Where we went wrong in housing

By Felix Salmon
January 23, 2010
this interview with Steve Waldman, one of the econoblogosphere's most thoughtful and intelligent writers. Here he is on the morals of walking away from your mortgage:

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Go read this interview with Steve Waldman, one of the econoblogosphere’s most thoughtful and intelligent writers. Here he is on the morals of walking away from your mortgage:

The financial industry has changed the economic and legal landscape surrounding consumer lending so that it simply bears no resemblance at all to interpersonal loans among people of good will in continuing relationships. But those are the norms they ask borrowers to adopt with respect to repayment. That act, demanding others act in accordance with standards from which one exempts oneself, is morally offensive. In a society which, despite economic difference, accepts no social class, ones moral obligation is to behave towards others as others must behave towards you. It is clear that, in general, banks and the special purpose entities that increasingly replace them treat their transactions with borrowers as hard-nosed business arrangements which they are willing to pursue on adversarial terms when doing so is in their interest. Borrowers should do the same. To do otherwise is to reward the cynical immorality of others, which serves no social good.

And here he is on the fetish of homeownership:

I think the government has chronically oversubsidized mortgage lending and homeownership. We cannot know what would have been, but I think we’d have a different and better housing market if we didn’t tilt the scales of the buy/rent decision towards BUY BUY BUY. The business of shelter provision for middle class families is horribly inefficient, literally a cottage industry. Absent all the subsidies, middle-class housing might have become professionalized by now, which could lead to enormous savings in money and aggravation for people who now waste time fighting with plumbers and roofers on an ad hoc basis. It’s remarkable that homeownership rates have kept rising even as people’s tenure in jobs has fallen and mobility has grown more valuable. We’ve made homeownership a totem of middle class prosperity. In doing so, we may have, um, foreclosed consideration of a variety of superior arrangements.

I love the idea of “professionalizing” housing: call it the German model. I’d note that an interesting hybrid exists in Manhattan: the co-op apartment building, where you pay a substantial monthly fee to a landlord-like figure who deals with most of the headaches of ownership, and where the board insists on high minimum-net-worth requirements before anybody can buy into the building, to help avoid the risk of foreclosure. It doesn’t really scale, though, and it doesn’t solve the mobility problem.


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The roots of the housing bubble go much deeper. Money drained from the economy by the trade deficit comes back to the U.S. in the form of purchases of assets. It has to in order for the dollar flow to balance. After 34 consecutive years of a trade deficit that drained a cumulative $10 trillion from the economy, there was almost nothing left to sell. The government was cornered into relaxing loan standards and bank regulations so that foreign money could be plowed back into the economy through the housing market. When that wasn’t enough, mortgages were simply resold over and over again.

The manufacturing sector of the economy was nearly wiped out by our trade policy, to be replaced by a housing bubble to keep people employed. Take away the housing sector and, presto!, we have double-digit unemployment.

There is no way out of this mess without restoring a balance of trade. The U.S. can no longer be party to the WTO (World Trade Organization) shake-down that has been propping up developing economies by draining America’s.

Posted by Pete_Murphy | Report as abusive

The scales of the buy/rent decision are only tilted when the cost of capital is artifically decreased. But that completely destabilizing subsidy distorts investment decisions in every facet of the economy.

The government needs to stop relying on the Fed to use interest rates to control economic growth. It does not work, and never will. Bernanke had to be on some kind of trip or suffered a serious memory lapse when he said that low interest rates did not contribute to the financial crisis. People make the buy/rent decision based on monthly payments, not the selling price, and the monthly payments are determined largely by interest rates.

Home ownership is not for everyone, but neither is renting apartments. There are some people who would rather live in the same place for 30 or 40 years, and for them, home ownership makes a lot more sense than renting. The problem, though, isn’t that people are encouraged to own homes (or not), it’s how the incentives are provided, and lowering interest rates is a dangerous way to accomplish the goal.

Posted by OnTheTimes | Report as abusive

The idea of the “professionalization” of housing is an intriguing one. My wife and I are in the process of replacing the windows in our townhome. We began the process way back in November, and are still awaiting homeowner’s association approval; our initial application was denied. I wonder why our HOA has not developed a “preferred vendors” list for projects such as this. Choose off the list, and your application requires no approval. In return, the companies agree to offer standardized pricing. This would seem to reduce the headaches all around, and yet it hasn’t happened even in a neighborhood with a fairly stringent HOA.

Posted by MitchW | Report as abusive

If “professionalization of housing” (i.e I assume that means “single-family real estate management”) could exist, it would exist.

The costs are too high to manage small and spatially-disparate properties. Condominiums, co-ops and various HOAs can and do manage such properties, even to the point of requiring management of all landscaping, roofing. But a great number of people do not want that kind of housing.

Posted by dsucher | Report as abusive

Pete, can you explain in more simple terms, especially ‘purchases, sell and resold’, I am a bit lost. Also, why are exports too low or are imports too high ?

Posted by Ghandiolfini | Report as abusive

Dsucher, you have a telephone call from the limits of arbitrage on line 3. Do pick up this time. And if you’d like the non-snark response, how can you possibly compare single-family housing, which is deeply subsidized via (deep breath) mortgage interest deduction, conforming loan provision, property tax deduction, FICO score, etc ad nauseam, with completely unsubsidized, high-unit-count, multimillion-dollar multifamily housing like ‘[c]ondominiums, co-ops and various HOAs?’ Which is to say, you have another call from the Apartment REIT subindustry on line 4.


The capital-account deficit argument has some data on its side, it is true. Still, if you take away the hundreds of billions in annual government subsidies for homeownership, maybe prices are closer to a sustainable level when the bubble pops.

Posted by wcw | Report as abusive