Jan152018

Bankers benefited more from the housing recovery than homeowners did

Higher home prices without higher wages makes housing unaffordable and only benefits existing homeowners and the bankers they owe money.

Repost from OC Housing News 2011-2016

loan-manager

What good came from the recent house price reflation rally? Did it stimulate the economy? No. Did it put millions of unemployed construction workers back to work. No. Did it stimulate housing sales? No. politicians and the federal reserve promised economic expansion and acceleration; however, so far these great benefits from higher home prices remain elusive.

So why isn’t the economy improving with higher house prices? The increase in home prices came with no increase in wages, so now houses everywhere are more expensive, and average Americans need to spend more of their income on housing, which makes less available to spend on other goods and services in the economy; thus economic growth is weak.bubble-money

The only good that came of the increase in house prices was that it enriched homeowners, and I’m sure many homeowners will argue that makes all the government manipulation and subsidies worthwhile, but higher house prices didn’t enrich all homeowners: while all homeowners benefit financially from higher house prices, about 30% of homeowners are loanowners who owe more on their mortgages than the houses are worth, and those underwater homeowners weren’t enriched by house price inflation — the bankers that hold their underwater loans were the true beneficiaries.

(See: Lenders benefit from loan modifications, homeowners not so much)

debt_heavyHow is it that people so easily forget this simple truth. Would anyone want to pay double what they currently pay for cars, clothing, or food? Why do people want to pay more for housing? As I pointed out several times, money spent on housing, particularly on debt service, is money not spent on other goods and services in the economy. Lenders are the only beneficiaries of debt-service spending.

Rising home prices could be a great thing if they come as a result of a lag between an increase in demand driven by an improving economy and an increase in supply from homebuilders.

The rising home prices wouldn’t be great, but the robust economy that caused house prices to rise certainly would be. Do any of you remember the economy of the 1990s? That was the last period of sustainable economic growth that wasn’t based purely on an expansion of cheap debt. That was more than 15 years ago; most workers under 40 never experienced a real expansion.

But if rising home prices are simply the result of restricted supply (or, worse, a real estate bubble) they aren’t doing anybody any good.

few_dollars_moreNo, house price inflation based on market manipulation doesn’t do anyone any good; its a refrain people on this blog are accustomed to, but I rarely see this truth uttered elsewhere. Average citizens don’t benefit from artificially boosted house prices because they must spend more on housing, and unless they start personal Ponzi schemes, that equity is locked up in their house.

The real beneficiary of higher house prices are the banks. In the short term they benefit by restoring collateral value to their bad bubble-era loans, and in the long-term they benefit by increased interest income on the larger loans required by higher home prices. Ordinary citizens don’t benefit much from higher home prices, but bankers certainly do.

Not arguing in my own interest

Perhaps I shouldn’t complain too loudly about rising house prices. I went out to Las Vegas and bought several properties before prices rose considerably. Whenever my parents come to visit they like to tell me how much recent comps are for the property they live in. They paid $96,000 for a retirement house in 2011, and recent comps are in the $170s, and that’s just one of their properties. My parents are excited about the success of lenders in reflating the housing bubble, and I can’t say I blame them.

The increase in equity is fun to think about, but I would have preferred house prices to remain lower for longer. I wanted to buy more houses, but prices went up so far so fast that cashflow investment no longer made sense. And since my family never intends to sell these houses (the rental income is my special needs son’s lifetime of earnings), the equity position is rather meaningless.

I try to set aside my own interests when I examine real estate issues and look at the greater good.  Some days I am more successful than others, but my commitment to you is to continue to tell the truth as I see it and try to set aside my biases.