Economy Shudders, Cracks Appear

I have a bad feeling about this.  Home values continue to drop, which in and of itself is not a bad thing.  The fact that loan programs are operating in ignorance of this predictable fact, and that government policies are struggling against it are truly disturbing.

Some quotes from a Reuters article (hat tip Paul Yoh)

“The overwhelming majority of the U.S. is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.” — Reuters

This “wipe out” is only meaningful if you are using the home primarily as an investment vehicle rather than as a place to put your family and all your stuff.  After all, a home which loses ALL of it’s value, sale price zero, will still keep your family warm and your stuff dry.  If you pay $200,000 up front (no loan) to rent a nice large place for thirty years, that’s less than $600 per month.  Not bad, eh?  But you don;t have 200 bills lying around, so add 5% interest, subtract a paltry 3% down, and a mortgage still comes in about $1,000 a month.  Nobody is getting abused here.

The only problem is when you try to sell it.  So when you look at a family as a company with a balance sheet, you’ve been “wiped out”.  Yet your family and your property remain yours, protected by your home.  And even if the value crashed to zero, all you have to do is honor the promise you made to pay back what you borrowed.  Again, nobody is being abused in this scenario.  Yet.

CoreLogic says a significant factor causing recent home loans to slide under water has been the availability of government-insured mortgages that require only a small down payment.

“This is creating a new wave of underwater borrowers,” said Gary Shilling, a veteran financial analyst and well-known housing market bear. “We have all three branches of government trying to keep people in four bedroom houses who can’t afford chicken coops.”

FHA-insured loans were begun during the Great Depression and have traditionally been used to enable lower income Americans to get mortgages.

Charles Coulter, a deputy assistant secretary in the U.S. Department of Housing and Urban Development, which oversees the FHA, said it was the FHA’s mission to provide affordable housing, particularly in times of financial crisis when private sector financing dries up.

See, this might not even be a problem, if there were no good reason for financing to “dry up”.  Euphemisms like that make it sound as though something dysfunctional has happened, perhaps even sinister.  But what’s dysfunctional is the government trying to shove money in places it doesn’t want to go.  The private sector makes money when they write successful loans, so they always want to write more successful loans, right?  The more you believe that capitalists are motivated to accrue money, the harder it is to accuse them of anything sinister.  There is no money to be made in denying people things–the real money is in providing them things for which they are willing to pay, which includes the use of money itself.

Manny Bongiovanni, a mortgage broker in Phoenix, who has processed mainly FHA-backed loans in recent years, said most such loans were issued at a 30-year, fixed low interest rate.

“Most of the people I have dealt with have ended up paying less on their monthly mortgage payments than they were when they rented. The good thing is, we have got lots of young families into these homes.

“And if they stay put, they will eventually get equity.”

That last line is the key. It’s what keeps the notional wipe-out from being real.

However, that doesn’t mean that things are good. I just wanted to address the “wiped-out homeowner” canard. They’re not wiped out like an investor who loses everything, or somebody whose house burns down. But it is still a problem. They work to build equity and the value of that work is *suppressed*. They go through a decade or more where their hard work is prohibited from benefiting them, other than allowing them to continue living at that address.

More on this later, but to me the real threat is inflation. With all the money-printing we;ve done, we were supposed to see massive inflation by now, right? I believe that the problem is that the capital requirements and banks flat-out terror at the confiscatory policies of this administration mean that the velocity of money is greatly suppressed. If excess money is printed but banks and companies sit on huge piles of cash, then there can still be no inflation. Once this money starts to move, there will be Hell to pay. And our dollars won’t get the job done.

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