The median price of homes sold in the San Fernando Valley (northern Los Angeles) dropped from $655,000 last June to $500,000 in January. Now, lots of people think that's the worst tragedy ever, but to my mind, half-a-mil is still way too high for the typical SFV house, which is about 35-55 years old, 1600 square feet, on a one-fifth acre lot, and with a lousy school. (But the weather is nice). Who can afford these prices without having Cousin Aram, his wife, three kids, mother-in-law, and her maiden sister move in with you and yours?
Yet, everybody who counts wants to bail out the speculators who drove the prices up to ridiculous levels.
If I were Obama or Clinton, I'd love to have a recession in 2008, so that after I win, prosperity will be back in time for my re-election bid in 2012. The last thing I'd want is to artificially postpone a correction now so that something worse comes along in three or four years.
I guess they all know something I don't know, because this Holman Jenkins column in the WSJ makes a lot of sense to me. What am I missing?
Any debate about a housing bailout can be put aside -- the bailout is underway, even in advance of specific plans being shopped around Washington by Bank of America to prop up home prices with direct subsidies to homeowners whose debt exceeds the value of their houses. No, the perverse effect won't be a replay of the '30s, or even Japan's decade of stagnation in the '90s, but the latter is your model, with a little inflation thrown in. The goal: avoid foreclosures and slow the fall of home prices to market-clearing levels.
Notice that today's bailout will be the opposite of the misnamed S&L bailout of the '80s. Then, only depositors, whose money was guaranteed under federal law, were bailed out. The federal government closed down thrifts, wiped out their shareholders, seized loan collateral and dumped it back on the market, even at firesale prices.
But this time, the liquidationist school has been routed -- so named for Herbert Hoover's Treasury secretary, Andrew Mellon, who said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rottenness out of the system."
Making the hole even harder to climb out of in tough-love fashion, government policy itself played a big role in creating the bubble, on the bipartisan theory that homeownership begets "social stability."
Like all good things, when converted to a slogan, this idea became our road to perdition. Charles Kindleberger, the late MIT economist who wrote the classic handbook "Manias, Panics, and Crashes," noted as early as 2002 an emerging housing bubble. In an interview with this newspaper, he pointed a finger first of all at Fannie and Freddie, whose channeling of government subsidized capital into the housing market helped turn housing into a leverageable, tradeable asset class.
Result: The minting of new homes and home loans as speculative chits, which in turn has made housing more susceptible to the ups and downs of other speculative markets.
So here's the question: Do the people who would be bailed out want to be bailed out? Do they benefit from being bailed out?
For starters, many homebuyers in the last two years were rank speculators, taking out zero-down subprime loans, then walking away when the bet didn't pay off. A careful study of recent Massachusetts foreclosures by Federal Reserve Bank of Boston economists suggests that the key factor wasn't an inability to pay, but an unwillingness to pay, once falling house prices made homeownership no longer a winning speculation. These people are already skipping out, because that's their best option.
Next up, what about the low-income homeowners who (unlike speculators) were the intended beneficiaries of homeownership expansion policies? Both President Clinton and President Bush championed such initiatives, and now 69% of households own their homes, up from 64% in 1992.