Even the better progressive economics commentators criticize
the Obama administration for not "fixing" the housing slump, but housing prices are still too high and the idea that the economy can be restarted through real-estate transactions is just wrong. The important economic news of last week was that manufacturing employment increased for the first time in a decade but that news was ignored by progressive and conservative economists who share a mistaken theory that the huge size of the US Finance, Insurance and Real-Estate (FIRE) sector and our post WWII long housing boom followed by the Bush era housing super-boom are normal or good things.
As a homeowner myself, I know that drops in housing prices hurt, but if the progressive economists mean what they say about caring about poor and ordinary working people, they should be more concerned about the effects of the high costs of housing on the income and wealth of ordinary Americans -far too much of our disposable income goes into keeping roofs over our heads- and about the gross unfairness of the way the government subsidy of housing favors the wealthier. And if the conservative economists mean what they say about family values they should object to the transformation of "homes" into speculative investment assets which transforms families into short term tenants without the stake in community and nation that the Founders thought was so important - and they would object to the massive government subsidy of the housing market which pulls investment funds from other, more productive areas.
During the last decade, as national infrastructure rusted, factories closed, wages stagnated and declined, ruinously expensive wars were started mostly to protect oil companies, and the tax burden was redistributed so that the share of the wealthy was shifted more and more to the middle classes and even the poor. This set of policies was politically possible only because a large part of the middle class was bought off by a housing price inflation that made it look like they were getting a share of prosperity. The dramatic effects of the bubble can be seen in this chart
: during the bubble, if you owned property, your on-paper wealth increased rapidly and you could convert that into cash via equity loans or sales.
Notice something else about this graph - the blue line shows steady increases in housing prices for over 30 years. If you or your parents were on this escalator, you got steadily "richer", but families that were not on the escalator got further and further behind: because wages did not increase. In fact, household income stalled in the 1970s - the illusion of getting Americans getting more and more prosperous only applied to those who managed to get on the right side of the housing curve. And finally notice where we are now - people who claim housing prices need to be boosted are arguing that we need to get back in a pricing bubble which still has some deflating to do before we get back to historically normal prices.
Since World War II, the housing market has been dependent on government intervention. The whole postwar buildup of suburbs came about due to both the development of highways at public expense, a system of cheap loans under the GI Bill and through multiple agencies, and the Mortgage deduction from income tax. And the Federal Housing Administration denied loans to black Americans
creating our white suburbs
. The way housing is organized and taxed and subsidized has made huge amounts of money for real-estate developers and banks and has been systematically unfair to renters and to poorer homeowners - as well as to business outside the FIRE sector. Why invest in steel mills when the government is providing such a boost to shopping mall and house construction? The mortgage tax deduction basically provides someone with a million dollar income a 35% of their mortgage interest on their mansion at government expense and provides someone making 40,000 a year 23% or less of their much smaller interest payments for their more modest house and provides nothing to the renter. Is that fair? And after 2000, the Federal Reserve bank and the Banking regulators tried to hide the effects of the Republican raid on the Treasury by creating a massive housing bubble inflated by cheap loans. The Bush real-estate bubble was fueled by a enormous government system of mortgage subsidies via the GSEs like Fannie Mae and Freddie Mac. The same right wing whiners who insist loudly that the Constitution doesn't allow the government to regulate insurance companies had no objection at all to the government guaranteeing mortgage loans for suburban developments.
The result was the appearance of wealth creation for the lucky part of the middle class, but since salaries didn't go up, this debt fueled wealth creation was at the price of making housing too expensive.
As of 2009, some 41.7 million U.S. households, or 36.7% of the total, faced housing costs that exceeded 30% of their pretax income — a level typically defined as the threshold of affordability. That’s an increase of 1.5 million from 2007, despite a sharp drop in house prices and policy makers’ extraordinary efforts to bring down mortgage payments.[wsj]
Things are bad for homeowners "as of 2009, some 31.0% of homeowners were shelling out more than 30% of their income to cover housing costs" and worse for renters: "some 47.7% of renters faced excessive housing costs, up from 45.6% in 2007." And, as usual, the poor get hammered the worst: "In 2007, nearly 13 million low-income persons paid more than half their monthly income for rent, lived in severely substandard housing, or both.
One of the suggestions of the President's deficit commission was that the unfair mortgage deduction be replaced by a limited housing credit. If the government is going to subsidize housing costs, it should give every household the same credit and limit it to a modest size. That's a good first step, but prosperity will come from a vibrant economy in which there are good paying jobs in green manufacturing and there are a lot of other steps to be taken to get us there. And one of those steps is to stop thinking that housing bubbles can save the day.