Sep 05 Mania Was Bound To Happen

I was reading a magazine listing homes for sale two weeks ago, and it seemed like every page had the same words: Price Reduced. It seemed a good time to buy, at least until I realized I would have to sell the house I am in, too.

One major reason is there are many more homes on the market. The mortgage market faces about 2 million foreclosures, or about 4 percent of mortgages. Locally, more than 500 homes were sold by sheriff’s auction last year in Stearns and Sherburne counties.

More houses in the market push down prices for everyone. In every transaction, there are winners and losers, and though markets have been tampered with and prices are going down, Steve Mooney, professor of real estate and finance at St. Cloud State University, said the winners include rental-property owners and first-time home buyers.

“There are a significant decrease in vacancies in the St. Cloud area,” Mooney said.

And although, according to Mooney, “our local market is a reflection of the nation,” our prices have remained more static than states such as Arizona, California and Florida, where greater variability has brought greater loss.

Gloomy scenarios aside, the U.S. mortgage market has experienced a “bubble” or a mania, which, as long as people believe an asset’s prices keep rising, makes sense to borrow to achieve it — even with no down payment. While prices rise, all is fine, but about once a decade the pyramid tumbles and economic lessons are relearned.

Two or three years ago, at a Central Minnesota Builders Association conference, a national economist said that the local regulation added more than $30,000 to the price of house developers took on in converting land into a buildable lot.

In more prosperous years, when home prices were rising 15 percent to 16 percent, people expected it continue. One could borrow at 6 percent and paid 10 percent, in essence, just living in the home. Optimism abounded.

As history shows, manias for certain assets at some point become collectively irrational, as people buy on the expectation that the item will keep going up in value.

Housing bubbles operate on this assumption, and although both political parties believe home ownership an unalloyed good, encouraging folks to assume a large amount of debt makes them vulnerable to vicissitudes of the market. For example, if a couple buys a home for $200,000 and puts 5 percent or $10,000 down, and the home value decreases to $170,000, it is easier to give the keys back to bank, the so-called “Jingle-Mail” phenomenon.

Although home ownership is a marker of good financial habits and homeowners are better off financially, we encouraged people to own houses without realizing renting is best for them. One example was the Community Reinvestment Act and Affordable Housing Ordinance. It may have lured folks into houses which they were not ready to purchase.

Encouraging people to buy homes with only a 3 percent down payment was like buying stock with a very small margin. They were leveraged at 20 to 1 or more for the most important purchase in their lives. Such lending was encouraged by public policy.

In the olden days, people who owned their own homes saved regularly and were financially literate and savvy. They had good financial outcomes.

So as a matter of public policy we thought increasing rates of home ownership were good. Even though people of all parties applaud home ownership, people put in homes prematurely don’t have these qualities. We took correlation (that homeowners are better off financially) and thought it was causation, luring people into houses and getting them to commit prematurely.

Some housing advocates tried to hold classes for new homebuyers of government-supported homes to learn how to handle money, but they were insufficient. People can’t learn these qualities from a class, only from experience.

Now some of us want to use the same government that aided and assisted us into this mania to help us out.

Government cannot prevent manias, but perhaps there would be fewer if government did less, not more.

And, without government help, there is something helping new homebuyers get into the market: “Price Reduced."

This article appeared Friday in the St. Cloud Times.