Tag Archives: Real estate bubble

If You Don’t Understand The Problem, Your Solution Won’t Solve It

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Paul Mirengoff at Power Line posted an article yesterday about the new Dodd-Frank rules regarding mortgages that will go into effect on January 10.

The article points out that because Congress chose to ignore the actual cause of the problem, the new rules will not solve the problem. The article cites comments by Diane Katz of the Heritage Foundation.

The article reports:

As Katz points out, Washington’s response to the financial crisis of 2008 rests on the premise that the housing bubble and subsequent crash were the fault of unscrupulous mortgage lenders who took advantage of naive, uninformed consumers. In reality, she says, “lenders and borrowers were responding rationally to incentives created by an array of deeply flawed government policies.”

What were these policies? Primarily, (1) artificially low interest rates set by the Federal Reserve, (2) the massive subsidy of risky loans by Fannie Mae and Freddie Mac, (3) and the low-income lending quotas set by the Department of Housing and Urban Development.

Rather than admit that the government was a major part of the problem, Congress simply directed the focus elsewhere, passed laws that will not address the problem, and continued on its way.

The article reports:

At the heart of the new regulation is a requirement that lenders ensure that borrowers have the “ability to repay” a mortgage. Borrowers will now have the right to sue lenders for misjudging their financial fitness. Borrowers may also assert a violation of the ability-to-repay requirement as a defense against foreclosure, even if the original lender has sold the mortgage or assigned it to a servicing firm.

The impact of this new scheme is obvious. As Katz says, it “will raise the costs and risks of mortgage lending” and thereby result in less credit availability.

I wonder if you lie about your income on your mortgage application if you still have the right to sue.

Diane Katz sums up the problem:

The 3,500 pages of new mortgage regulation will not guarantee that a housing bubble and collapse will not happen again. Nor can such inflexible standards possibly keep pace with the constant changes in market conditions. But it will constrain the availability of credit and increase the costs. Such a regime eviscerates the fundamental principles of a mortgage “market,” thereby punishing consumers more than protecting them.

The federal government gets more power to regulate and the American people pay the price.

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Is There Really An Economic Recovery?

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Yesterday the Daily Caller posted an article on our current financial recovery from the financial crisis of 2008.

The article reports:

Less than half of Americans’ per-capita wealth that was lost in the government-boosted property bubble has been recovered by mid-2013, says a new White House report that is intended to help President Barack Obama trumpet his economic accomplishments.

“Adjusted for inflation and population growth, only 45 percent of wealth lost during the recession has been recovered, and many of the hardest hit households did not benefit as much from the rebound in [Wall Street] financial assets prices,” the report admits.

I suspect that part of the fact that the lost wealth has not been recovered is due to the fact that a good deal of that wealth was in the housing bubble. You can easily make the case that it was not real wealth–it was part of a bubble. However, the jobs numbers are real, and they are pathetic.

The article reports:

But Obama’s economic report has so many gaps that it fails to mention today’s unemployment rate, or even the 20 million Americans who are unemployed or underemployed.

The report does declare that “over the past three and a half years, our businesses have created seven and a half million new jobs.” But the population also has grown 7 million, from 306.8 million in 2009, to 314 million in 2012, partly through the arrival of roughly 5 million immigrants.

…The report doesn’t mention the Supplemental Nutrition Assistance Program, or food stamps, even though enrollment in the program has dramatically increased over Obama’s tenure, from 28 million recipients in 2008 to 47.7 million recipients in June 2013.

The labor force participation rate currently stands at 63.2 percent according to Bureau of Labor Statistics data. In a very odd twist of fate, the people who voted for President Obama are also the ones hit hardest by the recession and so-called recovery. In view of their own economic survival, I strongly suggest that the low-information voters become informed voters before they vote again.

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One Indication Of How The Economic Recovery Is Going

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Yesterday Business Week posted an article about what has happened to the wealth of the average American family since 1989.

The article reports on median family net worth:

1989: $79,600
1992: $75,400
1995: $81,200
1998: $95,500
2001: $106,100
2004: $107,200
2007: $126,400
2010: $77,300

As you can see, family net worth was climbing pretty steadily until 2007. Part of the reason for the drop is the housing bubble. That bubble was the result of the Congressional plan to enable all Americans to buy houses whether they could afford to pay off the mortgage or not. A lot of that had to do with Fannie Mae and Freddie Mac and their collapse, but even then, these numbers are disturbing.;

The article concludes:

The Fed changed its methodology for the survey starting in 1989, so it doesn’t compare current numbers with pre-1989 ones. At the risk of comparing apples and oranges, I went ahead and did the calculations for two earlier surveys—in 1962 and in 1983. In 1962, median net worth (in 2010 dollars) was $54,200. In 1983, it was $88,000.

If those numbers are correct, then median family net worth rose 62 percent from 1962 to 1983, then fell 12 percent from 1983 to 2010. Since the methodology of the survey changed, those numbers are almost certainly off, but there’s no way for an outsider to tell how much—or even in which direction. Still, if they’re anywhere close to reality, it’s more evidence of how the American economy has failed to generate rising living standards for most people in recent decades.

At the same time the net worth of families was declining, the cost of living has gone up–gasoline is double what it was five years ago, food prices have gone up, our tax burdens have increased, etc. Some of us are still paying real estate taxes on the value of our houses before the housing bubble burst. It really is time to elect people who understand the economy–the things we are currently doing are not working.

 

 

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