Economics

Economic Policy By Metaphor (Cont.)

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From New York Daily News columnist Errol Louis:

But [Rick] Santelli and his self-righteous followers are like people who, seeing a neighbor's house on fire, cross their arms and urge the fire department to do nothing, pointing out that the flaming building was poorly constructed and owned by an irresponsible S.O.B. who smoked in bed.

All of that might be true. But it's probably best addressed after we make sure the whole block doesn't burn down.

Right now, an estimated 8.3 million homeowners are underwater, meaning their homes are valued at less than the amount owed on their mortgages.

It might come as news to those millions of struggling souls to learn that a reporter from CNBC…considered some, all or most of them selfish fools deserving no help from the government.

Here, the fire metaphor is undermined by the water. Is it really a contagious conflagration when a loan-purchased asset loses value? Despite every politician's best efforts, I still don't see it. (And to dispense with a little straw here, I don't consider those "underwater" homeowners as "selfish fools," even if some are demanding my money for their unfortunate decisions/timing.) If I buy a house for $600,000 (which I won't), and it's now worth $500,000, what does that have to do with me being able to make my mortgage payments?

The best asset-devaluation-as-wildfire argument might be that so much of the economy has been tied to the buying, selling, financing, and construction of homes that the sharp contraction in all that activity is wreaking economic havoc. That may well be true, but any bubble, when inflated large enough, begins to gobble up portions of the economy, which then suffer when the bubble is burst. The problem is, do the efforts to piece the bubble back together create new artificial/irrational inflation-pockets while unproductively soaking up tax dollars that could be better spent elsewhere?

Speaking of housing prices (and people who think the housing market needs goosing from the federal government), this recent Robert J. Samuleson op-ed contained a tasty tidbit:

Here's a little-known fact: Housing may be more affordable now than at any recent time, thanks to lower prices and falling mortgage rates (now about 5 percent). The National Association of Realtors has an "affordability index" that estimates the family income needed to buy a median-price house, assuming a 20 percent down payment and monthly mortgage payments equal to 25 percent of income. Affordability is now the highest since the index's start in 1970.

In related news, the White House has just released its "Making Home Affordable" plan.

Previous metaphorical musings here and here.

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  1. The problem is, do the efforts to piece the bubble back together create new artificial/irrational inflation-pockets while unproductively soaking up tax dollars that could be better spent elsewhere?

    Does the sun rise in the east?

  2. Fire departments fight fires. Bailouts…do what exactly? When Louis can tell me exactly what bailouts do, and why, maybe he could use that metaphor.

  3. Is this the same neighbor we warned repeatedly about storing straw and gasoline next to his furnace in his basement?

    I’ve never encountered Mr. Louis before, but is he always this much of a talking bowel movement?

  4. There are a lot of people (like CNBC’s idiot “housing market” reporteress) running around saying it’s absolutely necessary to prop up real estae values, because foreclosures and vacant houses force neighborhoods into a “downward spiral”.

    If you listen closely, it starts to sound like, “If these houses become too affordable, the wrong sort of people will move into your neighborhood!”

  5. If I understand my nautical terms properly, bailing out keeps you from going underwater. You might even use a bail to put out a fire. You could even use a bail to get the water out of someone’s house and simultaneously putting out a fire.

    Or you could just stop mixing metaphors.

  6. More often than not, the CNBC chick sounds as if she is reading directly from the latest Board of Realtors’ “fact sheet”.

    Stockholm Syndrome; just like the dope who “reports”on the car business.

  7. There are a lot of people (like CNBC’s idiot “housing market” reporteress) running around saying it’s absolutely necessary to prop up real estae values, because foreclosures and vacant houses force neighborhoods into a “downward spiral”.

    I wonder why this did not apply to the price of oil.

    Oil did much worse than the Dow; oil is now less than a third of what it was in July of 2008. Should the government have acted to prop up oil prices?

  8. I’ve never encountered Mr. Louis before, but is he always this much of a talking bowel movement?

    90% of Daily News and Post columnists are douchebags, so the odds are good that he is.

  9. Oil did much worse than the Dow; oil is now less than a third of what it was in July of 2008. Should the government have acted to prop up oil prices?

    We are incredibly lucky the oil bubble burst before the Government got a chance to do something about it.

  10. Don’t worry, our government has it all figured out. First they’ll spend billions to try to increase housing prices, and if that works, they’ll spend billions more to fix the shortage of “affordable housing.”

  11. Water is a pretty proven and zero negative-side method for dealing with a house fire, which is pretty obviously a problem.

    An underwater mortgage, however, is not obviously a problem, and there isn’t a proven and/or zero negative-side method for dealing with it.

    Metaphor Fail!

  12. Every time I buy electronics, 3 months later the equivalent is 20% cheaper. Where is my bailout?

  13. Bailouts are giant fans that fan the flames throughout the neighborhood, ensuring that everyone suffers equally.

  14. My understanding is bailouts function like loaning a grubstake to a gambler down on his luck.Ostensibly he is going to get the ol’ mojo back and win enough to pay back all his creditors and you too.In reality you know his creditors are the seemingly less-losing guys at the table and you are really bailing them out as he partially pays them rather than gambling with you.The only guy at the table with any real money is a fat Chinese ex-general and you borrowed the money from him.

  15. “If these houses become too affordable, the wrong sort of people will move into your neighborhood!”

    Yeah, those kinks of people.

  16. Oil did much worse than the Dow; oil is now less than a third of what it was in July of 2008. Should the government have acted to prop up oil prices?

    Well, I seem to recall many people saying we should put a floor on gas prices by raising taxes. Its kind of like propping up a bubble, except that when you prop up a bubble, somebody wins. Putting a floor on prices with a tax means everybody loses.

    Except the government, of course.

  17. Okay, I agree with everything that Matt is saying, but he’s missing Louis’ point. When numbers of houses in a neighborhood are foreclosed, the other (non-underwater, paid for, etc.) houses drastically lose value. That’s the fire he’s talking about.

    Said because I received my house assessment from Grosse Pointe City yesterday, and the house’s value decreased to 75% of what it was six months ago. Even though I have no intention of selling.

    Which means my real-estate taxes will probably go up, on account of some obscure point of how the Michigan property tax cap system works.

  18. Here’s a little-known fact: Housing may be more affordable now than at any recent time, thanks to lower prices and falling mortgage rates (now about 5 percent). The National Association of Realtors has an “affordability index” that estimates the family income needed to buy a median-price house, assuming a 20 percent down payment and monthly mortgage payments equal to 25 percent of income. Affordability is now the highest since the index’s start in 1970.

    Somewhat related news that the stimulus package doesn’t have a goddan thing to do with.

    The majority of homes sold last year in Oakland, Macomb, Wayne, Washtenaw and Livingston counties were priced at less than $100,000, as investors and first-time home buyers plucked foreclosed homes and other deals off the market.

    These two bargain-hunting players gave the market its good news last year: double-digit sales gains and reduced inventory levels.

    That’s the invisible hand at work, Obamatrons.

  19. If the hoses were filled with gasoline instead of water, then I think we’re onto something.

  20. If the hoses were filled with gasoline instead of water, then I think we’re onto something.

    Why do you want to hose underwater houses with gasoline, Egosumabbas?

  21. The easiest way for the government to make housing more affordable is just to get out of the way, let the foreclosures flood the market, and let new buyers buy in at the new lower market clearing prices.

  22. When numbers of houses in a neighborhood are foreclosed, the other (non-underwater, paid for, etc.) houses drastically lose value. That’s the fire he’s talking about.

    Only two problems, Geoff:

    (1) Underwater does not equal in default does not equal foreclosed.

    (2) The number of neighborhoods with a critical mass of foreclosed homes is vanishingly small and confined to a small geographic region.

    Really, if the problem is vacant houses in a neighborhood, which is more likely to get somebody living in those houses:

    (a) Letting the price fall to a market-clearing point, or

    (b) Giving a subsidy to someone who has demonstrated that they don’t have the wherewithal to own that house?

  23. Why is real estate, as an asset class, more deserving of being “propped up” than stocks, bonds and any/other financial assets?

    Exactly how are the people’s who home values have declined any more “worthy” of getting a bailout (if anyone ever could be considered to be) than investors whose taxable and tax-deferred retirement funds have taken a huge hit.

    Also, what exactly is so terrible about somebody being forced to give up a house that they never could sensibly have afforded to buy in the first place?

    Why they might have to go back to renting an apartment or something! Oh the horror!

    I’m not buying it.

  24. There’s a running gag* in the navy that goes along the lines of “good news, the flooding put out the fire”.

    I also agree with those who hate the conflation of ‘underwater’ with ‘problem’ – which the proposed Obama housing plan does.

    ‘Can’t make the payments’ = ‘problem’ (‘who’s?’ is a separate point). But anyone who drives a new car off the lot on credit is generally imediately underwater. Anyone who takes on a student loan is for all practical purposes underwater while in school.

    *not a myth

  25. Water is a pretty proven and zero negative-side method for dealing with a house fire, which is pretty obviously a problem.

    This is technically not true (the zero-negative part), but it’s even more a pedantic nitpick than my Mason Dixon comment on another thread.

  26. Oh I quite agree with you, RC, that being underwater doesn’t equal being in default. Someone here pointed out weeks ago that everyone is ‘underwater’ when they buy a car, for example. I just wanted to point out that Louis was thinking of crashing neighborhoods where there were lots of foreclosures. And yes, there aren’t many places like that. For example, on my street there are perhaps half a dozen houses on the market, but I don’t think there are any that are in foreclosure. Still, it was sobering to see the abstract ‘falling housing prices’ become quite concrete in my tax assessment notice.

  27. To my mind “affordability” is a trap. One should not buy a house that is more than about three times one’s income. The fact that low interest rates makes a more expensive house affordable just props up the already over-inflated housing bubble.

    House prices need to decline to the point where a median house price is about three times the median salary.

  28. We are incredibly lucky the oil bubble burst before the Government got a chance to do something about it.
    There is a website with the address http://www.lifeaftertheoilcrash.net.

    We are now living after the oil crash.

  29. We are incredibly lucky the oil bubble burst before the Government got a chance to do something about it.

    There is a website with the address http://www.lifeaftertheoilcrash.net.

    We are now living after the oil crash.

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