"Nobody" Wants More Foreclosures?
From my friend Jeff Scott, a link toGretchen Morgenseon’s column in the New York Times Why Treasury Needs a Plan B for Mortgages :
Of course, cries of moral hazard will erupt if borrowers get large cuts in their principal balances. Rightly so. Why should those who took on too much debt to buy too much house get rescued when those who were prudent go unrewarded?
But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors.
As Jeff wrote to me, this article embodies the general consensus that rising home prices are some kind of a public good: “Can the Times editors think of any other market where they can complain about the general harm that comes about as an effect of falling prices? The real estate lobby seems to have won a permanent propaganda victory over economics journalists on the dangers of falling prices in real estate.”
I believe that there is a widespread perception that rising housing prices “create wealth”. This is of course a fallacy of composition: if the prices of a good that you own rise relative to other prices, then you benefit. But this rise in prices does not represent a magnitude of new wealth created, only a shift in the distribution of existing wealth. People who do not own the good and wish to purchase it are worse off.
Rising housing prices as a public policy — through mechanisms such as the GSEs and preferential tax treatment — only cause resources to be shifted to house construction. These resources must come from somewhere; as a result we have less of something else.
As with any other price, a lower price benefits buyers while a higher price benefits sellers. There are a few prudent folks out there who chose to rent rather than overpay for a home, and would like to have the chance to buy a home at a bargain price.
Would investors be hurt, as Morgenson says, by more foreclosures? Investors are not a single homogeneous class with uniform interests. Older investors who rely on their investment properties for income may may not intend to sell any time soon; these investors care more about rents than resale prices. Flippers who bought at high prices, intending to resell at a profit, would suffer losses.
Morgenson ignores an important class of investors: people with cash who do not (yet) own properties but would like to do so. These investors-on-the-sidelines are waiting for a lower price to buy. Also, younger investors who are seeking to build a property portfolio would take a loss on their existing homes, but given their long time horizon would benefit more from the ability to augment their portfolio at bargain prices than the capital loss on their existing portfolio.
One final point: the “nobody” who wants more foreclosures must be the same nobody as in “nobody saw this crisis coming”.