Is home ownership the American dream or the American nightmare? (No this isn't another post about my family's homeownership woes. One can only write so much about buying and living in a lemon). David Stockman writes about the "Housing Investment & Debt Complex" and posits that we should pull the plug on the government's program of homeowner subsidies. What he proposes, letting all those homeowners go belly up and making the financiers realize losses on all those loans, will never happen but it's fun to think about in a makes-you-sick-to-your-stomach kind of way:
Before Richard Nixon initiated the era of Republican “me-too” Big Government in the early 1970s — including his massive expansion of subsidized housing programs — there was about $475 billion of real estate mortgage debt outstanding, representing a little more than 47% of GDP.
Had sound risk management and financial rectitude, as it had come to be defined under the relatively relaxed standards of post-war America, remained in tact, mortgage debt today would be about $7 trillion at the pre-Nixon GDP ratio. In fact, at $14 trillion or 100% of GDP the current figure is double that, implying that American real estate owners have been induced to shoulder an incremental mortgage burden that amounts to nearly half the nation’s current economic output…
At the end of the day there are upward of 15-20 million American households that can't afford their current mortgages or will be strongly disinclined to service them once housing prices take their next — and unpreventable — leg down. But Pimco’s gold-coast socialism is exactly the wrong answer. Rather than having their mortgages modified or forgiven, these households should be foreclosed upon, and the sooner the better. In that event, there's absolutely no danger that impacted families will go without shelter. The supply of rental units is swelling by the day and rental rates will come down further as speculators buy up REO and recycle back to the rental market.
Stated differently, pulling the plug on HIDC will rescue millions of households from mortgage-payment slavery and put them into a buyer's market for rented-housing services — a social welfare gain under present circumstances. To be sure, they'll loose their credit and probably their credit cards in the process. But the days of living off the housing ATM and bank-issued plastic are over for the American people anyway. Creating an honest financial environment where households are required to rebuild their balance sheets and consume within their means isn't a disservice or injustice to anyone.
Likewise, millions of additional families that can, in fact, service their mortgages or that own their homes debt-free will face a further shrinkage of their paper wealth. The $16.5 trillion of household real estate value reported by the Fed in its Flow of Funds for the first quarter of this year was already down about 30% from the 2006 peak, and could readily decline by another 20%. But would the implied $3 trillion loss of paper wealth be avoidable in any event?