Pete Flint at trulia.com created some controversy when he asked the real estate community on the site how they would grade President Obama’s handling of the housing mess. As with many politically charged questions in web forums, the responses quickly devolved into placing blame with either Bush or Obama when in fact neither were the core reason for the mess. In truth, the root of the crisis was in our monetary system. The Federal Reserve, attempting to centrally plan our economy through interest rate policy, kept rates too low for too long, stoking a massive housing bubble that was bound to burst with the devastating consequences that we have seen the past few years. Folks, it is important to understand that healthy economies are created from the bottom up, from the buying and selling decisions of businesses and customers, not from the top down, through interest rate policy set by government central planners. When it comes to real estate, it is the agents, brokers, lenders, appraisers, escrow officers, buyers, sellers, etc. interacting to complete real estate transactions that create a healthy real estate market, not government bureaucrats far away in Washington manipulating interest rates or creating tax incentives. When Washington bureaucrats attempt to override or redirect the natural buying and selling that takes place in a free market, they create distortions that must eventually be corrected. This is what happened in the housing market during the bubble; prices didn’t rise because we fundamentally needed massive numbers of new houses for a growing population. Prices went up because loose monetary policy encouraged reckless speculation. Distortions like these are always going to correct themselves so that the market can return to a natural, healthy equilibrium.
Think about how absurd it was to inflate home values to astronomical levels. If nobody could afford homes at the high prices, who is going to buy them? If nobody is going to buy, how are prices going to stay high? The banks tried to support the market by writing increasingly risky and exotic loans like subprime loans and pay-option ARMs, but we know how that turned out. The market corrected anyway and we ended up with a big mess in the financial system that still has yet to be worked out.
Is it even good for the economy for people to be spending 50% of their gross income on their mortgage because of high home values? If people are forced to spend half their income just for the roof over their head, how are they going to be able to spend money on other things? Huge mortgage payments have the same effect as a massive tax increase; if people have less disposable income, they will not spend as much on cars, vacations, food, education, etc., which in turn hammers an economy that relies heavily on consumer spending.
The best solution for this mess is to allow the correction to happen. The correction is going to happen anyway eventually, whether we like it or not. By trying to prevent the correction with mortgage modifications, foreclosure moratoriums, TARP programs, buyers tax incentives, federal loan guarantees, etc., we are just loading ourselves with debt and delaying the inevitable and making it more painful when it comes.
-CH
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