Friday, February 22, 2008

Real estate rant

One the many subjects that interests me is real estate. I am fascinated by the geography of how people congregate in areas, the way those areas change over time, and the value we ascribe to them. There are elements of sociology, history, race, greed, corruption, and all the wonderful emotions that make up good drama.

I am also interested in economics. Not in the supply-and-demand sense that we all learned in high school, but in the Freakonomics sense of how markets react to people and the unintended consequences of market intervention (I also read Jim Jubak on MSN and particularly liked his explanation of what the hell is going on with the credit market).

In case you haven't heard, we're currently in a housing crisis, which is wrapped up in a credit crisis. There are talks of bailouts, cash infusions, tax breaks, and other plans to right our course (i.e. market intervention). One particularly irritating plan that looks like it is going into effect is that the conformal loan limit is going to be raised. The conformal loan limit basically sets the level of mortgage that the federal government will purchase. Anything above and the loan is called Jumbo, and sits on the open market. Anything lower the federal government will purchase, thereby lowering the interest rate and making everyone feel safe.

So why would that irritate me? Well, for one, there has been a crazy run-up in real estate prices, especially in Southern California where I live. People have been given loans and bought houses that were not justified by their incomes. Much of this was speculation, people thought that prices would always go higher so there was no danger in stretching now, they could sell later for more. People that already owned homes did this as well through refinancing. Well this couldn't go on forever and once prices started to go down (as adjustable rates started resetting and people couldn't afford their payments and had to sell for less than what they bought for), more and more people realized they needed to get out. The psychology of the thing is that if people owe more than they think their house is worth, they're more likely to sell or be foreclosed upon. Once started, the cycle is viscious. People sell for lower prices, values of houses decrease, people start getting foreclosed, values decrease even more, etc.

The thing about a foreclosure is that if it's a conforming loan, the cost is eaten by the government, spread among the 300 million americans, and people don't get as hurt. Well, for the nonconforming loans that were sold as debt instruments the situation is sticky. Those are still owned by banks and they also want a government bailout. The government also wants to bail out people who bought too much and are in over their head.

Why does this piss me off? Because I could have bought any time over the last 3 years but didn't because the econmics didn't work. Now I have to finance (through my taxes) a bailout of either people who bought foolishly or the banks who loaned foolishly, or both. Now I'm not a free-market at all costs conservative. I believe in government social programs for those who can't take care of themselves. But I am against bailing out people who made conscious bad decisions, greedy corporations, or the millionarie CEO's that are crying because they won't be getting yachts for Christmas this year.

I was even irritated enough to post on the LA Land real estate blog on the Times website:

"How's this for a conspiracy: new larger conforming loan limits allow people to refi their large mortgages, the 'bad' mortgages owned by banks and investors are paid off, and the new mortgages are backed by Uncle Sam. When people have trouble paying those new conforming mortgages who's in trouble? Not the banks, who would be off the hook, but you and I, John Q. Taxpayer."

So what's the solution? I don't know - move to Canada? With global warming Vancouver could be the next Los Angeles. Either way I can't complain too much, I do live (rent) near the beach after all. In any event it is a learning opportunity and maybe I'll be able to take advantage of some government subsidies to write more about things that matter, like nachos.


tspwlv said...

You're right on. But I do feel good to know that when my husband loses his job in real estate and we're faced with losing our house that we paid way too much for (but can almost actually afford, and without too crazy of a loan), there will be taxpayers like you to make sure my children don't lose their home. And this is why America is great. That, and the Bruins.

BradleyB said...

I guess my complaint is that it seems like there is so much greed and corruption at the highest levels of our politics and businesses and when stuff starts to hit the fan it isn't those people who get hurt it's everyday people (and hopefully not those who have no choice about it like your kids). It does remind me of a quote about being president and how only crazy people would want to do it. Makes sense; I sure wouldn't want that job. Writing cookbooks sounds much more fun.