09 May 2009

Obsessive Housing Disorder

, ,

When I was a small child, my parents, member of the WWII generation, were buying ordinary working class houses in prosperous places like California for $10 or $12 thousand dollars. An executive’s house might cost $25 thousand. In provincial low income locations like the small Pennsylvania town I lived in, you could buy a house for $5 or $6 thousand dollars.

Recently, when I was living in the Bay Area in California, I was appalled to find 1500 sq. ft. two bedroom, one bathroom, ranch houses on postage stamp lots, needing complete renovations, selling for half a million. In some fashionable communities out there, the worst house in town was selling for well over a million dollars.

How did this happen?

In the old days, mortgages did not grown on trees. Banks lent money grudgingly and only successful people with very stable jobs could obtain long-term financing. Ordinary people had to save the money to pay all cash or find a motivated seller willing to hold a mortgage for a few years. Of course, that meant you might get a five year mortgage if you were very lucky. More likely, you’d get three years. Nobody was going to give you 30 years financing.

Then along came the government. The federal government supplied the leverage which allowed idiots all over America to bid up prices of houses, offering to pay major chunks of their income for 30 years. And Voila! people a bit older than me who bought nice homes in booming areas for a few tens of thousands found the value of their investment multiplied astonishingly over a couple of decades. I know one executive couple from Bedford, NY, who often told me ruefully that, though they had worked hard and saved and invested all their lives, the only thing that ever earned them serious money was the decision to buy their house.

Of course, the windfall avalanche of gold that came to the lucky homeowner who purchased in the old days was really just a wealth transfer from members of a younger generation facilitated by our obliging uncle.

Younger people didn’t really mind backing up the pickup trucks full of dollars in the driveways of that older generation and pitchforking out the money, because they all believed the party would continue. Real estate prices would just keep on growing to the sky, and their own turn would come. Some fine day, members of a generation still younger would come along, this time with box car loads of dollars.

Pity that the music recently stopped. No more growth to the sky. No generational wealth transfer for you.

Steven Malanga, of City Journal, says that government-sponsored housing booms have happened several times before, always followed by busts. We’ve just forgotten, and you know what Santayana said: Those who fail to learn from history are condemned to repeat it.

I don’t think that it is only a belief that home ownership inspires the bourgeois virtues that causes government to subsidize housing. Housing subsidies serve large, deeply interested constituencies and are inevitably popular.

StumbleUpon.com
One Feedback on "Obsessive Housing Disorder"

Scott D

The bizarre subsidy of one type of asset over another has relatively little to do with social engineering and a lot to do with the interest groups who benefit from the subsidies. Follow the money. The biggest group is existing homeowners who see big advantages to owning a scarce asset that will appreciate capital gains tax free and against which they can take tax deductible loans. Then there are, of course, the transactors — realtors, builders, bankers. In fact, just about everybody except those trying to buy a first home see an advantage. The hidden drawback is that in doing so we are steering resources away from more economically productive uses. Imagine the extreme of an economy where all capital flowed into real estate. Bubble, bubble . . . trouble.



Comments

Please Leave a Comment!




Please note: Comments may be moderated. It may take a while for them to show on the page.













Feeds
Entries (RSS)
Comments (RSS)
Feed Shark