Some say a recession has arrived. Some say it hasn't yet but will. Some say it never will.
Notwithstanding all the disagreement about where we are now, we've detected near-unanimity on the need for the housing market to stabilize (or "bottom") before the economy stages any kind of meaningful recovery. Which, as far as it goes, is almost certainly true. But the argument has assumed a normative dimension, with many observers claiming that it would be an affirmatively good thing for housing to bottom. Alas, this a question that gets too little attention in the current debate: Should we make extraordinary efforts to force the bottom into place right here, right now?
We think the answer is a definitive no. In the long run, the U.S. economy would be better-served if home prices fell further--much further in some markets, a little further in others--in order to reach market-clearing levels without short-term gimmicks and unsustainable subsidies.
After all, the big problem these days is that too many Americans became over-leveraged to acquire (or, more accurately, occupy) unproductive assets. This, we think, is a gross mis-allocation of public and private resources. And all this so Americans could stake partial/leveraged claims to an asset class that historically has been a relatively poor performer.*
- We are not of the "let them eat cake" school of economics. Not at all. But the castles-in-the-sky fantasies of the last few years served Americans of moderate means very poorly. These are people whose real wages are lower now than they were when we embarked on this outrageous real estate bubble. So bringing real estate prices back to some reasonable level of affordability, for all the dislocations it will cause in the short run, is very much in the long-term interests of working- and middle-class America.
- We aren't reflexively anti-government. By its very existence, government "intervenes" in markets...by creating them!** We do think that extraordinary interventions should have clearly stated objectives and plausible likelihoods of achieving those objectives. But we do think it's entirely legitimate for government to try to smooth out the roughest edges, and mitigate the negative externalities, of market cycles.
- We freely and fully acknowledge that falling home prices do and will hurt in the short run. But we'd rather take the responsible position of focusing on the long-term requirements of economic growth than just applying an expensive short-term salve to the wounds created by the last bubble.
And what are those requirements of growth? Here we'll focus on just one: A higher rate of domestic saving. By slashing interest rates, the Fed has punished saving (of which we need more) and encouraged borrowing (of which we need less). These days, the marginal spent dollar is the marginal borrowed dollar. They're the same thing!***
Only in the most short-sighted sense is a bottom in housing (which we intend to mean a stabilization in the price of residential real estate) necessary or good. A further purging of the truly perverse excesses that have barnacled the American economy over over the last few years would serve us all better in the long run. Less leverage. More affordability. Higher savings rates. More discretionary income for other stuff. More productivity.
No self-respecting elected official will touch this argument, and we understand why. But let's be honest: That doesn't make it any less compelling.
* Thanks in part to exceptionally high "expense ratios." If we included the true costs of homeownership (interest payments, property taxes, maintenance, &c.), the return on equity from residential real estate would, in all but the most unusual circumstances (of the sort we witnessed from 2000 to 2005), be remarkably low, even negative in many instances. That doesn't mean real estate is inherently a "bad investment." For several reasons, economic and otherwise, we like the idea of homeownership as much as anyone. But it does mean that as an investment per se, residential real estate isn't especially attractive.
** Through the establishment and preservation of physical and intellectual property rights, the enforcement of contracts, and the maintenance of infrastructure and public safety, among other things.
*** Those stimulus checks now flying toward a mailbox near you? Those are borrowed too, and the feds want you to spend 'em.
Alison Vekshin, "U.S. House Passes Anti-Foreclosure Bill Facing Bush Veto Threat," Bloomberg, May 9, 2008