Categorized | happenings

Why are we trying to stop the slide in home prices?

Tim Cavanaugh in this month’s issue of Reason states the obvious about the housing market (“House of Pain”). We all knew that housing prices had gone way, way out of control, particularly in markets like mine (Los Angeles), where people were buying small fixer-uppers-just-to-make-them-a-fixer-upper homes for nearly half a million dollars. The type of homes you would expect janitors to live in. Money quote:

Comparing data from the U.S. Census Bureau and the National Association of Realtors, you can estimate (very roughly) the ratio of median household income to the median home price in the United States. A house today costs four times your annual salary. Ten years ago, it cost only three times as much. In 1988 it cost about twice as much; in 1978, less than twice as much.

You don’t need fancy numbers. Personal experience is enough to show you that prices had become unhinged by the middle of Bush’s tenure.

We bought our first home in 1992 (3500 square feet, 1/4 acre) for about twice our annual income. We bought our second home (about 3000 square feet on five acres in Los Angeles) for about three times our annual income (although we qualified for loans seven times our annual income. While both the mortgage company (Countrywide) and our realtor pushed and prodded and prayed and petitioned us to take as much mortgage as we could qualify for.

In 2006, the value of our home had doubled in value relative to comparables in our area. Our income, however, had not. Homes we had looked at in other areas had increased almost 2.5 times. Nobody in my circle had income increases even remotely resembling this doubling.

How could home prices double in an area where incomes had increased by only single digits?

The fact is, on the part of home purchasers and mortgage lenders, somewhere around 2003 a whole lot of people got a whole lot of stupid, particularly in places like Los Angeles and Miami. Why should we enshrine this stupidity in prices held artificially high by government intervention?

So, right now, after the “market failure” that produced this dramatic drop in home prices in the past year, our home is still 40% more valuable, based on comparables from the month of November and December, than it was when we bought it. I don’t know about you, but a 40% aggregate return on an investment made seven years ago is pretty outstanding.

In reality, the home market still has a bit more falling to do. Taken in the long term, this is great for the economy. Look at it this way: back in 1985, I bought my first (pre-assembled) personal computer, a Macintosh SE for about $2,500. Two weeks ago, I bought an MSI Wind ultra-portable with thousands of time more everything than my 1985 SE for $320. Do you see anyone advocating that we stop the slide in computer prices?

One final quote from Cavanaugh:

But if an umpire decided mid-game that foul balls would now be counted as base hits, would that game have any more integrity if the intervention were limited to a single inning?

This is the real horror of economic intelligent design. It throws out the rules most of us have agreed to play by and tries to eliminate the downside risks that are essential to the functioning of a market. In September, after several money market funds dipped below the $1 net asset value these funds are expected to maintain, the Treasury provided $50 billion in temporary insurance money for market fund investments. Diana B. Henriques of The New York Times explained this was necessary because “consumers have long considered” money market funds “to be as safe as bank savings accounts.” If Henriques is right, these consumers—who apparently ignored the funds’ voluminous disclosure documents, and who never noticed that if you ask a bank teller to open a money market fund she’ll send you to another room or another branch entirely—used to be wrong in their assumption. But now the rules have been changed to conform to their misconceptions.

The rules change all the time. That’s not a bad thing necessarily. It is, however, when by changing the rules you lock in homes, or any other good, as unaffordable. Rule changes that ossify artificially high prices are bad for everyone.

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