We are "Guarding the wrong man"...don't blame housing

Like many things going on our economy today, discussions about the housing market and home prices are focused on the wrong issues. Housing prices are declining because people who want to buy a home for shelyer cannot get a mortgage. This condition was not caused by “over-priced” homes. It was caused by over-leveraging securitized mortgages on Wall Street. This led to massive losses for investors who, otherwise, would be buying “appropriately leveraged” mortgage backed securities today. As these massive losses were encountered, banks that usually provide the warehouse lines for mortgage companies have withdrawn from the market or failed altogether.

There are many in the country who want to buy a home for shelter. If these buyers could get a mortgage, then, when a family loses the breadwinner’s job, that family could sell the home to these qualified buyers, at an appropriate price, and move to a location where there are jobs. The number of foreclosures would fall, the excess inventory in the market would be absorbed and construction of new homes for shelter could begin anew.

The bottom line is that the over-leveraging on Wall Street has suppressed demand, by eliminating the availability of mortgages. The way to support the value of homes is to make it possible for those who want to buy a home for shelter to get a mortgage.

The second problem, that remains un-addressed, is the issue of why people buy homes as an investment. Whether they are “flippers” or investors buying rental properties for future sale, their activity in the market distorted the supply and artificially created the pricing bubble. However, the housing issues are not their fault. They were merely responding to rapidly rising prices and the “insane” mortgage products that were made available to them (investors) in order to satisfy the appetite of the MBS market’s “over-leveraging” on Wall Street.

It is no coincidence that the most extreme problems have occurred in California. State and local government in California have created tremendous barriers to the development of residential subdivisions and the construction of new homes. The consequence of these barriers is a built in housing shortage in California. This government induced housing shortage leads to constantly rising home prices to a point way above the actual value of the home. Once the availability of mortgages (read: Demand) is eliminated, these inflated prices collapse. The best way to avoid this problem is to remove the artificial barriers to the production of new homes. If this is not done in California, home prices will be above recent extreme highs in less that four years.

The best example of balanced supply is the Houston, Texas market. With no local zoning, and with large land parcels available at reasonable prices, the elasticity of supply (Houston is the closest example of “perfect elasticity”) prevents dramatic fluctuations of prices and allows the market to remain relatively stable during this downturn. Houston has less decline in home prices, fewer foreclosures and lower levels of inventory. All of these factors contribute to a more stable housing market and real estate values.

The bottom line is that we need to have more reasonably priced mortgage money available for families that want to buy a home for shelter, and we need to eliminate the artificial barriers to the development of subdivisions and the construction of homes in the tightly constrained markets, particularly California, Virginia, Maryland. Forcing housing prices higher through restriction of supply is a very expensive form of taxation without representation.