Why You Should Live in a Van Down By the River: You Can Move It.

I read a lot of economics blogs and columns, in part because I am a masochist but I also really like to see what economists are saying or not saying about housing.  At Marginal Revolution today there is a discussion about theories behind the involvement of Fannie and Freddie in the mortgage market.  The post states that the old consensus was that the GSE's were in place to make housing more affordable.  EPIC FAIL ALERT.  The notion that Fannie Mae, Freddie Mac, and the Federal Reserve have ever made housing more affordable is ludicrous and comical.  If you define affordable as low interest rates then you can definitely argue that they succeeded but you are ignoring the most important factor in whether housing is affordable:  your income.

We used to consider housing affordable if you spent roughly 25 percent of your gross monthly income on housing.  During the peak of the housing boom, Fannie Mae was routinely backing loans at 65 percent of  people's gross monthly incomes.  If you expand your definition of affordable to mean, "at the cusp of bankrupting you" then well done, Fannie.  You made housing more dangerously affordable than ever.

What we have in many parts of this country is a mismatch in the supply of housing with what consumers can actually afford, you know, given their crappy job prospects.  The government inflated housing bubble changed what we view as affordable and made a 3 bedroom house in the suburbs with granite countertops seem like a public good.  It's not.  We have a vast amount of homes that are affordable to a small amount of people.  This cannot be fixed by government intervention, it will require rising incomes and economic growth which will increase demand for what is currently, unaffordable housing.

HUD projections show that in my region, housing demand will be for homes in the $125,000 to $200,000 price range.  This is affordable given our median income levels and these are the homes that are actually selling right now.  What we have is a plethora of homes priced from $250,000 to $350,000 that even if you have 20 percent to put down (a modern miracle), once you factor in taxes and insurance you would need income in excess of $72,000 a year to afford.  This is assuming that you don't have any other debt.  If you have a car payment, student loan, and an average credit card balance this ups your income requirement to $100,000 a year to afford the payment.  Better get on the The Ladders website.

On the other end of affordability we have many families that are working class, what is quickly becoming a class of the working poor.  They may have combined incomes of $45,000 per year and they have consumer debt and spend virtually all of their incomes monthly.  For this family, an affordable house carries a mortgage payment of  $1125 including taxes and insurance.  For this family, a home that costs $150,000 is affordable.  Unfortunately, many of these families are living in $250,000 houses because they qualified for twice what they could actually afford with the help of Fannie, Freddie, and the Federal Reserve.

We have a number of housing problems which are exacerbated by our poor economy.  People underwater on their mortgages are trapped unless they say screw it and walk away and why wouldn't they; what incentive do they have to stay?  Do you really think people struggling to stay afloat are going to put the virtue of their word over a rational economic decision?  Didn't think so.

A bigger problem exists for unemployed homeowners.  Because economies tend to have local and regional agglomeration characteristics in particular industries, you end up with a lot of unemployed people in one area with similar skill sets.  If these unemployed people were mobile, as in able to sell their house and not take a complete financial schlacking, they could move to where their skills might be employable.  Unfortunately, we have a labor force that is very immobile right now which makes unemployment even worse.  Being a renter right now has tremendous advantages, particularly if you can move to take advantage of opportunity.

Perhaps, the Banks should become landlords and turn short sales and foreclosures into rentals.  This would slow down the decline in housing values because the properties wouldn't go to market and then drag down appraisals for the next two years for other homes in the area.  Bankers would make great Slumlords, they wouldn't even require training.

Just when you thought it couldn't get worse....

This article in the WSJ is today's reason that I am fast tracking my plans to become a pirate.  Here is the opening sentence:

"The U.S. government will likely continue to play a role in guaranteeing mortgages, but policy makers must figure out how to design a system that doesn't lead to a rerun of the collapse of mortgage-finance giants Fannie Mae and Freddie Mac, Treasury Secretary Timothy Geithner told attendees at a housing summit convened on Tuesday."

Arggh.  My immediate irritation is with the word "design".  The government couldn't design an exit strategy from a wet paper sack yet they can design a system to prevent financial ruin?  No, they cant and the fallacy that you can design a system to control a spontaneous order like our market economy is mortifying and dangerous.  I was even more disturbed to find out that two economists I greatly respect  seem to be throwing support to Geithner on their blog.

The argument pervasive at the moment is that without government backing there will be no private capital in the mortgage markets and this will lead to a further decline in housing prices, more underwater homeowners, and more stress to the economy.  Currently, the government is involved in backing 90 percent of mortgages whether implicitly or explicitly.  As far as I can tell the idea is to wean the government out of its involvement in the business of housing by temporarily increasing its role, an idea that is so profoundly crazy I cannot believe it is being taken seriously by smart people.

I agree with the ultimate goal that the government (read taxpayers) will not be intimately involved in every loan made for housing.  The problem lies in the fact that once the government is involved, it changes the expectations of the private players and becomes the new rule of the game.  The incentives will not be there for the private sector to take a role because the expectation will be that the government will continue to prop up the market.  Private capital will flow into areas other than mortgages and the taxpayer will end up with the flaming crap bag on their steps.  Temporary government intervention typically turns into permanent government intervention because it distorts market signals and diverts investment to alternative sectors.


I don't know about you but if I hear the phrase, "Mortgage Rates are at historic lows," one more time I am going to exercise my second amendment rights and blow up my television.  Mortgage rates have been too low for too long, another part of the problem.  The Treasury officials are arguing that without a government guarantee on mortgages, mortgage rates will soar.  Fantastic!  Let them soar, they have been distorting the real cost of lending and altering borrowers decision making calculus for too long.  Interest rates are prices and as such, they should reflect the risk associated with lending and the cost of doing business.  Let interest rates rise and more private investors will enter the mortgage markets.  Keep interest rates below the actual market rate and the government will be the only entity dumb enough to jump in.

I am so tired of government stimulus that I think I need a Valium to cope with my over-stimulation.  

Why Financial Reform Won't Work: Part 1

I have been ranting about financial reform legislation and how it won't work and will probably have horrible unintended consequences but before today, I didn't spell out why I feel that way.  Today, I decided to spell it out after I received a email from Barack Obama's people telling me to call Senator Grassley and convince him to vote for the combined bill.  The email came in with the subject of Urgent and claimed the legislation is the "boldest overhaul of the financial system since the Great Depression."  I like the use of the word boldest in this sentence because bold does not equate to intelligent, well designed, or effective.  Once, my co-blogger after drinking for twelve hours, stole a golf cart at a NASCAR race and proceeded to drive in small circles turning left and screaming, "Guess who I am?  I'm a NASCAR driver."  This was a bold move, one of his boldest.  It does not qualify as one of his most intelligent or positive moments and it could have landed him in jail.  Sometimes bold moves, while funny as hell, are not good ideas.

What I hate most about the legislation is the creation of a  Consumer Financial Protection Bureau.  You might wonder why I could hate something that sounds so innocuous and the answer lies with where it will be housed:  The Federal Reserve.  We are supposed to be comforted by the fact that it is an autonomous bureau with a single director.  Look, there is no independent agency or bureau in all of Washington D.C., I don't care what they are intended to be.  Furthermore, how autonomous were you when you lived under your parents roof?

The Federal Reserve is one of the 5 major players that created the crisis we find ourselves in and they have no business being anywhere near a bureau intended to protect consumers.  They fueled the crisis, failed to recognize it, and then sold consumers down the river in the bailout mess.  Putting a Consumer Protection Bureau there is like assigning lions to be security detail for gazelles.

Another key element of the package is regulatory control and accountability for the ratings agencies.  The problem with this is that the regulators have to understand what the agencies are doing and what the products are they are actually rating.  Half the instruments Wall Street are trading are so convoluted that people within the firms trading them don't know what they are.  How could a regulator possibly know what the ratings agencies are doing or what they are rating?  Someone smart enough to get it isn't going to work as a regulator, nope, they will go to work on Wall Street inventing new instruments of debt and new ways to sell it.  Don't even get me started on the corruption inherent in regulation anyway.


It's very simple; Consumers need to protect themselves.  If we have gotten so collectively stupid that we think the government can protect us than we are totally screwed as a nation.  The government couldn't protect us from September 11th, then the government created the conditions for the housing crisis, and I'm not sure if you noticed; the government can't fix the economy either.  The best the government can do to help the consumer is encourage financial education in the schools and mandate more economics courses for our students.  Even that won't solve the problem.  When people want to do stupid things (think NASCAR story above), they will find a way to do them. 


The email from Barack's people claimed that the bill would end the exploitation of the consumer by ending hidden fees and pages of small print.  The pages of small print you get with a loan application are there because of regulations, trust me when I say we would have preferred to not send you fifty pages of documents to get your loan approved.  If you think there is small print now, just wait.

The truth is, when I was a loan officer, my customers didn't read the disclosures I sent them.  They looked at two things:  their monthly payment and their closing costs.  They signed fifty pages of disclosures without reading them.  Most of my customers would get their loan package and call me and ask for the Cliff Notes, which I was more than happy to provide them.  If you really ever read a loan package and understood everything in it, you probably would not want to get a loan.  There is a clause in most loan documents that if you make any material changes to your home without notifying your mortgage company they can call the note due and demand full payoff.  How many people know that?  How many people know that and tell their mortgage company that they turned a bedroom into a stripper lounge?

I don't have the answers on how this gets better but I think it starts with us getting smarter, which is not too promising and quite frankly, makes me fear for the future.

Independence from the Myth of Homeownership

It is Independence Day and I have been contemplating whether it is time for us to collectively say we don't buy the myth of homeownership anymore and declare our independence from the fallacy.  Will we do this?  Of course not.

The government likes homeowners and for good reason.  Homeownership provides stability, a tax base, and makes people far less mobile than they otherwise might be.  All of this allows for easier governance and more far reaching impacts.  This isn't just a goal at the Federal level, municipal governments enjoy these benefits as well and are incredibly reliant upon homeowners as a means of survival.  This is why the government promotes homeownership and creates the propaganda we know as the "American Dream."

In 2001, I was invited to dinner at a small business owner's home.  The evening was pleasant at first, but when I made what I thought was an innocuous and indisputable observation, they turned on me.  The hideousness that came out of my mouth was, "Housing isn't always a good investment, the stock market outperforms housing over time.  People would be better off renting and investing their money in the market."  What had been a pleasant evening with food and wine turned into an absolute shitfest.  The couple, twice my age, looked at me like I had just declared that I was going to eat them with fava beans and chug a nice Chianti.  Actually, it was worse than that.  In heated voices, they provided me anecdotal evidence of how if they didn't own homes they never could have started their business.  I cried Bullshit.  At one point, the wife rolled her eyes at me and called me a naive child.  Then when I provided economic evidence for my argument, they called me Un-American.  Apparently providing statistical data supporting the fact the return on investment of the stock market is greater than that for housing is unpatriotic, who knew?  I lack the ability to back down from an argument and because I was so convinced I was right, I didn't shut my yapper and was never invited back to their home.  Their final argument as they shoved me out the door was that the dot-com bust proved me wrong.  Is there nowhere that I can hide from foreshadowing and irony?

So how did I go from arguing against homeownership to becoming a homeowner and then profiting from shoving other people into the same situation?  The answer is complicated but I think it was the combination of the propaganda post September 11th along with the recognition that the market was about to boom.  I bought my first house with the expectation that I would make a lot of money on the investment plus, I needed somewhere to live.  I never thought I would become a salesperson for the American Dream and there was no way I could have anticipated how good I would be at it.  I guess I'm saying that I sold out.

When you stop and think about what happened after September 11th it is hard to not realize how fragile our economy is.  I don't think we ever recovered from the 2001 recession, certainly not in terms of incomes and real wealth.  We had a fake recovery, fueled by an illusion.  The housing boom made people feel wealthier, and on paper they actually were.  That is why we had the rapid increase in household wealth and the record consumer spending expansion.  The price we paid was the ensuing decline in household wealth, the single greatest decline in modern history and nearly tenfold what we experienced during the OPEC crisis in the 1970's.  Without the government fueled housing boom we would still be in the recession of 2001.  Reread that statement because I don't think it gets enough play in the media.

It seems ironic that people get up in arms about government spending to get out of this recession when they didn't bat an eye while government incentives "got us out" of the last one.  The sad and scary fact is that this recession is really the double dip of the last one and since we aren't recovering, we might get a triple serving of economic smackdown.

Perhaps, I'm wrong, but I don't think so.  Here is a basic fact about our housing boom recovery that supports what I am arguing:  We really didn't have inflation during the recovery according to government measures.  Inflation is not always a bad thing, in fact, in a true period of economic growth we should have inflation due to rising wages which increases demand and puts upward pressure on prices.  We actually had stagnant wages during this time and by some measures, we experienced wage erosion.  That is the opposite of economic growth, that is economic decline.  

The booming economic years of  2003-2007 were a myth, just like homeownership.  The government stimulated us into recovery through less transparent measures than it is using now.  Incentivizing homeownership through legislation, expansion of the GSEs and arbitrarily low interest rates was our stimulus and ultimately has proven more costly than we can even comprehend.

Am I saying the housing crisis is the fault of the government?  Hell yes.  I recognize that greedy bastards on Wall Street and Main Street played a role, but, they were merely responding like rational economic actors to the incentives the government was providing.  I almost feel sorry for the poor bastards on Wall Street who are being demonized by indignant politicians for causing the crisis.  Hi Pot, have you met Kettle?



So, Happy Independence Day.  Enjoy your potato salad and beer, it is as American as dogs in bandannas.  In the spirit of the holiday, I offer this from the Declaration of Independence:

."..that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness."

Notice that homeownership isn't a fundamental right.  Let's remember that the next time we hear about the American Dream.  Don't even get me started on the liberty part....

Abolish The Fed, But Keep the Money

I have met some very interesting people through Facebook and email since starting this blog.  Apparently, I have also triggered the fascination of a guy obsessed with whores who may be taking our name a little bit too literally.  If you are that guy, let me reiterate:  WE DO NOT HAVE SEX FOR MONEY.  As I told you, we have networked with people we can't stand for money and we accepted money for our tiny role in the destruction of the economy, but neither one of us wants to sleep with you for any amount of money. 

I received an email from someone who appreciates my hatred of the Federal Reserve and felt that our shared desire to see the Fed shutdown inferred that I also shared their hatred for money and wanted that abolished too.  Umm, no I don't.  While I appreciate your desire to make the world a better place and I completely understand your righteous indignation with the banking system, I have to completely disagree with the notion of getting rid of money.  Please hear me out....

Our currency has no intrinsic value, it is just paper and crappy metals.  BUT, it reduces transaction costs and facilitates exchange, which is pretty damned important.  Money has allowed commerce to grow and has made people better off by allowing them to exchange with different people relatively painlessly, in turn, allowing people to have necessities as well as luxuries that they otherwise wouldn't have access to.

Imagine if there was no money and we traded in commodities.  We would be forced to specialize in our own "currency", perhaps I would raise goats and chickens to trade for other goods I might need.  In terms of portability, goats and chickens would make lousy currency and would require a much bigger purse than I care to tote around.  Secondly, they stink.  I highly doubt people would enjoy sitting by me at Wrigley Field if I had to bring goats and chickens to buy beer, not to mention, people at Wrigley hate goats.  Just sayin.

In the spirit of beer I offer my third and most important defense of money.  Imagine my community has a few bars and I want to go get a beer.  I load up a few goats and chickens in my horse pulled cart and head off to the bar.  Upon entry, the bartender looks at me and tells me he can't serve me.  I argue that I'm completely sober and he replies, "No, its not that.  Another goat farmer was just here and I finally had to cut him off because I don't need anymore goats."  I might offer my chickens only to find he is stocked up on those to.  He might tell me what he really needs is some wool.  Now I have to go off in search of a sheep herder who needs chickens and goats in the hopes we can trade so I can go back to the bar with wool.  I have the added worry that in the time it takes me to track down someone to trade with, another thirsty bastard will show up to the bar with wool, drink my beer and max out the bartenders demand for wool.  Complicated?  To borrow a line from Mrs. Palin, you betcha. Even worse, I might not ever get that beer. 

Money isn't what is wrong with the world.  I'm sure that is hard for some people to swallow in the economic disaster we find ourselves in.  You can be angry at fraud and corruption but you can't blame money for it.  You might argue that it is the love of money that creates fraud and corruption but I don't buy that either.  Money doesn't make people behave like assholes...people choose to behave like assholes.  Get a bunch of assholes together and you can form a government or a corporation and really do some damage.

I like money and I like beer, and frankly, making change with goats seems awfully messy.