Thursday, February 28, 2013

I Dream of Debt?

Getting ahead – in education and housing – mustn't mean going under

Usually when I see an article that catches my eye or ire, I tweet about it and get on with my day. Ken Harney's "The Nation's Housing" column in this Sunday's Post had me muttering to myself by the second paragraph.

Mind you, I understand Mr. Harney's target audience: single-family homebuilders and real estate agents. They're interested in producing and selling product as any good business does. When a source of demand dries up, they become rightly concerned. It's fairly easy for builders and agents to enter the housing market in boom times when profits are high and exit in slack times when there's no money to be made. The same case can't be made for homeowners stuck with an underwater mortgage.

In his column Mr. Harney states: "First-time buyers are missing in action; they represent a smaller proportion of overall sales activity than their historical norm." Mr. Harney blames "massive student-debt levels", but that's too narrow a focus and perhaps misleading. According to a recent analysis by The Pew Research Center, overall debt levels are down since 2008 for Americans under 35 years old. Younger Americans have put off big-ticket purchases such as houses and cars; they're also going to school longer (acquiring more debt along the way) and getting into the job market, marrying, and having children later.

But wait, there's more at work here: qualifying for a mortgage is harder with tightened lending standards; consumer tastes for ownership are changing; there are more single households forming; and first-time homebuyers are skittish about plowing their savings into a fixed, immobile asset whose future value is uncertain. And perhaps we want to become a more mobile society, going where employers need us and the work takes us.

"All of this represents a potentially significant issue for homeowners and sellers in the overall market," Mr. Harney states. "Without entry-level purchasers, the housing system doesn’t work well. If there’s no one to buy moderately priced starter homes, the owners of those houses can’t sell and move up." Mr. Harney's statements will make some shout, "Market failure!" or "Crisis!" It makes me scream, "No!" The market hasn't failed; instead, market dynamics and consumer preferences have changed.

The culprit is not the market; it's over-eager lawmakers who spotted a giveaway opportunity for constituents and industry lobbyists without acknowledging the downstream effects of burst asset bubbles and underwater mortgages. The market distortions created by subsidized lending and insurance bid up housing prices so first timers are priced out or go deeper in debt, raising the expectations (and demands) of current homeowners for ever increasing home values until the upward spiral crushes itself and household wealth.

The policy solution is to unwind subsidized student loan programs and end housing subsidies that encourage indebtedness (specifically, mortgage interest deductibility and FHA insurance underwriting). The housing system works best when suppliers can enter and exit the market easily, the government stays out of the tenure choice between ownership and renting, and consumers can choose where they live without buyer's remorse.