“According to the map we’ve only gone 4 inches.” – Harry, from Dumb & Dumber.
“I don’t care about losing all the money. It’s losing all the stuff.” – Marie, from The Jerk.
Good morning fellow debt slaves. Now where have I heard this particular thought before?
Fed Policies Devastated the Middle Class
Inflation benefits those with first access to money, namely the banks and the already wealthy. In the case of housing, by the time money was made available to those lowest on the totem pole, a housing crash was baked into the cake.
In that manner, Fed policies have devastated the middle class, complete with bank bailouts at taxpayer expense, Fannie Mae and Freddie Mac bailouts at taxpayer expense, and the robbing by inflation of those on fixed income struggling to get by on 0% interest rates on their savings while the Fed holds interest rates at zero.
The above excerpt from Mish Shedlock’s excellent blog is from the first of a two-part series on HPI data, the CPI, and interest rates, which is really to say “inflation”, here as it relates to real housing costs. And, on this point, at least, I think he’s right “on the money”, though he neglects to note that the inflation “set-up” is a necessary precursor to the sort of theft he (and Jefferson) describes.
Still, as I’ve noted before, it really does help to dig a little deeper than the CPI to really understand the inflation problem and this article provides some useful thinking on that subject. The following chart, for instance helps to demonstrate just how completely the (nominal) equity accrued (or saved) by American families in the single largest asset class has been so effectively dissipated by our monetary policy over the past two decades.
And so, speaking of “lost decades”, stocks, as we know, have fared just about as badly as housing…yes, even allowing for the more recent upswing on the “roller-coaster” ride. The Dow, as we speak today, has risen to 13,000 and change, only now re-establishing the peak level first reached in April 2007, a mere half decade ago. It it, likewise, a mere 14% up from the January 2000 peak near 11,700. Corrected for inflation (using the CPI now), we get a “real” net decline of roughly 17% over the past twelve years.
Are you tasting those yummy carnival hot-dogs again? But, the ride, I think, isn’t anywhere near being over yet.
There is a problem, however, with Mish’s analysis. Notably, however much “real” housing prices have declined, many (generally “responsible”) folks are stuck paying on the mortgages that they contracted during the peak of the boom. So, while it is quite true (as Mish contends) that housing price inflation was under-weighted in the CPI during the boom, I’m not sure it helps us all that much to now re-weight the formula during the ensuing bust (which means, of course, that the BLS will do just that).
As noted above, it was the inflationary boom, that served as the necessary inflationary “set-up” for the inevitable deflationary phase of the “three card monte” con of central banking. Thus far, the only people who have been able to actually capitalize on housing deflation are those who have already lost (or otherwise walked away from) their homes.
It is true that some – those with particularly good access to credit, as usual – have refinanced. Others, of course, are now snapping up cheap foreclosures to convert to rental use…a good and useful economic function, I might add, in a market that has become so dysfunctional. But, even those who have refinanced have, nonetheless: a) lost a pretty good chunk – if not all – of their equity and b) to add insult to injury, are probably still paying against an outstanding mortgage balance that rose along with nominal home prices.
So, I’m not sure that I’m seeing the “upside” (for lack of a better word) here. I mean, which is a worse fate: Paying an overly inflated price for your housing during a boom and subsequently losing it or losing all of your equity and keeping the long-term obligation to pay the overly inflated mortgage for your (now much less valuable) home?
How about those who were “smart enough” to avoid the bubble altogether? As it happens, they too were punished, here for their unwillingness to enter the debt trap. For one thing, their rents grew, although admittedly at a slower rate. But, more significantly, being so “smart”, they probably put their savings in the stock market, now didn’t they? Either way, they fell behind too. Nobody really wins against the Fed.
Presumably, we all need to live somewhere, other than – we might hope – the proverbial “van down by the river“. It’s all fine and well to imagine that these various bubbles, once burst, will pass into some renewed period of normalcy, weeding out the dead wood, etc., etc. That is, of course, unless you’re the one stuck paying the costs over the next 20 or 30 years. When considered along with the bailout costs (to those who propagated the whole con), I’m inclined to call that “holding the bag”.
So, here’s the question for the day: Have we actually come to a point where the only prudent thing left to us is to walk away from our mortgages? At the beginning of this “crisis”, I had great sympathy for those who were losing their homes…and some little bit of anger towards those so-called “strategic” defaults. But, I’m now beginning to reconsider the whole deal.
Now, with average foreclosure times having risen to 631 days, I’m reminded of the old joke: “dog catches car”…(what next?). Banks are reaping the whirlwind, as it were, and walking a tightrope over a very real chasm of massive (and still growing) mortgage defaults. They have caught the car. And, for many of us “debt slaves”, economic survival may well depend on walking away from any and all debt…even those of us who still have the means to keep paying.
I had a conversation on this topic with a good and upright friend (“The Sojourner”). He, quite ethically, argues that we (and he) have a moral obligation to keep paying these debts even though he, like so many others, is now well under-water and has a growing need to adjust both his housing and his budget.
As I said, I’ve generally been quite sympathetic to my friend’s point of view…and have myself expressed it often enough in the past. But, I can’t help but wonder over the depth of our real obligation to these banks. Consider:
These same banks aren’t all that eager to finance today’s buyers, otherwise known as those who might otherwise relieve us of our debt obligations. I get that this is a measure of increased prudence, but that’s a bit like closing the barn door after the horses have escaped. And, when their reluctance extends to the refinancing of the original mortgage, well I’m sorry, but that’s not very helpful either, is it?
Next, we might take a moment to consider that the original mortgage contract stipulated the exchange of security (the home itself) in the event of default. And, by the way, you put your own equity up first, meaning: you lose everything well before the bank loses anything. The bank’s risk was covered well above your own. In some states, of course, unpaid loan balances are collectible if they can’t get enough from the sale of the home to pay the debt. And, while that might affect your consideration of a strategic foreclosure, it again demonstrates the degree of protection afforded to the bank in this contract relationship.
Finally, at the height of the foolishness (with all of “NINJA” loans and so forth) the banks had begun to cut their own throats…not to mention ours. I would tender the argument that they demonstrably failed to live up to their obligation to protect the (long-term) value of my investment by diluting the market with such crap. Moreover, “they” (in my case Bank of America) bundled my good credit along with all their crap loans in order to sell it to the market. Thanks a bunch. Next time just ask first, ok?
So, regardless of whether or not it makes financial sense to walk away from your loan – and your home – I’m not altogether sure that we have much of an ethical obstacle to overcome. This new thinking on the subject, however, does come with certain costs….both individual and collective.
We might note, for instance, that so-called “strategic” foreclosures comprised an estimated 30% of all defaults in 2010, up from 22% in 2009. Somewhat dangerously extrapolating, we might reasonably expect this pattern to grow to a majority within the next two or three years. So, what then?
Actually,this might be a good time to refer back to an earlier (2009) post by Mish on this very topic. The data he’d reviewed back then suggested that “strategic foreclosures” had risen from a mere 9% to 18% between 2007 and 2008, further evidence of the long-term trend here. The Mortgage Banker’s Association’s own view: “strategic defaults are spreading like a virus.“
More significant, perhaps, is Mish’s comment that “strategic” foreclosures were far more likely to be initiated by those with good credit and income. That little factoid might force one to reconsider the longstanding divide between “smart” and “dumb” money all over again. But, again, it doesn’t really address the ethics of your choice, does it?
In this inflation/deflation debt game most of us will be playing catch-up, almost all of the time. In fact, the only way you’re ever likely to “win” in this game is if you just happen to perfectly time your entry and exit from the booms and busts. Unless you’re the bank, even if you have to resort to socialized cannibalism to cover the costs of your mistakes.
I have very little doubt that the default “problem” will continue to grow. The dog, as I note above, has caught the car. I can’t (and shouldn’t even try) to convince anyone to do anything on such a serious matter, but I’m more inclined these days to sympathize with those that might find it prudent, if not necessary, to walk away from their homes.
Check here for more info on foreclosures in Washington State.