Wednesday, October 08, 2008

Why is Cheap Housing a Problem?

Many Republicans and Democrats seem to think that a major problem is that houses have gotten too cheap.

Sure, it's not great for people that bought a house at a higher price, but now have negative equity. However, those people still have the same house that they had before, and they presumably have the same mortgage they had before. So their mortgage payments should be the same (unless they decided to play the rate game and get an adjustable rate mortgage, but with rates down, that shouldn't be a major problem). So if they were comforable paying $1,000 a month two years ago to live in a house, they should be comfortable with that same amount today, no?

Now, it really sucks for those people who have to, for whatever reason, relocate. But even then, what matters is not that you sell your house for a loss, but what the differential between houses is. So if the region of the country you lived in goes down a lot, but you have to move to a region where prices haven't collapses as much, that makes you worse off. But that has to be a relatively small subset of the population.

Sure, if housing prices drop, you can no longer use your equity as a piggy bank for a home equity line of credit. But that was all paper gains anyway.

So whom do falling house prices really hurt? Those people that bought houses they couldn't afford (either to live in or do speculate with), and who were hoping to refinance later and take out equity. I'm sorry, that's just so damned irresponsible on so many levels. So we try to keep housing artificially expensive so that people who couldn't really afford their houses and put in little or no equity can stay in them?

About 15 states have a crazy law that says if you walk away from your negative equity house, the bank can't come after your other assets. So these people can move across the street into an identical house, cut their mortgage, and leave the bank holding the bag.

Who benefits from falling housing prices? Well, for one, young people. If you just graduated college, I'd imagine that given the choice, you'd rather have cheap houses than expensive houses. If people can spend less money on their mortgage, they can spend more money on everything else. In our society, we like everything else to get cheaper. No one laments when cars get cheaper, or when personal electronics get cheaper. No one promises to do something about falling oil prices. (Weirdly, however, the government does keep some food prices artificially high, but I'm sure most Americans don't realize this).

Yes, I own a house and I have a mortgage. But even with falling prices, I have the same house and the same mortgage. So I'm really only worse off if I prepare an internal balance sheet of my net worth...

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