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Harvard economics professor Martin Feldstein, who made himself famous by predicting in 1993 that Clinton tax increases would not raise any revenue, strikes out big time in his proposal for the housing market in Thursday’s NYT. He tells readers:
1) House prices are continuing to fall because of the wave of foreclosures;
2) Consumers are not spending because they are losing housing wealth;
3) A major reason unemployment is high is that underwater homeowners can’t move to places with jobs;
In response, he proposes a plan that could bail out banks from underwater mortgages while leaving millions of homeowners as near indentured servants.
Let’s deal with each of these points in turn.
First, house prices are falling for the same reason that the price of Pets.com stock plummeted in 2000. The housing bubble has not fully deflated. If Feldstein bothered to check the data he would know that real house prices are still about 8-10 percent above their long-term trend. Consistent with over-valued prices we see that there is still a near record vacancy rate in housing (topped only by the levels hit in 2010).
In other words, the main reason for house prices to decline is simply excess supply. There are certainly areas where foreclosures have blighted communities and thereby caused prices to fall further, but this is not the main story of house price decline.
Second, consumers actually are still spending at an above normal rate. The savings rate out of disposable income is still just 5 percent. This is above the near zero rate at the peak of the housing bubble, but it is well below the 8 percent average of the pre-bubble years. It is strange that Mr. Feldstein appears to be unaware of the lower than normal savings rate (and higher than normal consumption), since he has done a great deal of work on precisely this topic, and his original claim to fame was a paper showing that Social Security lowers household savings.
We should actually anticipate that savings will increase further when the bubble has fully deflated, and according to Feldstein’s past writings, this would be a good thing. It is striking that he now seems to view saving as bad.
Feldstein’s third claim is simply not supporting by any evidence. There have been several studies that examined the extent to which being being underwater has prevented job losers from moving to new jobs (including one study by John Schmitt and Kris Warner). They all have found little or no effect. People are prepared to leave their homes, or two-earner couples separate so that one earner can move to a job. This is simply not a major cause of unemployment.
So Feldstein has no real basis for his claims about the disastrous impact that the housing market is having on the economy. However, his policy solution is a disaster. He proposes to have the government pick up half of the loss on seriously underwater mortgages. In exchange, if the homeowner consents, the lender can track them to the ends of the earth for their remaining debt.
There are two really really big problems with the Feldstein plan. First, it is completely voluntary for lenders. This means that they will not take up the deal with people whom they think are likely candidates to repay their mortgage. There are many underwater homeowners who are struggling to pay their bills. Feldstein’s plan offers them nothing. The bank knows that they will pay, so they will not put their mortgage in the program.
However, there will be more questionable loans that will go into the program. Some of these people may be able to make their payments after the principal write-down. They will then get to live in their home until they move and in all probability never accumulate a dime in equity (but the bank got half of its loss picked up by the government).
Others will take the deal and then find themselves still unable to pay their mortgage — remember we still have 9.1 percent unemployment and most people in Washington don’t seem to give a damn. Under the Feldstein plan the debt will now become a recourse loan, which means that the bank can hound foreclosed homeowners until the day they die for any portion of the mortgage that is not repaid by the sale of the house.
So there you have it, a solution for a non-problem that gives banks tens of billions of dollars for bad mortgages and makes foreclosed homeowners debtors for life. What could be better than that?
10 Comments
Your point about indentured servitude is well taken. And now, there’s no frontier for the indentured servants to move to at the end of their servitude, unless it’s NYC’s and other cities’ parks.
Feldstein is a fraud. Always has been.
I figured that out over 40 years ago, when I was a mere tyke in my 20s and knew very little economics. Had the misfortune if making his acquaintance while I was putting Prof. Otto Eckstein’s model of the economy together. Feldstein has “done” the financial sector equations. I called him to tell him he had data errors in estimating his equations. He said: use them anyway.
Housing bubble was a collision between stupid lenders (banksters) and stupid borrowers (homeowners, flippers, etc.). Taxpayers don’t owe either one jack shit.
Foreclosures also affect neighboring homes. The couple who lived next door to us literally fled their house one step ahead of the sheriff. That house has stood empty for six months, and recently went back on the market at a lower price than what we paid for our similar house–in 1987.
From the San Francisco Chronicle this morning:
“We used to have Steve Jobs, Johnny Cash and Bob Hope.
Now we have no jobs, no cash and no hope.”
I have long since given up on either the government at any level or the private sector at any level pursuing any effective policy on any effective scale in attacking the economic problems.
The government at any level is a foil held by the plutocracy. The plutocracy, in turn, is self-serving.
People who are not rich need to look to our own defenses. There is no part of the current socioeconomic system that is going to be ridden to our rescue by any new FDR’s or new great heroes of the masses. We’re in a post-modern banana republic.
The banks took no mercy in throwing people from their homes, why should any mercy be shown to them with their problems. They should just take a number and wait in bankruptcy court with all the people they put there.
just to keep things real, mr. baker, my son and his wife, both gainfully employed, are currently over $150K underwater on their mortgage… they are both perceived as valuable employees in the nation-wide system they work in and would like to be promoted… in order to do that, they have to be geographically mobile… in order for them to be geographically mobile, their options are: 1) walk away from their mortgage; 2) execute a short-sale; or 3) hit the jackpot by applying and being hired for a job that includes a home buy-out provision in the re-lo package… options 1 & 2 are, needless to say, less than attractive and option 3 is becoming rarer than hen’s teeth… these constraints aren’t keeping them from applying but they certainly do weigh in on any potential decision-making…
http://takeitpersonally.blogspot.com/
I thought he stop eating monkey brains year ago.So what you saying by your analysis is that the consumption of monkey brains come with certain long term mental risk.
House prices continue to fall because demand is down. Average incomes, outside the top 1-0.01%, are falling. Unemployment is higher than official estimates, which themselves do not take into account under-employment.
Those who have jobs don’t know how long they’ll keep them. They are worried about falling benefits or seeing them taken away completely. They are living with their grown children, who can’t find jobs, or they are living with their grown children because they can no longer keep choosing between feeding catfood to themselves or their cat. They are worried about a permanently blighted future for themselves and their children.
Feldstein’s second claim confirms his belief that spending was dependent on a housing bubble – and the predatory belief that housing prices could only go up and up. In reality, people have lost not just the equity in their homes. They have lost jobs, hopes of jobs, hopes of job advancement. They have lost retirement savings and benefits. They have lost hope of educating themselves and their children.
They have seen the growing, open cynicism and predation of the political and corporate elite. They know that they are not among the elect and are worried about their futures as never before. That’s not a condition in which even those who have money spend it.
Homeowners can’t sell their houses because there is too little demand for them, because banks won’t lend or won’t lend on affordable terms, because the costs of sale are escalating, along with the price of inefficient products such as title insurance. Aware buyers are reluctant to buy because title to many properties has been clouded by the banksters’ fraud. They can’t sell or won’t buy because properties have been left to rot by banks who would rather raze a property, taking a full loss on their loan, than spend a marginal amount to maintain and sell it. That does more than lower local house prices. It eviscerates neighborhoods and whole towns, depriving people of optimism and lowering the likelihood that banks will loan in those neighborhoods.
People won’t sell their house and leave their neighborhoods, dragging their children to an apartment in a new neighborhood and new school, on the off chance they might find a job. They’ll move when they have a new job. Unless you’re a VP or higher, that means paying all the thousands of dollars it costs to move by yourself; companies no longer pay for it.
As for finding a new job, it means losing a job network, seniority and known benefits and starting over. It often means taking less job and a lowered standard of living. And those over 40, with slight blemishes on their credit rating or imperfect health, or who are currently unemployed, will face blatant discrimination, much of it illegal. The government encourages that discrimination by turning a blind eye to it, by refusing to enforce existing laws about age, sex, and other forms of employment discrimination.
Mr. Feldstein seems willingly avoiding an accurate description of what ails the housing market, because what ails the housing market ails all of society outside of its top 10%.