My last two columns, "Changes in Housing Attitudes, Changes in Economic Latitudes" and "Still Waiting on a Homebuying Rebound," elicited quite a few comments and challenges from subscribers, so I'm going to delve a bit further into the issue of housing and its relationship to the economy and the capital markets.
In the latter half of the 1990s and first half of the 2000s, I owned a residential mortgage brokerage that originated loans nationally. The market concentration was in the coastal urban areas of the U.S. that also had stations carrying my radio show. They included every major city on both coasts, as well as Phoenix, Houston, Dallas and New Orleans.
These were also the areas that experienced the greatest boom in real estate speculation, lending and appreciation.
One of the aspects of the housing bust that followed that boom is that it was magnified in its breadth and scope because the vast majority of homeowners at all income levels and home price points were levered to the greatest extent possible. That aspect has never received the attention it should have by public financial policymakers, bankers and capital market participants broadly.
What that implies is that it wasn't the poor and people with low credit scores who accepted the invitation by the wealthy to participate in the housing sector by way of subprime loans that caused the subsequent housing bust to metastasize into a full-blown financial crisis.
It was the vast majority of the pre-existing homebuying market participants who got stupid and started to leverage themselves into real estate to a much greater degree than had been the case before underwriting guidelines were degraded.
At the time I was originating mortgages, we referred to this as the dentist wanting to live like a hedge fund manager.
The bulk of the corrective action taken since then, however, has been focused on doing away with mortgages for people with low credit scores and requiring income documentation for everyone.
The logic in limiting the corrective action to these areas is predicated on placing the blame for the crisis on the poor, which is simply ludicrous.
By extension, this also implies that public financial policymakers and regulators are of the opinion that home prices were closer to their real value 10 years ago and that the correction in values since has taken them below the long-term trend as a percentage of national income necessary to support them.
Beyond cutting out mortgages for people with bad credit, the corrective process designed to support home values has also been to allow for an even greater percentage of income to be allocated to mortgage servicing than was the case prior to the last housing boom.
Fannie Mae and Freddie Mac now allow borrowers to allocate up to 45% of their gross income for mortgage servicing. Prior to the 2000s, that level was 28%.
Allowing this degree of income leveraging supports home prices, but it also pushes them to levels that cause the sector to absorb national income and per-capita income, which in turn provides a drag on economic activity and the ability of the economy and incomes to grow.
In total, this activity by regulators, public financial policymakers, bankers and consumers is indicative of a kind of Stockholm syndrome wherein everyone believes the economy functions best by allocating as much income toward housing as possible.
This is an insane proposition because doing so actually accomplishes the exact opposite.
Since the Lehman-crisis era, monetary and fiscal authorities have been operating on the assumption that supporting home prices is synonymous with supporting the economy.
The reality, however, is that supporting home prices in the fashion that's been pursued is actually harming the rest of the economy.
If the Fed and mortgage regulators really wanted to support the economy, real growth and growth of jobs and incomes, the goal in policymaking should be to establish a plan for reducing the amount of national and per-capita income that may be dedicated to mortgage servicing, not increasing it.
Having said all of that, there is no awareness of the error in public financial and regulatory policy being evidenced by policymakers.
This will inevitably have to change at some point and investors need to be watchful for signs of this awareness being expressed by policymakers.
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