Monday, July 30, 2007

Real Estate Puzzle

Here’s a shocker, according to the San Diego Union-Tribune, 17% of all resale homes in the month of June in San Diego County closed at a selling price lower than the price at which they were purchased. That’s almost one out of every five. The average depreciation (yes, that’s depreciation of real estate) was $61,000. Mortgage defaults are up 150% over the same month of last year.

This is going to get ugly.

Before I go further, my wife and I own a home in San Diego. We have a thirty-year fixed-rate mortgage and quite a lot of equity because we’ve had the home and the mortgage for quite a lot of years. I would certainly like to keep that equity, but I do not believe that our leadership should take action based on my personal wellbeing. I believe our leaders should act in the best interests of the society as a whole, whether that works well for me or not.

Back to the issue of homes being sold at prices below the purchase price. Like many things in the news, we risk over-simplifying the issue. On the face of it, and much of what is being opined, is that people bought homes that they could not afford because easy money was being thrown in their faces that not only allowed but encouraged them to do so. That being the case government should keep those people from losing their homes, and prevent real estate values and equities from dropping, by instituting some sort of support or refinance program.

It sounds heartless, but I’m not so sure I support that approach. If the situation was as stated above I certainly would, but I have too much evidence that the situation is not as simple as it seems. I read papers, and I talk with people who are in the banking and real estate businesses.

Not all of those homes being defaulted are new purchases. Some are the result of refinancing, sometimes multiple refinancings, and lines of credit to take out equity for the maintenance of a lifestyle that the homeowner could not afford; to purchase cars, boats and big screen televisions. What portion? I don’t know, but I suspect it is significant. Banks and mortgage brokers have been selling those product lines hard for several years.

Should the government save people from the consequences of those decisions?

Of those which are new purchases, how many are truly innocent victims? Once again, I don’t know, but I suspect the number is actually quite small. Many of the loans were what are called “liar loans” where the buyer is told that information will not be verified. Those are loans where the buyer and broker were conspiring to defraud the lender.

Should the government step in to protect the fruits of dishonesty?

In other new purchases the buyer was intending to refinance (or “flip”) the home before the increased payments kicked in, and found out that he was less clever than he imagined he was. Or the buyer knew that the payments were going to increase, but assumed (or merely hoped) that something would intervene to accommodate or prevent the increase. (“Maybe interest rates won’t actually go up.”) Maybe, perhaps even frequently, the buyer was given bad advice and often given that advice by the real estate agent selling him the home.

I have some sympathy for this buyer, but buying a home is the biggest financial decision that the average person will ever make, and to make it without due diligence… To make a decision involving hundreds of thousands of dollars one’s money based on the advice of the person to whom one is giving that money when he is telling you precisely what you want to hear?

In the world I live in you need to accept responsibility for your decisions, and you need to be aware of that responsibility before you make big decisions.

If the government instigates a program to refinance or support real estate values, who picks up the tab for that? It’s going to cost money, and a lot of money. Where is that money going to come from? Right, you and me. Why should people who don’t own homes, and people who did not make bad decisions on the homes that they do own, pay for the bad decisions of others, no matter how well intentioned? And bear in mind that a portion of those intentions, a portion which I believe to be significant, were not well intentioned at all.

Real estate values in San Diego are utterly absurd. If they are kept propped up then people will continue to buy homes they cannot afford simply because there are no homes in this county that anyone other than the “idle wealthy” can afford. Either people who can’t afford them buy these homes or they will remain unsold. If values drop, then (aha!) people will be able to buy homes that they can afford.

There is an even bigger reason, though, that I oppose “saving” these bad loans.

The American economy is living in a dream world, in an economy that is an illusion propped up by debt.

In 1975, average US household debt was 62% of disposable income. By 2005, that number had jumped to an unsustainable 127%. Savings rates are in negative numbers. Incomes are stagnant, debt increasing, savings negative and yet retail sales are high enough that they are “fueling the economy.”

The Dow Jones shot from $13,000 to $14,000 in just three months. The companies represented in that list did not increase their capital in those three months, they built no new factories or buildings and they gained no real value. Their stock gained $1000 multiplied by the number of shares, and stock is a liability, a debt.

Pundits refer to the “housing bubble” but it’s not, it is just part of a larger problem for our economy which is the “debt bubble.” Homeowners are borrowing money, pledging the equity in their homes, to buy big screen televisions made in China and companies are borrowing money to buy other companies for more than their actual value. Money in the hands of the super rich increases, United States dollars in China increases, and everywhere else debt increases.

Wiser heads than mine will have to propose specific solutions. I suspect they lie in returning manufacturing and production to this country, finding ways to “insource” meaningful jobs that “Americans do want to do.” I suspect it’s not going to be easy, that it will require reductions in the large profits that corporations are enjoying right now, and that taxes might have to increase.

But I don’t think part of solution is increasing government debt load, nor do I think is protecting individual citizens from bad debt decisions.

No comments:

Post a Comment