12 May 2010

A Capital Idea

Your house is just a home. It ain't no investment. This is one of the fundamental themes proposed by this endeavor from Day One. One of the more poignant ways of stating it: there's nothing useful, from a capital investment point of view, to be gained by employeeing rednecks to pound nails in Nevada, Arizona, and Florida. One Florida politician remarked that a large part of the problem there was that in order to restore the state's economy, it is necessary to pay rednecks to pound nails, again.

The USofA is the most extreme of the developed countries in its treatment of house building. Not only are we one of just a few which permits the deduction of mortgage interest, we permit and encourage sprawl, and we have the wonders of the Home Equity Loan. We I was a kiddie, these were referred to as Second Mortgages, and having one was a blot; only Bad People took out Second Mortgages.

The ground, so to speak, shifted with the 1973 OPEC oil embargo. Interest rates were forced to sky high levels (the foolishness of this is a matter for another episode), thus depressing home prices. Those who bought then began to reap windfall capital gains beginning with Reagan as interest rates fell and house prices rose. They, of course, saw this turn of events as spectacularly smart decision making. Umm. No, they were just lucky. Most rich folk got there because they were lucky.

So, we get to the Dot Com bust, and Greenspan's urge to lower interest rates. As rates dropped, prices rose. And Bushies everywhere took credit for their genius at making money flipping condos. It all came crashing down, and would have whether or not SubPrime and Alt-A loans had been created. The ratio of median house price to median income is, to all intents and purposes, fixed.

The demand for "safe" securities exceeded what was available, so the collateralized debt obligation and mortgage back security were created. To satisfy this demand, mortgage companies (not, by and large, banks; no matter what the Wingnuts say) started to fiddle the rules in order to produce more and more high value mortgages. No one cared to look at the base assumption: home mortgages are "safe" only so long as the ratio of median house price to median income holds. Break that assumption, and you break the "safety". And so it was.

Housing as a sector that absorbs fiduciary capital, is a Bad Idea. It is not investment, simply because, unlike a newer and better machine tool or factory building, housing does not aid in the production of any good or service. It is this increase in productivity that drives what economists call Real Return on Investment. The only way that housing pays any return is if the owner remains gainfully employed, and the building doesn't *decrease* in value. Housing is *merely* fiduciary investment, not unlike buying stocks. Buying stock is a bet that the seller is too stupid to see that the sale price is lower than it will be in the future.

It's no accident that as the USofA has declined, a growing percentage of corporate profits comes from financial manipulation, reaching 40%. It is no accident that Banksters (Morgan Stanley, most recently) are happily walking away from housing that no longer is worth the mortgage balance. It is no accident that mere civilians have figured this out, too. An economy (or the country) is as strong or robust as the physical goods it produces. The American Revolution has many causes, depending on whom one reads; economists tend toward the anti-Mercantalist argument, which is an economic system where a dependent economy exports raw materials (often food stuffs and related) to a Mother Country in exchange for manufactured goods; we wanted no part of being on the losing side of the trade. Currently, such goods make up an increasing proportion of what the USofA exports. We have, by de-industrializing and financializing, turned the calendar back 200 years. Now, that's nostalgia. All we need now is plantations and slavery.

1 comment:

Daniel Simmons said...

Interesting thoughts. Particularly interested in your views on high value mortgages and that the rules have been fiddled