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Mortgage Default Is A Patriotic Duty

January 12, 2010

I read a mysterious statement the other day.

“My data show that between 1890 and 1990 real home prices actually didn’t increase,” said Robert Shiller, in Newsweek (Dec 30, 2009), Why We’ll Always Have More Money Than Sense.

We have all been in a long state of delusion. Our psychosis is simple. We are married to real estate which increases in value. I can get rich. You can too.

The belief in increasing values of real estate is the president of our financial crisis. Now we know he didn’t deserve the office. The price will be paid. We can all confirm the high stupidity of the crowd which we are in. Of course I’m a member, but I’ve decided I’m done, and you have too.

Now we are cured. Or some are. Or a few maybe.

price my data show

If real estate is a “flat” asset, with price changes created only by inflation, and not true increases in value, than you know we still have quite a big fall to go ahead of us. And if we don’t fall, that’s almost certainly worse. The graph above shows Case Shiller through the third quarter of 2009. The numbers are adjusted for inflation.

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Take a minute and pick out the most striking feature of the graph. Study it a minute. What do you think it is? Do we agree?

The striking feature is that the current breaking bubble is a bubble which was a King Kong bubble. Any predecessor bubble in the last 120 years was a hiccup. Now we have gangrene. At least one limb must go.

The best numbers, which are Case Shiller, predict a fall of 22% from current levels. And that’s if we don’t overshoot.

Over the last three or four months I have been looking closely at the data on pricing from Case Shiller, Freddie Mac, The Federal Housing Finance Agency, and First American Core Logic. I have been surprised by how negative the forecast is based upon long-term price trends.

While there are variations, all of the different data sets point to patterns very much like what you see above from Case Shiller. If history has a pattern, and the most educated voice on the matter says it does, then a fall is written in stone. The critical question: Should we respect what the stone says? Or should we try to break the tablet?

Who can imagine the perverse effects of a policy which successfully circumvents something as towering as the pricing of all of our 129 million residential housing units?

If successful, the most obvious perversion of our current policies on housing is that we will continue to pay too much for the most expensive cost which each of us shell out for every day and every month and every lifetime. We are fighting an ocean’s tide retreating. How will we hold the water on the shore? We are forcing a more expensive lifestyle across our entire economy. Rich and poor. Young and old. All are scheduled to pay more if the bubble doesn’t pop completely.

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We live in a world of radical price competition. The obvious competition we are losing is the competition based upon the price of labor. Expensive housing exacerbates our competitive disadvantage.

Our focus should be on providing our services for a lower cost. Does anybody think it makes sense for us to increase the cost of housing when the price of labor is too high? If housing costs are high, will that help our competitiveness?

rate federal home bank data 1971 to 12 2009

Those new to this argument about the price of housing should consider that the government effort to artificially inflate prices includes radical intervention. Fannie Mae, Freddie Mac, and the FHA, all government banks, are the entire mortgage market today. Private investment in mortgages is gone. No sane banker is going to make a loan on an asset that has fallen 30% in value.

The federal government is also literally giving money to buyers through a tax credit. And the federal government is buying a huge percentage of mortgages to artificially keep interest rates low (see above). And the federal government has issued an unlimited credit line to Fannie and Freddie so they can write as many mortgages as they want.

unit sales NAR 1999 to 200911

sales units

If you don’t understand all of these names and programs, trust me when I say that nuclear bombs have been used on the housing market.

Think about that for a minute, and look at the pathetic unit sales above. The government is dropping nuclear bombs on the mortgage market and nobody is dying. They can’t move the product.

What has been taking off are foreclosures. They are soaring. The general feeling is that foreclosures are terrible and should be stopped because of the distress they bring both to a family and a neighborhood. The more important truth, widely ignored, is that foreclosures promise to bring back cheap prices. We know from the first chart in this story that lower prices are natural.

In our post-bubble world, foreclosures are the surest mechanism for creating affordable housing. Consumer advocates should now welcome this method of price correction. Those true to their mission will embrace a mass-foreclosure remedy.

In a credit bubble, the smart economist makes the highest goal a true reckoning with phony debt. The common man now has a chance to play the smart economist.

Let the house go back to the lenders. The bank will throw the mortgage in the garbage. Reality will return. Prices will fall – perhaps dramatically from our current 30% loss. Our goal should be to reduce systemic mortgage debt in the United States in amounts equal to the losses in real estate values. It’s trillions in the plural.

Default is an intelligent act. Take the right steps so we can beat the Chinese and the rest of the world. We need the jobs now. We need to get back to work now. We have to compete based on the price of our labor. We can’t charge less for our work while paying more for phony mortgage debt issued to buy a home at a phony jacked-up bubble price.

The government has screwed up management of the financial crisis by granting debt assets special status. It’s time for owners of debt assets to take losses. It’s time for the people to fix the financial crisis. Give debt investors the losses they bargained for.

It’s time to take ambitious steps to make housing cheap. Do your job. Mortgage default is a patriotic duty.

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Michael David White is a mortgage broker in Chicago.

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Thanks for carrying the story to Automatic EarthBusiness Insider, Jesse’s Cafe Americain. This story originally appeared on the Implode-O-Meter blog.

38 Comments
  1. al loredo permalink
    October 24, 2010 1:39 pm

    I agree and wonder, even if banks are owned by the same insurance company how lenders and insurers who have opposite interests (lenders pay to protects risk of losing loaned proceeds; lenders project to profit from probabilities of not having to to pay on the full insured value. At least for full accounting disclosure to its shareholders, insurers would be expected to stop insuring overvalued homes and to become the strongest supporter of rewriting mortgages down to market value.

  2. The Two Lands permalink
    March 17, 2010 2:15 pm

    I agree with everything you say about the national data and trends.

    What about the isolated enclaves – the handful of towns like Palo Alto or Scarsdale – that hold special appeal and offer no new land? You have been careful to acknowledge the need to consider “local market dynamics”, but what do the long-term historical data say about such places?

    • March 17, 2010 3:50 pm

      Hello Two Lands, I haven’t studied it but think there are good arguments on both sides of “no new land” neighborhoods. Manhattan probably proves the argument false by having limited land and big boom and bust cycles. I have also read of huge inventories in the wealthiest suburbs and those inventories must lead to price busting. thanks for your comment. mdw

  3. Rod permalink
    February 27, 2010 9:03 am

    Michael

    My feelings on the state of the housing market are in line with your article.
    I have no debt on my current home and am looking to move to a better area.
    Sounds like I should.
    1. Take out a mortgage on my current home to preserve the low interest rate.
    2. Use the proceeds to bottom fish over the next several years.

    What do you think?

    Rod

    • February 27, 2010 6:42 pm

      Bottom fishing makes sense. Probably use a line of credit. You don’t want to pay interest on unused money. Thanks for your comment. mdw

  4. Adam Cznarski permalink
    January 28, 2010 4:27 pm

    My wife and I spent 3 years paying $3000 monthly for a $300,000 home we could not afford. Needless to say it is the worst financial decision I ever made in my life.

    I recently found a 3200 sqft. foreclosed home in a better neighborhood for $50,000 and at just over $15.62 per square foot, I am overjoyed. I will spend the next year completing repairs, and when I get the foreclosure notice, I will be prepared. Please I urge all your readers to act strategically and logically.

    You are my hero!

  5. rps permalink
    January 18, 2010 10:31 am

    I ask you what’s more outrageous housing prices or university (private & public) tuition? How many of the refi’s, helocs, etc…. were the chosen debt vehicle to pay their children’s university tuitions? If you’re plan is to reduce the over-inflated housing industry, then we should do a two-fer and drop a neutron bomb over the hyper-inflated out of control university system. Imagine if americans collectively refuse to send their children to 4 year universities for the next two years?

    • January 18, 2010 11:35 am

      Hi RPS, great idea. the private-college industry is somehow immune to price competition. Maybe we should listen to Klink or Schultz or Burkhalter? Didn’t one of them say: “We have ways.” Thanks for your comment. mdw

  6. Cullpepper permalink
    January 18, 2010 10:26 am

    “Let the house go back to the lenders. The bank will throw the mortgage in the garbage. Reality will return.”

    This would be true if the bank still owned the mortgage. Instead, Fannie & Freddie will just ask for another tax-payer subsidized bailout to keep the flood of empty properties from hitting the market and lowering home prices.

    And that’s the good scenario-

    In the bad one, the mortgage has been sold downstream in a bundled SIV which has been heavily, heavily leveraged AND short sold via CDS, leading to a collapse of the banking system, requiring another massive taxpayer bailout.

    Oh wait… that already happened.

    • January 18, 2010 11:30 am

      HI Cullpepper, what the owner of the debt receives is a true reckoning of the value of their investment. Thanks for the comment. mdw

  7. President Camacho permalink
    January 16, 2010 8:42 pm

    Right on. This message needs to get out to the masses. That is our only hope.

  8. breezer1 permalink
    January 16, 2010 5:01 am

    everthing you say seems to make sense. the current climate in the us will get worse and here in canada we have the same failed policies except we are usually a year or so behind you guys. great article however sombre. thanks, b.

    • January 16, 2010 11:30 am

      Hi Breeze once the terrible medicine is digested, the patient can return as super person. thanks for your comment. mdw

  9. frank permalink
    January 15, 2010 6:44 pm

    Why doesn’t the same argument on rates and valuations hold true for the equity markets and all discounted cash flows and their corresponding valuations, in general?

  10. affordablehousing permalink
    January 14, 2010 11:14 pm

    The faster those with underwater mortgages default, the faster we can get back a country where decent housing costs 3-4 times annual income. Home-owners, please help us get there…

  11. Robert permalink
    January 14, 2010 8:08 pm

    I hate to say this, but what about the political/real world consequences that, it seem, have not been considered much, at least not widely from what I see. I am thinking of the California land bubbles in the 1800s. Didn’t everything plummet, horrible time, but then recovery in a few years. What some say, let everything alone, let it all crash, etc., and it will fix itself. If it all does blow, as it should in a sense, labor prices, home prices, etc., all plummet. It’s not doomsday, but it could be one hell of a scenario that could take the government and/or free market, even globally, years to recover — if they survive.

    In other words, I will never forget a discussion we had in college — just tossing this out — as food for thought. One conservative was denigrating FDR, with all his government support for the poor, etc., and a liberal piped up, Yes, John, but look what happened to other countries — they got Hitler and Mussolini, dictatorships, facism, etc. This is what no one wants to happen. Am I an alarmist, or have you or others seriously considered this as a real threat, political upheaval beyond our experience, and what are your thoughts? Or ways to prevent it, it seems only government can provide a cushion the free market cannot. Think of Pharoah with supplying grain under Joseph’s tutelage during seven years’ famine — or, a revolution, invasion, convulsions from without and within. Too much letting do can cause irreperable damage.

    P.S. – I don’t think anyone should point to 1933 as precedent, and how we recovered from that, because we were a creditor nation then, investment was flowing in from a European wealthy class, what with half the world suffering from the first world war, like China is supposed to be now, on the way up. Now we are a debtor nation, losing power and influence.

    • January 14, 2010 8:33 pm

      If you set as your priority the right price of housing, and the right amount debt which matches that accurate price, then you have to take steps to achieve it. Thanks for your comment. mdw

  12. Rick permalink
    January 14, 2010 12:13 pm

    GRAPHS ARE NOT DISPLAYING.

  13. Bruce permalink
    January 14, 2010 10:23 am

    Michael,
    Excellent article. Thoroughly researched, with good explanations, and conclusions. One might ask why would anyone attempt to support a bubble – especially when the outcome is a fait accompli (i.e.: lower prices at the long-term trend)? The answer is that the gov’t is attempting to aid the banks, not homeowners. That is why the Fed has bought all of the toxic RMBS, and is “buying” long-term Treasuries in a futile attempt to keep rates low, and prices up. Unfortunately, this was/is being done with public (read taxpayer) money. I for one am incensed! Also, thanks to elimination of “mark-to-market” accounting rules, the banks do not have to fairly value what dodo they do carry on their books currently. 2+2 no longer equals four. This is insane, but the logical result of a Congress completely captured by the financial industry (one industry of many). There is nothing in these efforts constructive to US citizens, and so I agree with your proposal to default. There is great power in civil disobedience. If everyone did the same, the shell game would stop, and prices could mean-revert – as they will eventually anyway – even if many banks that should have already failed would do so. 180M registered voters have more power than 500-odd Congressmen, and 13,000 odd lobbyists. We just need to believe it.

    “a little rebellion now and then is a good thing” – Thomas Jefferson

  14. Chris Carter permalink
    January 14, 2010 9:47 am

    If Shiller’s data is right then property prices must have absolutely cratered relative to incomes over those 100 years.
    Is that right?

    • January 14, 2010 10:33 am

      Good question. I don’t know the answer, but I wonder, as I think you do, how it could be possible that incomes would not affect property values. Thanks for your comment. mdw

  15. Andy permalink
    January 14, 2010 8:35 am

    Don’t worry – there’s always someone worse off than you. In this case, it’s us, here in the UK. Our bubble makes your king-kong bubble look like a hiccup. We rule!

  16. Data request permalink
    January 14, 2010 8:32 am

    It would be helpful to see the Monthly (Interest) Rate History chart extended back to 1950; or even further (if the data are available).

  17. Wallace permalink
    January 13, 2010 3:31 pm

    Thanks for this blog! I have been stressing over what to do. I cannot pay $360k for a home in Baltimore City appraising at $50K and dropping by the day.

    It is just me, and I have a large home that utilities are killing me. I am going to a cheap apartment, lick my wounds and start over…

  18. alibeamish permalink
    January 13, 2010 11:37 am

    so true

  19. Paul permalink
    January 13, 2010 12:50 am

    Let’s say I believe everything you say. I’m a rational person. What is going to be the sign of a good time to buy? When will that be?

    • January 13, 2010 8:23 am

      Just guessing, I would say wait for stable values lasting two or three years. Or, make sure you get a great deal. Thanks for your comment. mdw

Trackbacks

  1. Property Values Projected To Fall 12 Percent In 2010 « NewObservations.net
  2. Some Argue That Default Is A Patriotic Duty « HomeBuyerPower®
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  4. The Meck Deck » Blog Archive » The Housing Bubble and Our Clueless Bankers

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