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If the price of gasoline or food, or even college dropped 20%, most of us would be overjoyed.
So why is it considered a catastrophe when housing prices drop?
Isn’t it funny how falling home prices are automatically assumed to be a bad thing? Yet a decrease in food prices, college, and gasoline would be good?
We have been systematically taught that housing is a good investment and that prices must go up. Ask your parents why they bought their house. One of the top 3 reasons will almost certainly be, “It was a good investment.” However, for many people in many situations, it is not. In fact, housing is can be a terrible investment. It shouldn't be looked at as an investment, it is shelter. No more than a car should ever be purchased as an investment.
Yet the illusion persists, whether it’s people begging to buy a million-dollar house with no research, or people saying things like, “I wish I’d bought more real estate” after incurring a paltry 1.2% return rate over several decades.
As a result, you get media reports that implicitly echo the cultural assumption that housing is a good investment. The way they describe the housing market — oops, “housing recovery” — influences and reflects our cultural assumption. Let’s take a look at a headline from a major national news publication:
"Housing prices rise by highest percentage ever. More news that the housing market is recovering."
Interesting…it’s a “housing recovery” when prices are getting expensive. Would you say that with toothpaste?
Also interesting: Why is it a painful decline when young people and other first-time buyers get more affordable housing, lower their debt burden, have more discretionary income not tied up in servicing mortgage debt?
What if we discard the assumption? Let’s try the following:
prices are become more out of reach for young people. Young paying their future earning to the old.
Or…prices reach a new level of expense, draining families of income for things like education, heath care and spending.
Affordability declines for first-time homebuyers.
As Warren Buffett said in his 1997 Chairman’s Letter to Shareholders,
“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
For young people, every time the market goes down, you should be cheering for your own individual finances. You can acquire investments at lower prices and you have a long time for the market to grow.
Yet, paradoxically, lower housing prices do represent a clear risk to the American financial system, whose growth is predicated on consumer spending, which is in turn strongly influenced by housing prices. That’s why this obsession is so serious and confusing to many. Lower home prices actually increase discretionary spending. (Excluding foolish HELOC induced lifestyles of course)
Just because virtually every media presentation celebrates the “rapid increase” in housing values doesn’t mean that applies to you. “Higher house prices = good” is a cultural assumption and a very negative one indeed.
The reason is because the US government made the decision that home ownership was apart of the American dream and enacted policies to encourage homeownership and enrich homeowners.
Homeowners are a very powerful and numerous piece of the American public. Compared to renters, they are older, more likely to be married, have higher incomes, and are more likely to vote.
So on all levels of government it is understood that higher housing costs helps out existing homeowners.
If the price of gasoline or food, or even college dropped 20%, most of us would be overjoyed.
So why is it considered a catastrophe when housing prices drop?
What this viewpoint ignores is the macro-economic effect, which is based upon the premise that my spending is your income and your spending is my income. Your premise is that prices drop on everything you buy but not on what you sell, which can't hold up.
The result of dropping prices is that the people who used to have more money (from sales), now have less. They respond by spending less and that means your income decreases, and you respond by cutting your spending, and so one.
Economists have a name for this. It's called a deflationary depression and it's not pretty.
During the Great Recession, we had about 6% deflation.
By doing so, they hurt everyone who was not irresponsible. So, what the government did was pick winners and losers and those winners turned out to be the criminals (banks and politicians who helped them) and the irresponsible.
They didn't have to step in, the market would have righted itself. Banks would have folded, other banks who didn't make stupid loans would have benefitted from it. Those who paid enormous amounts for homes because "everyone else was" and didn't consider the consequences of such would have lost their shirt to which all those who weren't stupid as such would have gotten homes at a greatly reduced value.
This is how reality works. One persons loss can be another person's gain and those who were losing, did so by their own hand, of their own agreement, of their own risk. If you reward failure, then people will not act responsible, they will not learn lessons and everyone who is responsible ends up paying for those who are not.
So, here we are back to a market shooting up again, everyone is excited and loans are flying out like crazy, people are rolling the dice again to get the pay offs on home buying as if it was a collectable trading fad and what will happen next? The market WILL crash again, and... here they will be again, crying about the unfairness of it all, how they need the government to step in because you know, those banks are too big to fail, and well... those people who stupidly paid for those homes are going to lose money.
Where is this money coming from? Who is going to pay for it all? Let me guess... tax payers are going to get stuck with the bill, yet again... you know... because people need the help.
It is insane, and you know what? It won't work this time because the government is broke... severely broke and if they keep on this track, if people keep acting like idiots, everyone is going to get devastated, but hey... as long as stupid has company, its ok right?
I'm responsible and I gained. I gained because I understood the system, the money, the politics and the economy. But I only ask for my Gov't to step in in extremis, not during typical economic ups and downs.
The money as always came from new central money creation. New money adds to our National Debt, a number which will always grow as we do as a nation, and will never be paid down in entirety. Yes some will be paid down by taxpayers because every dollar sent in to the Federal Gov't as tax is one dollar of cancelled national Debt. But no, the Gov't is not broke by any means. National Debt is unlike personal. And even then as a nation we have many times that value in assets if the need should ever arise, And it should never arise.
The thing is that if another housing bubble forms and bursts, it will result in a depression.
Probably not. Much if not most of the dead wood has already been culled. And expectations will be different the next round. Different from the lenders standpoint and the buyers. Lenders are more wary and closer by the book. Buyers are cash and investors that can more often afford to lose, rather than a broad middle class caught unaware in 2008.
Probably not. Much if not most of the dead wood has already been culled. And expectations will be different the next round. Different from the lenders standpoint and the buyers. Lenders are more wary and closer by the book. Buyers are cash and investors that can more often afford to lose, rather than a broad middle class caught unaware in 2008.
If the bubble bursts, people will be underwater on their mortgages again.
I'm responsible and I gained. I gained because I understood the system, the money, the politics and the economy. But I only ask for my Gov't to step in in extremis, not during typical economic ups and downs.
That is like saying you have no problems being responsible for losing a a few dollars at the craps table, but when you decide to bet the farm and lose, well... then you should get a do over. What makes one responsible is that they are responsible for all of their decisions, not just the ones that that they think does them the least harm.
Quote:
Originally Posted by Hoonose
The money as always came from new central money creation. New money adds to our National Debt, a number which will always grow as we do as a nation, and will never be paid down in entirety. Yes some will be paid down by taxpayers because every dollar sent in to the Federal Gov't as tax is one dollar of cancelled national Debt. But no, the Gov't is not broke by any means. National Debt is unlike personal. And even then as a nation we have many times that value in assets if the need should ever arise, And it should never arise.
People believe this madness due to the fact that they have been informed copiously that the more zeros behind some primary numbers on their credit reports is the bestest thing ever to have accredited to them courtesy of the Federal Reserve.
People never tire of gambling especially when it is encouraged by the house. Makes 'em feel important, useful- fulfilled.
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