Nothing should be done to support high housing prices

I felt the need to sit down and scribble this out, early this Friday evening, before going to see Watchmen, because there is a gigantic fundamental error circulating in the think-tanks in Washington D.C. Many authorities within the Obama Cabinet are openly declaring that everything that can be done to stabilize housing prices must be done. The free-fall in the value of housing must stop. The reason why the average home owner should buy into the mortgage rescue plan is that it will prevent foreclosures from lowering the value of your home.

Hehehehe...

Well, this would all be very nice political bullshit if it were a mere excuse for rolling out some aid to stricken families. Unfortunately, of late, I have gotten the impression that Obama's boys and girls are serious about this notion. I think the really want to stop the free fall in the price of housing.

Let me make this absolutely and completely clear so that nobody can misunderstand what I am saying: Nothing should be done to stabilize house prices. Nothing could be more dastardly, more terrible or fundamentally wrong for the American people than stabilizing housing prices at current levels and attempting to get them to rise again.

In all this goddamn hoopla about banking collapse, you are forgetting the absolute fundamental reason for this crisis. Hot leverage dollars bid up the prices of real estate to insane levels. We have reached the point where just about every common house is totally unaffordable to every common American worker. Because housing prices are unaffordable, we are seeing a massive amount of defaults on mortgages. It is not just happening because speculators are abandoning ship. It is not just happening because of predatory loans. It is happening because Joe the plumber can't afford his $550,000USD 1,200 SQFT townhome in Receda California. Any loan of this amount to Joe seems both predatory and foolhardy.

Call me foolish. Call me irresponsible. Call me a dreamer. However, I believe that when every common ordinary home is unaffordable to every common ordinary worker, you have a very serious structural flaw in your economy and society. People can't buy houses when they need shelter. They can't sell when they need to move. They can't build when more housing is needed, because there is no hope of finding buyers.

When wage growth is 0.0% after inflation, year after year, housing cannot continue to appreciate at 7.7% year after year. There are no new dollars in the American wallet to cover this massive increase in cost. Banks like Bear Sterns and Lehman might favor the system of life-long debt peonage, but we common citizens do not. Most of us refused to sign off on this system, and that was when the housing market bubble burst.

To get out of this crisis, the price housing must correct. The market is self correcting right now. Housing values are dropping. This is good. It must continue for some time. Townhouses in L.A. need to go down to the $200k range, not the $500K range. Even at this price they are onerous cost items indeed.

If the Obama administration is serious about stabilizing prices they will

1. At best, waste trillions of dollars and barely retard the correction process.
2. At worst, waste trillions of dollars and fuck the very same little people they claim to represent.

So why the hell are we in this financial crisis anyway?

The root of the present crisis is pretty simple: The price of housing has reached the preposterous point where every common middle-class home is totally unaffordable by every common middle-class buyer. Housing has been overbought, over-speculated, and overpriced for some time now.

Call me foolish. Call me irresponsible. Call me a dreamer, but I think you have a serious structural problem when every common home is unfordable by every common buyer. I remember when my Dad told me I had to jump in the housing market back in 2005. He insisted that housing had appreciated at the rate of 7% compound per year for the longest time. It was only going to get more expensive. I needed to jump in.

"Where is the growth in real wages to cover this 7% increase in housing prices?" I scoffed.

"Real wages, adjusted for inflation, have been increasing at pretty close to 0.0% for the past 20 years. It might even be negative, according to some reports. Prices cannot continue to increase like this. Houses are already unfordable. Who will buy this houses in a few years?"

My Dad didn't like that at all. He had just refinanced his house, through Country Wide, at something like $350,000. He harvested a ton of 'equity' to open a restaurant, which is now closed for business. The notion of being locked at debt level, or being underwater, did not appeal to him at all. He hated that notion. Still, he grimaced in pain, understanding that there was a problem.

The problem is that markets like to get even. The market is getting even right now. The real value of homes dropped more than 10% from historic highs by the month of September. This created systemic failure in the credit and finance industries. Speculators who were underwater, stopped paying their mortgages. Many abandoned investments, looking forward to foreclosure as a way to get out of a risky gamble. As the losses mounted Country Wide, Fannie Mae, and Freddie Mac all exploded. LIBOR shot through the roof. AIG was swimming in red ink due to "Mortgage Default Swaps", a type of insurance we don't call insurance.

How can the mortgage industry drag the entire system down like this? How can a single burst blood vessel in your brain kill you? How can a little blood clot in your heart give you a fatal heart attack? How can one crushed vertebrae in your back paralyze you? All it takes is one serious point of failure to bring the whole system down into a collective crisis.

But I digress... The real subject of this crisis is the outrageous price of housing. The credit crisis is a side effect not the cause of problem. The boss of BB&T bank, John Allison, says that all the chaos of September 2008 was created by a 10% drop in that price. The good news is that housing has to drop another 30% in order to reach a point of moderate affordability across much of our country. The bad news is that housing has to drop another 30% in order to reach a point of moderate affordability across much of our country.

If most of this chaos and crisis was fomented by a 10% drop, what will 30% more look like? There have to be a lot of losers over a significant period of time for the average price of a home to decline another 30%. A lot of ordinary home owners will have to take losses when selling. A lot of real estate investors and developers will have to take losses. A lot of banks will have to take losses. A number of insurance companies have to take losses.

This is going to be a long, tough, grinding deflation.