Home Ownership Hubris

I bought my first home during a time when my life had finally settled down enough to plan for a lengthy stay in one place. It was a terrific house. I found out later that it was constructed by a finicky and conscientious builder. It was rock-solid and comfortable. Even today I wish I still had that house, except located here in Illinois.

At the time, I had just finished my Ph.D. and was getting a real paycheck again. Cindy and I had lived in an 825 sq. ft. apartment for eight years, followed by a year in an 826 sq. ft. apartment. We were ready. I did not give much thought to the economics of home ownership, noting only that we were required to come up with a significant down payment and had to document somewhere near a thousand things about our finances.

For career reasons, we moved to California six years after buying that wonderful house and I anticipated a much higher housing cost. I was right, but only partly so. I expected to pay half again as much for a house in Northern CA than I had in Wichita KS. That price, I learned, would buy a lavish tent in Chico. Prices had been appreciating 20% a year for four years when we arrived, and I found that in order to get a house in which we could reasonably raise two kids, we would have to fit into a fraction of the space at well over twice the price.

I did not have the knowledge of real estate that I have now, but I do recall thinking that if any fool would lend me enough to buy that house, I would take it. Now, remember this. I did the math. We could make the payments. Had the university there not reneged on my contract, we would have made it just fine for years to come. Yet in the back of my mind a haunting thought crept in. Why are housing prices doing this?

I figured that at some point prices had to level out. I am not give to speculation by nature, and my financial decisions are by and large conservative. Thus I did not get housing fever as some did, using the equity to buy jet skis, motorcycles, and other toys. This even as my house, three years later, became worth $100,000 more than I purchased it for.

Looking back, that was simply insane. Now I know why. Enter George Will, who reviews a book that I plan to get, like, right now. It is called Reckless Endangerment, by Gretchen Morgenson, a New York Times columnist, and Joshua Rosner, a housing finance expert. In it, Morgenson and Rosner dissect the origins and causes of the great housing boom and bust of late.

Will’s take on the crisis is similar to mine. Though I have yet to examine the book in detail, the theme is captured in Will’s quote:

The book is another cautionary tale about government’s terrifying self-confidence. It is, the authors say, “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.”

The liberal mindset is a shining example of what material is used to pave the road to Hell. Home good. People poor. Government help. In the end, good intentions set poor people up for a major fall and to boot destroyed wealth in astronomical amounts. Let’s not forget that liberals were not solely at fault here. How do you think Big Banks got so rich and powerful? Certainly not by offering legitimate lending to qualified buyers and taking the hit on any bad decisions they made. They engaged in loan-making that should make any banker blush because they knew the government would bail them out.

Here are the Cliff Notes to this debacle. Theme one: Banks operating in a free market are disciplined by that market, but only when allowed to experience the consequences of their decisions. Theme two: The only entity that can shield banks from negative consequences is the government through the use of force (taking our money and giving it to the banks). Neither government alone nor banks alone can do much damage. Were government not involved in banking except for the legitimate enforcement of contracts and banks were not both the shapers and beneficiaries of government largess, the “too big to fail” phenomenon would never have occurred.

The solution is straightforward. Let the market, not the government, figure out who should own a home. Let banks that make consistent egregious errors in judgment fail. Get the government out of the banking business entirely. Will this cause disruption? You bet it will. Lots of it. The alternative, though, is many time worse. As more and more money is funneled to the crooked and incompetent, more and more middle-class and poor people will suffer. The crony capitalists will continue choking us out until one day they slit our throats. Let’s not wait for that.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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