Saturday, September 05, 2009

To Own, or Not To Own

For years The "Economist" has been on something of a jeremiad about tax policies that subsidize home ownership, typically through a mortgage interest deduction. Now, they are taking on the question of whether home ownership makes sense at all.

On the plus side, homeowners accumulate wealth, invest more in their neighborhoods, pay more attention to schools, etc. To the extent that is true,
Home ownership, in short, benefits everyone—not just the homeowner—and the more there is of it, the better. Which is why it is usually encouraged by the government. In America, Ireland and Spain, homeowners can deduct mortgage-interest payments from taxable income.

Yet, against this must be weighed the worldwide financial crash, which was tied directly to "... this supposed miracle of social policy:"
The disaster began with defaults on American subprime mortgages, a financial instrument designed to spread home ownership among the poor. It gathered pace after the failures of Fannie Mae and Freddie Mac, two government-sponsored enterprises that provide cheap home loans. As a result, the home-ownership rate in America has fallen for four years, the first time that has happened in a quarter of a century. In 2008, 2.3m families lost their homes or faced foreclosure—double the average before the crisis—reducing the home-ownership rate from 69% in 2004 to 67.5% at the end of 2008. The number of owner-occupied dwellings also slipped in Britain in 2007-08 for the first time since the 1950s.

Hence the scare quotes around "Economist." The sheer dunderheadedness required to equate the social argument for home ownership -- regardless of its actual merits -- with government induced corruption of lending standards would earn an instant scathing on any free-to-read blog. Why the heck does anyone pay for this dreck? (Speaking as one who pays for it ...)

The main arguments for home ownership, though, are not primarily economic, but social. Home ownership, argue those who want to expand it, benefits society because it encourages stable, more law-abiding communities; it makes people more likely to vote in local elections and join clubs; and it benefits future generations because, it turns out, the children of homeowners do better at school and have fewer behavioural problems than children of renters.

...

[And,] More stable neighbourhoods are more law-abiding. According to a study of New York City, the home-ownership rate was second only to income as an explanation for different crime rates.

Further, children of homeowners do better at math and reading, graduate high school far more often, and have far fewer teen pregnancies.

However, correlation is not necessarily causation. Such consequences could flow from the birds-of-a-feather effect. Or not. Unless they do. Given the distribution of human talent, it is hard to argue against the possibility of the successful herding with their own kind, with the knock-on effect of sequestering relative failure.

Too bad The "Economist" left off perhaps the most potent argument for home ownership of all: self sufficiency. Renters need do nothing for themselves; they need take no precautions, nor think of prevention. They can simply, and only, call the rentier.

In contrast, and here I will induce from personal experience to discover the general rule, successful homeowners must take charge of their own conditions. For example, last winter I called on a heating contractor to do an inspection. As a consequence, I learned the fan motor, because of starting current exceeding spec, was giving signs of failure rather sooner than later.

As a renter, I would have relied upon the rentier to figure that out ahead of time, and paid for that figuring, and paid for someone else to do the work, most likely after the thing failed.

As an owner, I bought the motor, and, with my son, replaced it. We, as a family, gained the economic benefit of self sufficiency. He, as a man-child, learned how to approach a novel problem in such a way as to prejudice the future into providing a solution: having never done such a thing myself, success was only possible through careful analysis and proceeding very methodically.

These lessons, far from trivial, are unavailable to renters. The lesson they learn is depending upon someone else to provide.

But what of the subsidies to homeownership? In essence, the mortgage interest deduction represents a transfer of wealth from renters to homeowners, led to the housing asset bubble, and weakened financial services.

Right?

Hogwash. To arrive at that conclusion requires ignoring that rentiers also get to deduct interest, along with a whole host of other things, from income. Removing, as The Economist desires, the interest deduction for owner occupied housing amounts to preferring dependence upon others instead of self-provision. Further, by focussing on ownership, the article completely neglects what renting entails. Owners provide their own property management and, in a great many cases, their own maintenance. For a given amount spent on housing, paying for these things must mean smaller and meaner accommodation.

Of course, purchasing a home amounts to an automatic savings plan. Over, typically, thirty years, a homeowner will have put aside a substantial amount of money. On the flip side, though, people could have put their down payments into equities and rented rather than owned. Over the last 30 years, those equities would have been the better bet. (Also, oddly enough, the article faults equity tied up in houses as being illiquid, while two paras prior faults homeowners for using the equity in their houses. Which is it?)

Right?

Well, perhaps. Owning property as well as shares is called diversification, which, last I heard, is A Good Thing. Taking the longer view, though, owning property is a form of retirement planning. Paying off a mortgage means one's living costs plunge: all that is left is maintenance and property taxes. Until his dying breath, a renter continues to buy property for the rentier, while also paying for maintenance and property taxes.

Ultimately, this article failed. It performed a journalistic non sequitur, blaming home ownership for grotesquely stupid government policy, then used the consequences of doddery as proof that homeownership isn't such a good idea after all. The focus on mortgage interest deductions for homeowners is equally mystifying, giving further credence to the suspicion that The Economist's primary value lies in twee literary stylings, rather than any particular knowledge about economics.

So, To Own, or not to Own?

Homeowners are self-selecting. Absent CRA infections of traditional lending standards, being able to purchase a home requires significant self discipline and planning for the long term. No one should be surprised if communities comprised of such individuals are statistically temperamentally different than those that are not.

A free society should encourage self-sufficiency over dependency. Renting does just the opposite. Instead of rewarding the acquisition of a dozen skills, renting makes them pointless. And instead of providing the freedom to shape and improve one's own environment, renting leaves people at the whim of others.

For those who, through choice or fate, have the personal skills to, in effect, set up a business of their own, home owning makes sense. For society, whether to encourage owner occupied housing depends a great deal on how much that society values freedom.

The Economist ends with this:

As Adam Smith wrote in “The Wealth of Nations” two centuries ago, “a dwelling-house, as such, contributes nothing to the revenue of its inhabitants.”

Apparently they have not read, or do not remember, The Theory of Moral Sentiments

36 Comments:

Blogger Bret said...

The economist was once an excellent rag, but has, IMO, hugely degraded over the last few decades. This is just one of several recent articles that has me sadly shaking my head.

While I think home ownership is probably beneficial overall for the reasons you point out, I also think it is less clear cut than you make it out to be.

"Self-sufficiency is the road to poverty."

In other words, installing the fan motor may well have been a good lesson for the man-child, but puttering about the house doing things that you don't specialize in doing (and therefore you're probably not maximally efficient) is not necessarily beneficial to society. Having the rentier, who specializes in renting and maintaining properties do his thing, freeing the renter to focus his energies on his specialties, makes a lot of sense.

In the end, home-ownership and self-sufficiency make sense in a large part because of tax distortions.

September 05, 2009 5:43 AM  
Blogger erp said...

Skipper, perhaps the "Economist" didn't make clear that in order to function efficiently, the rentier, must be the government. To avoid waste, dwelling units, inside and out, must be standardized. In this way, there are no private rentiers making a pr*f*t by providing housing and nobody's home is better or worse than another's.

High rises are the cheapest to build and maintain and have the added desired effect of pressing home (pun intended) to the occupants that they are merely faceless cogs in a vast governmental machine.

The left has caused the recent down turn in the economy largely because of their ruinous practice of forcing banks to give mortgages to people who can't possibly pay them. Now there seems to be the beginning of a campaign to denigrate home ownership. I read a while back that Barney Frank, economist extraordinaire, has been babbling about the benefits of renting. What he fails to say, is that it benefits collectivism, not us.

I think is the major advantage of owning your own home isn't economic. It's that we can arrange our environment to fit our own individual life style and taste. That's the notion the left has been, for at least a century, trying to stamp out. We are united only by our belief in individual freedom and precepts of our founding fathers, ownership of private property being one of the basics of our heritage.

There are few places around the world other than the U.S. where ordinary middle class folks like us can own their own place under the sun. This simple fact has stuck in the craw of the world socialist movement and has been the major factor in thwarting it here.

September 05, 2009 6:53 AM  
Blogger Peter Burnet said...

Surely the strongest argument in favour of home ownership is that Krugman and three Harvard professors have come out against it. Sometimes correlation is causation.

The Economist's articles often read like they were assigned on Saturday for a Monday deadline. When I read articles on other countries, the initial impression is often one of experience and insight delivered effortlessly. But when I read one about Canada, I'm left with the image of a twenty year old stringer with an almanac and academic Who's Who pulling an all-nighter with pills and caffeine to put something together before dawn and covering his factual blunders with off-the-wall insights he knows no one will remember.

Good post, Skipper. This is a theme worth pursuing. The left really does have this thing about home ownership.

September 06, 2009 4:08 AM  
Blogger Hey Skipper said...

In other words, installing the fan motor may well have been a good lesson for the man-child, but puttering about the house doing things that you don't specialize in doing (and therefore you're probably not maximally efficient) is not necessarily beneficial to society.

Surprising to hear that from a free-marketer.

My time is not equally valuable. Sometimes it is very expensive -- there is nothing around the house that would be cost effective for me to do myself if it meant fewer billable hours at work.

But when there is no possibility for billable hours, then my time has very little value. So, if I use that time to avoid cost, then that money is available for something else. Whether it takes me three times longer -- as in this case -- than someone who knows what they are doing is, economically speaking, irrelevant.

This case of self-sufficiency suppressed employment in the heating repair business, but elevated it elsewhere -- $200 (the labor cost to replace the motor) is available for something else.

Therefore, I don't see how maximizing the value of my time comes at any loss to society at all.

In contrast, the rentier is charging me for his time, plus the time of the person who performs the work. For a given cost, rentier provided housing will be smaller, shabbier, and less suitable than owner occupied housing.

In the end, home-ownership and self-sufficiency make sense in a large part because of tax distortions.

That is the argument the Economist continually makes, but it is getting no clearer to me through repetition.

If I purchase an apartment building -- that is, become a rentier -- then the interest on the loan (as well as a whole slew of other things) is deductible from the income on the property.

If I purchase a home for my own occupation, why should the interest not be deductible from my income?

Of course, the taxes I pay on my income are less, because of mortgage interest, than a renter pays.

But just as of course, the renter pays less rent because the cost of providing the housing is less for the rentier.

Treating owner occupied housing and rentier provided housing differently would be making a conscious decision to actively prefer rentiers and renters over owner-occupiers.

What is the economic argument for that?

September 06, 2009 8:19 AM  
Blogger Hey Skipper said...

erp:

Skipper, perhaps the "Economist" didn't make clear that in order to function efficiently, the rentier, must be the government.

I don't agree. Clearly, the "Economist" utterly failed, in an article that already had plenty of that, to address the implications of its position. If I pay a rentier for things I can do myself, then, by definition, I will have less to pay for other things. The inevitable consequence of using tax policy to discriminate against owner-occupiers is less living space, more densely packed.

There are those on the left who prefer such a thing, and owner occupied housing stands in the way. Publicly provided mass transit relies upon (using networking terms here) large packet sizes. Personally provided mass transit uses small packet sizes. In order to work, the network topography of the former requires sparsely interconnected sources and sinks: densely populated urban areas linking to specific commercial areas.

Personal transportation, however, works with widely distributed sources and sinks. That is (largely) the network topology of the US. It is fundamentally unsuited to publicly provided mass transit.

I think is the major advantage of owning your own home isn't economic. It's that we can arrange our environment to fit our own individual life style and taste.

Exactly. We don't need to ask permission (well, homeowner's associations notwithstanding). Further, we gain economically from wise decisions. A well cared for residence sells (rents) for more than one neglected, and the gain goes homeowner (rentier). If I am an occupier, who's interests am I going to prefer, mine, or the rentier's?

September 06, 2009 8:35 AM  
Blogger Hey Skipper said...

Peter:

It is singularly odd how The Economist continues to be so successful when other weekly newsmagazines are sinking like greased safes. (There was an article a few weeks ago on this -- well written, and echoed your objections -- but I don't have the link, or the time to hunt it down.)

But even their lengthier articles, such as this, give signs of a hearty appetite for cherry picking. That is, where they are not giving the impression they have utterly no idea what they are talking about; e.g., savings rates.

I have subscribed since around 1983. There are upsides: it does provide the ability to have some notion of what is going on in a lot of places. Also, for someone who travels a lot, I never have to worry about having something to read.

Downsides: it is often like literary rope chewing, they often print appallingly stupid things. Oh, and their whole take on global warming has become positively missionary.

September 06, 2009 8:55 AM  
Blogger Harry Eagar said...

'Further, children of homeowners do better at math and reading, graduate high school far more often, and have far fewer teen pregnancies.'

A suburbanite's view, I think. I bet it doesn't fit very well in New York City, which, after all, has over 5% of US population.

Over at Volokh a week or so ago, there was a discussion about how much owning stuff impedes mobility, with, according to the economic efficiency zealots, bad results on allocation of resources.

However, you need to get over your delusion that government policy had anything to do with the mortgage failures. I just last week wrote up a story about a foreclosure here.

$192M purchase money mortgage at a little over 1% with a $227M mezzanine loan, and $175M equity.

The borrowers walked away from the whole thing. Can't blame that on CRA.

September 06, 2009 10:50 AM  
Blogger erp said...

For your amusement, here's an NYT article our local liberal rag reprinted on the front page of its Sunday edition this morning. It's about one of our favorite topics, the dreadfully low rate of savings among We, the People.

Our president is quoted as saying in his weekly radio address, "The fact is, even before this recession hit, the savings rate was essentially zero."

When are we going to get some new canards?

September 06, 2009 10:58 AM  
Blogger erp said...

Harry,

1. There are plenty of home owners in NYC. Not everyone lives in ghettos and/or luxury condos. I'll bet homeowners even among minorities outnumber renters in the boroughs.

2. The discussion at the VC wasn't so much the economics of home ownership as it was about the journey one takes when one becomes a successful adult. One perforce has more possessions including perhaps a child, so one can't move with just a back pack from one furnished place to another. It's a drag, but one most people think is worth the trouble if for no other reason than one no longer is at the mercy of landlords and furnishings of dubious ancestry.

3. The CRA was the vehicle through which local banks were coerced into making bad mortgage loans. They were then allowed to bundle them up and sell them to bigger banks. Eventually there were to more bigger banks to take them, so We, the People get to pay for them.

4. Of course borrowers walked away from the loans. They had no vested interest. In fact, to them, it was just like walking out without paying the rest. If they had 20% of their own money invested in a down payment, there would have been far fewer defaults because there would have been far fewer loans approved.

5 Denying it's so doesn't change the facts.

September 06, 2009 11:20 AM  
Blogger Harry Eagar said...

Not true. Not even partially true.

The biggest provider of funny loans was Countrywide, which was not subject to CRA.

Nor were banks that were subject to CRA forced to make funny loans. Just Thursday, the vice chairman of the biggest bank in the state was bragging to me about how they hadn't made ANY subprime loans. Not one.

The loan I referred to did have better than 20% equity. $175 M out of $565M. They still had to walk away.

The alleged savings rate of Americans is a myth, too. It isn't zero, but it's pretty close. Otherwise, the Chinese wouldn't have all those Treasury bonds.

A friend of mine in the real estate business used to tell me that values in places like Maui could never go down, because the generation with the highest income was about to inherit the assets of the generation with the greatest wealth ever accumulated.

Guess what? Didn't happen. $7 trillion of alleged 'savings' disappeared almost overnight.

September 07, 2009 10:17 AM  
Blogger erp said...

I never said any bank or mtge company was subject to the CRA. I said the CRA coerced institutions by thinly veiled threats of being called racists (the same thing Jesse Jackson and Van Jones' organizations did and are doing to shakedown corporations).

We've already gone through the discussion here and on the other post Judd blogs of what savings mean in the modern day.

We no longer put money in cigar boxes for a rainy day as they did in the generation prior to mine, nor do we put money in passbook savings accounts as my generation did.

Now we put money in mutual funds, CD's, IRA's and similar accounts not classified as savings by the media or the government.

I have no knowledge of Hawaiian-style banking and why the CRA didn't get their hooks into mtge lenders there.

Perhaps the difference is because homeowners do not own the land on which their homes are built, there are anomalies that differentiate the housing market from the rest of the country.

September 07, 2009 12:10 PM  
Blogger Hey Skipper said...

Harry:

A suburbanite's view, I think. I bet it doesn't fit very well in New York City, which, after all, has over 5% of US population.

From the article:

More stable neighbourhoods are more law-abiding. According to a study of New York City, the home-ownership rate was second only to income as an explanation for different crime rates.

++++

However, you need to get over your delusion that government policy had anything to do with the mortgage failures.

I am calling shenanigans.

It is clear beyond dispute that the CRA opened an avenue to zero down, zero documentation loans. It is also clear beyond dispute why the CRA came into being: that the benefits of home ownership are so beneficial and obvious that government policy needed to act against redlining poor communities. It is also clear beyond dispute that government policy required Freddie and Fannie -- both with implied government backing -- to purchase bundled mortgage backed securities, which included, by government policy, sub-prime loans. Banks were, in fact, coerced into making CRA loans.

Whether Countrywide was subject to the CRA is way beyond the point. Good intentions, for good reasons, led to unintended consequences. The CRA did, in fact, lead to the destruction of lending standards. Yes, companies like Countrywide deserve all the shellacking we can muster, but the Countrywides would never have existed absent the CRA.

In case this isn't clear, try a counterfactual: assume in, 2003, the government repealed the CRA and, instead, required a minimum of 15% down, ten years documented work history, required payoff in 30 or fewer years, and prohibited ARMs / neg-Am / etc loans. (In other words, put the mortgage industry back to where it was before the CRA). By the way, I think there was an attempt to repeal the CRA several years ago ...

Would that have affected the outcome any? Of course it would have. And since that single counterfactual completely changes the outcome, it also makes clear how vacuous The "Economist" article is. Introducing CRA led to the corruption of lending standards, which led to an asset bubble, which led to people (many of whom should not have been homeowners to begin with, and would not have been without the CRA) treating homeownership as a casino, and, BTW, the CRA's corruption of lending standards grotesquely increased the default rates that eventually came.

Nowhere in that litany of stupidity do I see anything that indicts homeownership itself. I do, however, see many things that, like links in a chain, keep ending up with the CRA and consequent impositions on the FFMs.

I just last week wrote up a story about a foreclosure here.

The plural of anecdote is not data. Particularly since that anecdote is, as likely as not, a knock-on effect of the CRA induced secular collapse of the housing market.

A friend of mine in the real estate business used to tell me that values in places like Maui could never go down, because the generation with the highest income was about to inherit the assets of the generation with the greatest wealth ever accumulated.

It is, despite the loss of savings, still the wealthiest generation ever.

September 07, 2009 12:29 PM  
Blogger Hey Skipper said...

erp:

Our president is quoted as saying in his weekly radio address, "The fact is, even before this recession hit, the savings rate was essentially zero."

When are we going to get some new canards?


I have written about this canard.

What struck me previously was how savings was defined (or not).

What I don't remember mentioning at the time was how Social Security completely blinds people who should know better.

On average, workers contribute something like 10% of their income to Social Security. (Less than 13% because of the income cap).

That doesn't count as savings, by definitional stupidity: it is counted as a transfer, not savings.

However, if SocSec was not a Ponzi scheme -- that is, workers saved 10% of their income for their own retirement, then the savings rate would suddenly be 10%, not zero percent. Despite there being absolutely no difference in disposable income.

Except, that with an aging population, it would be less than 10%.

Of course, there are 401k contributions. Currently, US workers contribute about 8% of before tax income to 401k plans. Which doesn't count as savings, because it is before tax.

Even though it is.

And then you still get back to society's net savings rate with an aging population.

I can't believe I am smarter than His Obamaness, or The "Economist" or Krugman.

So I must be missing something. What?

September 07, 2009 12:38 PM  
Blogger erp said...

You aren't missing anything, you're adding something, your unbiased intelligence.

Of course, SS is a Ponzi scheme, as is the concept of any insurance, i.e., new money pays benefits to old money, but nobody ever thought back then that practically half the population is, as they say, "between engagements" and not likely to contribute anything in this lifetime.

I am slightly encouraged as we had a long time handyman here this morning. A very intelligent and capable jack-of-all-trades previously supportive of Obama who has done a 180.

September 07, 2009 1:08 PM  
Blogger Bret said...

Hey Skipper wrote: "Surprising to hear that from a free-marketer."

Why? Specialization and diversification are generally called for by free-marketeers.

Hey Skipper wrote :"My time is not equally valuable."

I don't think you're typical because of regulations about how much you fly. I think that most people with higher paying skills could work and get paid for as many hours as they like.

Hey Skipper wrote: "I don't see how maximizing the value of my time comes at any loss to society at all. "

The reason the value of a typical person's time (again, you're not typical) is maximized is due to taxation. I wrote an explanation here.

Hey Skipper asks: "...why should the [mortgage] interest not be deductible from my income?"

Mortgage deductions are just part of the problem. The main problem are taxes, regulations, and guilds. Again, check out the post I identified above.

The bottom line is that we are economically worse off if we are not spending as much time as possible doing those things that we are best at.

September 07, 2009 5:58 PM  
Blogger Hey Skipper said...

erp:

Of course, SS is a Ponzi scheme, as is the concept of any insurance

The point here is not so much that SS is a Ponzi scheme -- although it surely is.

Assume we were to, with a wave of a wand, make SS self funding tomorrow. The money I am not spending on myself today, which is not defined as savings, would still not be spent on myself tomorrow, but would be savings. Huh?

To run that Huh out a little further, Pres Obama (nor a great many people who should know better, including the entire staff at The "Economist") clearly hasn't given the question of what the savings rate should be, or what constitutes savings, much thought.

Insurance is not a Ponzi scheme, though, rather, it is a bet

... insurance policies are basically bets we make against catastrophe. I bet that my house will burn down, the insurance company bets that it won't. I bet that I'm going to die in the next year, the insurance company bets that I won't. I bet that my car is going to get stolen, the insurance company bets that it won't. If I lose the bet, there I am with my life, my house and my car. If my car explodes when I plow into my house, my wife and kids have a big pot of money to sit up at family dinners and call "Daddy."

Which, BTW, is one of the best explanatory paras written anywhere, ever.

Bret:

The limitations on my billable time are unique, and irrelevant.

Let's do the numbers.

Per my heater motor example, the quoted labor cost was $200. It took me four hours to do the job. Okay, five, including one-half hour each way to pick up the motor; my compensation, in terms of cost avoidance, was $40 per hour.

The mean hourly wage for all occupations in the US is $20.32.

There are a few occupations with a mean exceeding $40 per hour, but not many, and not by a lot. So, for most (probably 3/4) wage earners, it would actually make economic sense to take time off from work to fix something.

That is why I'm surprised a free marketer would think it more worthwhile to hire out the work. For those who can manage to obtain fairly accessible electrical, plumbing and carpentry skills, the return on doing the work oneself almost always exceeds what one can earn at work.

Sure, specialization and diversification have their places -- typically as part of a complex production process.

But not in the case of homeownership. Self reliance, persistence, analysis and prudence are far less important to the renter. And since the renter has to pay someone else for those skills, renters in general will live in smaller, meaner, circumstances.

Renting also devalues the male role in families, since renters effectively hire out nearly all the tasks men typically take on.

Looking at your essay, clearly taxation makes a difference. The cost I avoided was completely tax free. However, I think the assumption you made about opportunity cost is way too generous. Very few people can actually put in as many billable hours as the calendar allows. Further, for those at the rarefied end of the wage spectrum, productivity suffers and (from personal experience as a software engineer) can even become negative due to mental fatigue.

Also, I think your analysis suffers somewhat because the money I don't spend on electricians / plumbers / carpenters / painters / lawyers (I just replaced our wills) doesn't vanish, it is available for something else we would rather have.

September 08, 2009 9:25 AM  
Blogger Harry Eagar said...

Community Reinvestment Act passed in 1977.

FHA reduced downpayment on insured mortgages to 3% around 1991 (I forget exactly)

Subprime bundling invented in early '80s.

Collapse 2007.

CRA had nothing at all to do with the latter.

Redlining was, by the way, a genuine problem, destroying vast amounts of capital, not to mention the unconscienable injustice of a market-based mortgage lending system.

September 08, 2009 9:42 AM  
Blogger erp said...

This comment has been removed by the author.

September 08, 2009 10:01 AM  
Blogger erp said...

This comment has been removed by the author.

September 08, 2009 10:17 AM  
Blogger erp said...

I hope the third time's the charm.

Skipper, I wouldn't dream of disagreeing with David.

Many boomers believe the world of their youth is the standard for everything. It's what global warming is all about. Whatever the savings rate, global temps, etc. were c. 1970 is "the ideal." Deviations are, well, deviant.

You're so right about there being a point of diminishing returns on hours worked which is why I could never understand all nighters and cramming for tests any more than working 18/20 hours and expecting the quality of the work not to suffer.

While taking time away from your primary high paying job to install a water heater, is not time well spent, doing repairs around the house in your spare time is good for self-esteem and a good lesson for the whole family. Your daughter will learn to look for a guy like dear old dad, and your son will know how to wow the girls when he gets to noticing them. There's a reason construction workers (and pilots) are routinely polled to be at the top of the sexy chart.

My husband can't do heavy work anymore and although we can easily afford to have the things he used to do around the house done by younger guys, I can see how diminished he is by it. It's a loss far worse than the physical limitation itself.

September 08, 2009 11:53 AM  
Blogger Hey Skipper said...

Harry:

CRA had nothing at all to do with the latter.

Once again, I urge you to try the counterfactual.

Without the CRA, there are no subprime mortgages. Without subprime mortgages, mortgage backed securities are, in fact, AAA, rather than presumed to be AAA because they always have been. Without subprime mortgages, there is no housing bubble.

To say the CRA had nothing to do with the collapse in 2007 amounts to chopping off the causal chain where it is convenient for you.

So, I will ask you again: Presume Congress passed a law in 1977 requiring all mortgages to be backed with 15% down, have a payment period no longer than 30 years, and have a fixed interest rate.

Does the housing bubble still happen?

If not, and the alternative will require a lot of 'splainin, then government policy did, indeed have a pivotal effect on the housing market.

Redlining was, by the way, a genuine problem, destroying vast amounts of capital, not to mention the unconscienable injustice of a market-based mortgage lending system.

Redlining was based upon both racism and economic reality. In fact, people within redlined areas were economically worse off because of racism, and, therefore, also far less able to acquire the means to buy a house. This led to them -- and their communities -- being unable to enjoy all the economic and non-economic benefits of homeownership.

Which means a market-based mortgage lending system could not fix a vicious circle.

So, instead, the government decided to "fix" market based mortgages, for all the right reasons.

And all hell broke loose 30 years later.

What is the road to hell paved with?

erp:

While taking time away from your primary high paying job to install a water heater, is not time well spent, doing repairs around the house in your spare time is good for self-esteem and a good lesson for the whole family.

When speaking of the benefits of being an occupier-owner, as opposed to a renter, I am speaking in general, rather than specifically (although I used a specific case to illuminate the general point).

Very few people (although a higher proportion of owners than the overall population) earn enough per hour to make it worthwhile to have someone do for them what they can do themselves. Provided, of course, that they have the tools and skill. Both are an investment over time that are completely irrelevant to renters. For those who make that investment, they retain the resources to do what would otherwise never be done (a point Bret missed, IMHO.)

At our last house, we replaced the existing deck with something much nicer. We would never have undertaken the project if we had to pay someone else, and we wouldn't have had the money to build the deck had we not repainted the house ourselves the year before. Over time, the amount of money we spent on home improvement projects was budget limited, but we did more projects because we did not pay someone else.

That makes DYI an economically rational decision.

That DYI favors producers over tradesmen is irrelevant.

My husband can't do heavy work anymore and although we can easily afford to have the things he used to do around the house done by younger guys, I can see how diminished he is by it.

One of the days I dread is when my son gets all the tools I have acquired ...

September 09, 2009 10:09 AM  
Blogger erp said...

Skipper, Harry has a blind spot that no amount of illumination can reach.

Redlining, denying mortgages within specific geographic areas, was indeed an insult and assault on negroes, but after the 1964 Civil Rights Act was passed by congressional Republicans, things changed and banks had to give all qualified buyers mortgages and people couldn't refuse to sell their homes to blacks under penalty of the law.

So, I don't know what Harry is talking about when he says that redlining still exists. I think what he calls redlining is that banks won't lend money to unqualified applicants. That isn't redlining, that's Banking 101.

About DYI home repairs, I've known many men who are well able to pay someone to make renovations or repairs to their homes, my brother for instance, but who either delight in doing it themselves or don't trust anyone else to do it right, or both.

September 09, 2009 11:15 AM  
Blogger Harry Eagar said...

Not true, either of you. The Civil Rights Act said nothing whatever about mortgages, which is why redlining was made illegal later.

Lenders, being unequal players, found ways to get around this, and there were extralegal factors as well.

It is not true that good loans couldn't be made in redline districts. In fact, because historical practice had driven down values, you could find excellent bargains if you didn't mind having black neighbors; and therefore the loans were easier to manage for buyers than an equivalent house in the suburbs.

I had a friend who came into the real estate business after a career doing other things and liked to work out deals for people (not all of them black, despite what erp imagines) in redline districts.

She didn't make much money off these little deals (I recall one where a perfectly satisfactory though very small and old house sold for $12,000 to a single woman), but she didn't mind that.

Her broker-in-charge did, though, because HER cut was smaller and, following Smithian notions of proper economic behavior, expected her agents to devote all their time to the most lucrative deals.

Sounds almost like the question of whether Skipper should devote his time to replacing motors, doesn't it?

There was no particular problem with subprime mortgages, since they earned higher interest. That's how lenders are supposed to manage risk to their capital, right?

The problem was that they were securitized in order to convert illiquid wealth into liquid wealth. The CRA and government had nothing whatever to do with this.

Instead of liquifying assets, the smart boys ended up vaporizing it.

The real counterfactual is that in California (and Hawaii, too, on a much smaller scale), subprime loans went bad in big numbers following the demilitarization of California after 1991, and while a few lenders lost money, there was no damage whatever to the financial structure, because those loans had not been securitized and failed one by one.

A few (or even quite a few) bad loans could not bring down vast pyramids of debt.

There were additional factors, including rampant fraudulent valuations and overcomplicated funny adjustments that were less evident in 1992 than in 2006, but these were not mandated, caused by or even encouraged by the CRA.

They were purely the result of private market shenanigans.

September 10, 2009 12:32 PM  
Blogger erp said...

You're talking about two separate subjects. Redlining as applied to bank loans and redlining as applied to keeping neighborhoods segregated by race.

Both insidious practices were outlawed in 1964 (you may be right that a separate act was necessary for mortgages, but I don't remember it).

For the past 20-30 years no bank or mortgage company would be foolish enough to deny a loan to any qualified buyer nor would any property owner refuse a sale on the basis of the buyer's race, sex, etc.

My remarks about the CRA, financial markets crash, etc. stand and need not be repeated here.

September 10, 2009 3:59 PM  
Blogger Bret said...

Hey Skipper wrote: "Let's do the numbers."

A few things...

First, it's interesting that a repair company can charge an effective $40-$60/hour for fairly low-skilled labor. Perhaps taxes and regulation play a role?

Second, I agree that for small jobs, it makes more sense to do it yourself. For example, it wouldn't make sense to hire a contractor to change a light bulb since you could change the light bulb faster than finding a contractor to do it. On the other hand, it may make much more sense to hire a contractor if the effort is measured in days or more because the transaction cost of finding and contracting the firm is now small compared to the overall effort. Your 4 hour example may be closer to the former.

September 11, 2009 7:26 AM  
Blogger Hey Skipper said...

Harry:

The Civil Rights Act said nothing whatever about mortgages, which is why redlining was made illegal later.

My use of the acronym CRA refers to the Community Reinvestment Act. That CRA very much belongs in the causal chain of events.

The problems the CRA was intended to address were very real. Racism and poverty became self-reinforcing, so that one of the means for building wealth and stable communities -- home ownership -- was effectively denied to certain areas simply because virtually no one in those areas qualified for conventional loans. Either or both of down payment and work history were lacking. IMHO, the consequent "redlining" was based more on bank prudence than racism, but that doesn't really matter.

Regardless of the why behind the what, the CRA essentially compelled banks to make loans that they would not otherwise have made. In essence, ironically for your side of the argument, the CRA deregulated mortgage banking by eliminating existing banking practices as reasons to deny mortgage credit. Subsequent legislation required the FFMs to increase the portion of their loan books devoted to sub-prime mortgages.

Now, just to be clear, poor people and communities are not to blame for the subsequent schlamozzle. It does not matter what their default performance has been. It does not matter whether any, all, or none, of the banks subject to CRA themselves enthusiastically exploited the sub-prime market.

What does matter is that the CRA eliminated constraints on mortgage soundness. That meant any financial institution could make loans on terms that would otherwise have not been attractive to the secondary market, except at higher interest rates. (Which, btw, the CRA effectively prohibited.) In order to further expand homeownership in poor communities, the Clinton administration changed the CRA to require loans to those borrowers. And, by extension, anyone else. To make loans more affordable for those borrowers -- which had to happen in order to made the required loans -- loan terms got creative for borrowers in poor communities. And, by extension, anyone else. The Clinton administration required the FFMs to buy the sub-prime loans originating in poor communities. And, by extension, anywhere else. Sub prime loans went from 1% to 12% of all mortgages within three years of the Clinton changes in 1995. (See the comments attached to this Business Week CRA tongue bath.

Is the CRA responsible for the financial collapse? No, there is plenty of responsibility to go around.

Was the CRA a cause? Yes, in precisely the same sense that, like an aircraft accident, there are almost always many causal links in the chain, any one of which, if removed, would have stopped the mishap.

Just so here.

Which is why I have urged you to consider the counterfactual: Assume the CRA mandated minimum 15% down payment, 30-year maximum payback period, fixed interest rates, and 10 year work history.

With everything else remaining the same, explain how the housing asset bubble still happens.

If you can't, then that makes CRA not only a cause, perhaps the sine qua non, of the financial meltdown.

September 11, 2009 10:42 AM  
Blogger Hey Skipper said...

Bret:

First, it's interesting that a repair company can charge an effective $40-$60/hour for fairly low-skilled labor.

I don't think that is interesting, or surprising, in the least. Have you ever called out a plumber?

The HVAC company was really charging about $100 per hour for a two hour replacement. In addition to the work actually performed, that had to pay for the transit costs (driver's time, vehicle, license, fuel, etc), plus all the other overhead of operating a business. All of which you know far more about than I. So I'm betting the technician was probably getting around $30 per hour out of it.

Undoubtedly, taxes and regulation add to the overhead. However, even if those two considerations doubled the cost to the purchaser, it would still be cost effective for people acquire the skills to take on almost all tasks around the house, regardless of the time involved.

The only time that is not true is for jobs requiring expensive, specialized tools, or unique skills. Very few tasks around the house -- siding, roofing, pouring a new driveway are most of the examples -- qualify.

So, almost all homeowners can effectively increase their income over all renters to the degree homeowners are self sufficient in maintaining their own surroundings. Or, putting it in different terms, for a given portion of income, homeowners can live in more spacious and well appointed dwellings than can renters.

In fact, you can demonstrate the same point with cars. If I was to lease cars, I would be permanently tethered to a monthly car payment. On the other hand, we purchase our cars, and I am largely self-sufficient in their maintenance. Consequently, I cut ownership costs in half while greatly extending the economically useful service life of our vehicles. E.g.: "my" car is 17 years old and has 203,000 miles on the clock. It looks and runs like something a fraction its age. Over that period I have purchased probably at least two fewer vehicles than someone less self sufficient, and have long since stopped paying depreciation.

I'm guessing that example of self sufficiency has saved us at least $40,000 over that period.

Hence my theory that self sufficiency is almost always cost effective for almost all people. And, that the consequence of eliminating the mortgage interest deduction for owner occupiers, while retaining it for rentiers, will have the inevitable consequence of reducing overall self sufficiency and all that entails.

September 11, 2009 11:09 AM  
Blogger Harry Eagar said...

Skipper, the counterfactual of all counterfactuals is that banks that DID NOT make funny loans were not prosecuted, harassed, pilloried or otherwise molested by the government.

(One reason is that the 'penalty' for breaching the CRA was to be denied a braching application. Banks that didn't need those were exempt.)

I understand the difference between the Civil Rights Act and the Community Reinvestment Act.

The Community Reinvestment Act was needed because banks would not write mortgages even for conventionally qualified buyers. There was and is a largish black middle class that was well able to afford residential real estate.

Some banks, including where I lived, provided free education to teach working people how to qualify for mortgage loans.

I went to one. The first thing the instructor (a loan officer) said was, 'If you have income you're not declaring, maybe you should think about declaring it.'

September 11, 2009 11:50 AM  
Blogger Hey Skipper said...

Harry:

Sometimes the most eloquent answer is the question avoided.

And the next most eloquent answer is the included qualification:

Skipper, the counterfactual of all counterfactuals is that banks that DID NOT make funny loans were not prosecuted, harassed, pilloried or otherwise molested by the government.

Emphasis added.

An enquiring mind would be curious about the qualification "... by the government."

There are lots of ways to persecute, harass, etc, besides by the government.

Two words: ACORN, lawsuits.



I found this interesting tidbit about Countrywide:

Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.
Who was that virtuous lender? Why - Countrywide, the nation's largest mortgage lender, recently in the headlines as it hurtled toward bankruptcy.
...
For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage caused by relaxed lending standards.
(Emphasis added)

What is another name for relaxed lending standards?

Deregulation.

++++

Sorry for the rush job. Gotta go, back Sunday.

September 11, 2009 10:30 PM  
Blogger erp said...

Here's some clarification on the CRA's part in the current financial crisis from the Investor's Business Daily.

Apparently there's a new commission empaneled to whitewash the past and put the same people who caused the problem in charge of "fixing" it.

September 12, 2009 7:04 AM  
Blogger erp said...

Sorry about that.

Investor's Business Daily

September 12, 2009 7:08 AM  
Blogger Harry Eagar said...

'Tragically, they're modeling the panel after the Pecora Commission'

IBD is a hack-driven sheet, as the quoted sentence reveals.

That does not mean that Wallison couldn't be right, but he isn't.

Skipper likes counterfactuals. I prefer factuals, like Ireland, UK, Spain and Hungary.

The same outcomes are seen there, but the difference is that the CRA and Fannie Mae and Freddie Mac are not.

It is an article of faith with zealots like IBD that financial regulations are sinful, but it is an historical fact that during the period of regulation the US economy grew the fastest and recessions were least prevalent.

It's hard to understand why people quarrel with success.

September 12, 2009 11:08 AM  
Blogger Hey Skipper said...

erp:

Thanks for the link.

IBD is a hack-driven sheet, as the quoted sentence reveals.

I don't care if IBD is staffed by compulsive nose pickers, the article's contents are what is on point here, not what you think of its owners or reporters.

That said, I took a look at the article. The very first para mentioned Peter Wallison, asserting he started warning as far back as 1999 that Clinton Administration policies would undermine the mortgage market.

Searching on ["Peter Wallison" "Fannie Mae"], on the first page of results was this New York Times article. Ordinarily, I wouldn't quote this extensively, but it is really hard to know where to stop:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets ... will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements," said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. "Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market."

...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
"From the perspective of many people, including me, this is another thrift industry growing up around us," said Peter Wallison a resident fellow at the American Enterprise Institute. "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

...

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.


Written in 1999. By the NYT, a notoriously Wall Street friendly hack driven sheet.

No need to read the IBD article one sentence further.

The mortgage crisis was not a failure of capitalism; rather, it is at the very top of that steaming pile of spectacularly failed government policies.

September 14, 2009 10:15 AM  
Blogger erp said...

Stand back -- Obama is at this moment attempting an even bigger power grab of financial institutions. Article from Reuters

September 14, 2009 10:44 AM  
Blogger Harry Eagar said...

Funny, the mortgage meltdown missed Houston, which has -- I have driven through them -- extensive neighborhoods of poor blacks and Mexicans.

Making loans to people who have to borrow to pay the interest or who depend on escalating values and flipping is always a bad idea.

This was, however, as case of Brer Rabbit begging not to be thrown into the briar patch.

And keep this in mind: Fannie Mae and Freddie Mac had nothing whatever to do with the CRA.

September 17, 2009 12:50 PM  
Blogger erp said...

Harry, you continue to believe the CRA/ACORN were independent of Fannie and Freddie against the overwhelming evidence of the contrary.

Here once again are the goods from the American Spectator.

After the CRA went into effect, Saul Alinsky-inspired groups such as ACORN and the Greenlining Institute used the law to get into the shakedown business...

The shaking down of lenders intensified when then-Treasury Secretary Robert Rubin presided over the Clinton administration's effort to put the CRA on steroids. Banks began to make risky subprime loans and Fannie Mae and Freddie Mac aggregated them for sale in the secondary market as mortgage-backed securities. These practices made it easier for banks to give in to ACORN's demands to originate more and more doomed mortgages because they knew they could offload their high-risk debt on quasi-governmental suckers Fannie and Freddie, which were under intense political pressure to service the subprime market ...

September 17, 2009 1:16 PM  

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