John Browne: Housing woes hurt growth
Speculation in housing was pivotal in causing the Great Recession. Dismissing history, investors and lenders believed that real estate values would climb continuously. This misconception fueled a historic boom in house prices.
This resulted in mounting speculation that was funded by more lenient, even aggressive, lending practices. Some would say that some lending practices, like adjustable rate mortgages (ARMs), bordered on deceptive. By lending to subprime borrowers who had little chance of paying their mortgages, lenders stood to foreclose on the underlying properties at a capital profit, plus some interest.
Many of these unsound mortgages were “bundled” to form the underlying security for financial instruments and sold to unwitting investors internationally. A highly speculative boom took house prices some 30 percent above their 100-year average price increase trend of 2 percent per annum.
When the Great Recession hit, house prices fell dramatically. Though not to their 100-year trend line, the fall threatened the bankruptcy of major lenders, including huge money-center banks and insurance companies that were potentially placing politically sensitive annuities at risk. The Federal Reserve organized the salvage of the banks, investment banks and insurance companies — at the expense of taxpayers.
Contrary to its charter, the Fed bought mortgage and other paper, some of it toxic and financed by synthetic dollars and currency debasement. While this rescued lenders, it had the perverse effect of preventing house prices from falling to a “more affordable” level nearer to their 100-year trend line. Another measure of Fed-inspired correction was a tightening of lending conditions. The Dodd-Frank Consumer Protection Act served further to tighten credit to home buyers.
The depressed level of housing and a reduced “wealth effect” is viewed as a serious growth inhibitor.
With the aim of “making housing more affordable,” the Obama administration introduced measures to allow for the restructuring of terms for those less well off. It was only minimally helpful to the many individuals who were “underwater” with housing debt.
“The current administration will continue to help homeowners hurt by the financial crisis,” Treasury Secretary Jacob Lew proclaimed late last month.
Buyers are facing historically high house prices, tighter credit restrictions, falling average wages and increased taxes associated with Obamacare. There are concerns that house prices could fall again. Many prefer to rent, using post-tax money, rather than own with tax-deductible mortgage interest payments.
Purchase prices for rental property are rising, as are rents. Yet falling levels of ownership are politically dangerous and do not bode well for consumer demand and economic revival.
It appears that consumer morale has been harmed more than had been thought. Regardless of the amount of synthetic money introduced by the Fed, some wealthier consumers are losing faith in the markets. They are hoarding cash and spending only on smaller, “feel-good” luxury items.
As for the economy in general, it appears that the government's key task for improving the housing market is not restoring liquidity but boosting consumer morale to increase demand.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at johnbrowne@yahoo.com.
