incomes stagnated, so did home prices. The 2 have always been linked.
But this trend changed noticeably between 1996 and 1998, and changed even more after 2001. Home prices began rising faster than the incomes. Tax changes did have some effect. But it was the "easy credit" factors that caused the bulk of the change.
The net effect of the "easy credit" factors was to increase the home purchase price vs. income ratio. Some of the "easy credit" factors were the reduced Fed target rate (making it cheaper for banks to borrow short-term to obtain money for mortgage origination), no-down payment loans, reduced down payment loans, interest-only loans, adjustable rate loans, "option" loans (allowing borrowers to pay only a portion of their interest, allowing them to fall into the "negative-equity" category), piggy-back loans (allowing a buyer unable to afford even a down payment to obtain a separate loan to fund the down-payment), no-documentation/"liar" loans (allowing people no income to purchase homes by claiming they made more money than Donald Trump), along with loans that combined many of these factors.
The biggest single contribution was from the increase in "securitization" of mortgages. This allowed mortgage originators to make risky loans to uncreditworthy borrowers, and then dump their own risk by selling the loan to another party. The ability of a mortgage originator to dump the loan default and foreclosure risk on another party, while profiteering from risky loan creation, was a key factor. There was nothing to be lost, and everything to be gained, if the loan could be sold to another party. Meanwhile, secondary buyers of these mortgages, often blinded by greed and rendered senseless from high yields, were not fully aware of the risk they incurred. The buyers of the resultant mortgage-backed securities (and even more greed-blinded and senseless), were often unaware of the risk. The latter was even more problematic, as MBS buyers were usually spending someone else's money. In some cases, it was a hedge fun. In other cases, MBSs were purchased by a pension fund managers, who were not fully aware of the risk. This resulted in the transfer default risk to unsuspecting pension fund holders. Default risk was never eliminated, or even reduced. It was simply spread out, so that many could share the adverse outcomes incurred by a few greedy morons. In many cases, the risk was completely removed from those who knowingly and egregiously incurred the risk, and on to those who had taken no risk at all. In the case of pension funds, those incurring the risk have little choice about accepting the risk. Most 401Ks have extremely limited choices. More often than not, the choice is between one risky option or another risky one. Low-yield, truly safe options are often not available. All the while, the government encourages and subsidizes this blind, semi-mandatory risk taking, by giving tax deductions to those trusting their money to a pension fund manager. And if the pensioner doesn't accept the risk and removes his money, penalties are incurred and taxes are assessed. Talk about Corporate Welfare for Wall Street. And mandatory at that.
What the Bush junta and the government are really saying is:
"If you 'donate' your money to Wall Street, we won't charge taxes on it.
However, if you do something as un-American as taking your money out of your pension fund, proving you're an anti-government-pinko-commie-leftleaning-liberal-paranoid-conspiracy theorist-IslamoFascist-terrorist-nutjob-fartknocker, then we
will charge you a penalty, we
will assess taxes, and we
will put you on a terrorist watchlist.
So there. Be a good American. Stop asking questions, stop whining and accept the risk of losing all your money.")
Alright. End of rant.
Getting back to housing.
All the combined "easy credit" factors allowed buyers to purchase homes that were disproportionately expensive compared to their income. The media, the government, and Fed chairman Greedspan encouraged this lunacy.
Though home prices have experienced peaks and valleys throughout history, they have
always reverted back to a consistent straight-line relationship to consumer income. At present, nationwide median prices need to decline roughly 50% to return to their historical relationship to income. In some bubble areas (like California), the decline would have to be nearly 60% to return to historic norms.
Since home prices have
always returned to those historic norms, there's no reason to suspect they won't again. Which means there's no reason to suspect nationwide home prices won't decline 50%. In fact, it's unreasonable to claim they won't decline.
American homebuyers' income simply cannot support current prices. Nor cannot it support only a 10% decline. Much larger declines are not only possible, they're probable. In fact, they're almost guaranteed.
The only variables are how fast prices will drop, when they'll "bottom out," and how much will price declines overshoot the stable level before returning to normal. (i.e., how much
lower will prices go than even the historically "stable" level, before they rise back to the normal trend level.)
Many graphs are available demonstrating how current home prices have greatly exceeded the normal home price-to-income ratio. I'll insert as many as possible here (I may have to come back later.)
I agree with Grapple. The only way to maintain home prices, or even mitigate a massive decline (which is almost guaranteed), is for American real wages and income to rise. This will only happen if labor demand increases more than the supply, which means reduced outsourcing and exportation of American jobs, and reduced "importation" of labor, through both illegal immigration and H1B/L1 visa expansion.
If Corporate America continues its successful campaign to suppress American wages, by importing labor and exporting jobs, home prices will definitely crash. And badly.
The credit bubble is bursting along with the housing bubble. With consumer credit contraction, and with no compensatory increase in employment and wages, consumer spending can only decline. And that spending decline will also include housing.