Don't Fear the Bubble That Bursts
YOU remember the great real estate crash of the 1990's, don't you?
In New York, inflation-adjusted prices dropped almost a third in
less than a decade. The fall was even worse in Los Angeles, and it
wasn't pretty in Boston, San Francisco or Washington, either.
Thousands of families were forced into much smaller homes. Many have
never lived as well as they did in those giddy pre-crash years. It
was a painful preview of what the dot-com meltdown of 2000 would
bring.
What? You don't remember any of this? You think I just made up those
numbers about plummeting house values?
I didn't. The real estate crash really happened. The median house
price in the New York area fell 12 percent from 1988 to 1995, which
is nearly 33 percent in inflation-adjusted terms.
But the rest of it did not happen. Large numbers of people did not
lose their homes. If anything, the drop in prices allowed a lot of
families to buy their first house or trade up to one that they never
could have afforded in the 1980's. You may know one or two people
like this, and they probably still annoy you by bragging about the
great deal they got.
Now it looks as if we might be about to go through it all again.
Talk of a bubble about to burst is everywhere. Houses are taking
longer to sell, and sales of new homes are falling.
But instead of panicking, most homeowners should be taking a deep
breath. The real estate slump of 2006 offers a fresh chance to
puncture the No. 1 myth about the nation's No. 1 topic of
conversation: the idea that we should all be rooting for high house
prices. The myth is good for real estate agents, but it creates
needless anxiety for everyone else. It's time that most of us
learned to stop worrying and love the bursting bubble.
"Even in the most vulnerable markets, most people just have to look
through it and ignore it," said Mark Zandi, the chief economist of
Moody's Economy.com, "because it's of very little relevance to them."
That's the good news. The bad news is that a big part of the
country's economic policy has been built on the myth.
THE best way to think about the value of your house at least in
the short term might be to compare it to Monopoly money. Having a
big pile of it feels good, but you can't really spend it.
As long as you are living in the house, you have no way to lock in
your gains. Yes, you can borrow against those gains, but new debt is
not exactly found money. And when you move, odds are that you will
go someplace that has a real estate market very much like yours.
Whatever profit you make you will just plow back into a new home.
This is why the housing boom of the last decade, unlike the dot-com
frenzy, has not made many people rich. Everyone knows stories about
Microsoft millionaires, AOL millionaires, even Pets.com
millionaires. But do you know anyone who retired at age 35 after
selling her condo in San Francisco?
Obviously, there are exceptions people who do have a very real
stake in the short-term value of their house. (And a rapid drop in
house prices would be a problem because of the broader economic
damage it would cause.) Somebody who is planning to move from
California to Iowa, and retire on the proceeds, would be hurt by
falling prices in California. The same goes for anyone about to move
to a much smaller house.
Worst off would be the families who have borrowed heavily against
their homes. For them, a price drop could erase all of their equity,
leaving them with no money for a down payment when they move. This
happened to some Californians in the 1990's.
But the victims of a moderate price decline don't come close to
making up a majority of Americans. At most, 10 percent of households
are so leveraged that their mortgage debt equals at least nine-
tenths of their home's value, Mr. Zandi said.
Compare this with the more than 30 percent of families that don't
own a home and clearly have nothing to gain from further price
increases. Or all the young families that hope to move sometime soon
into a house that's larger, and more expensive, than their current
one.
So there is a good argument that society has a compelling interest
in keeping house prices from getting too high. Reasonable prices
allow young, middle-class families to buy a house without going into
too much debt. They also let people live where they want. Right now,
there are a growing number of workers making long commutes from
places like Hagerstown, Md., and Stockton, Calif., solely because
they cannot afford a decent-size house in a close-in suburb.
They can blame our tax policy for part of their plight. It pushes up
home prices by handing out $80 billion a year in subsidies for home
ownership, mainly through the mortgage interest deduction. People
who get that deduction love it, for the same reason that any of us
would love a government policy that sent us a few thousand dollars
every year.
But there really is no sound argument in favor of it. It
overwhelmingly benefits well-off families who would buy a home even
if it didn't exist. About 70 percent of tax filers get nothing from
the deduction, in large part because many don't make enough money to
itemize their tax returns. Consider that other countries without the
deduction, like Australia and Britain, have home ownership rates
just as high as this country does.
A more sensible policy would use the $80 billion in a way that
helped people much more than artificially high house prices do by
expanding health insurance, say, or cutting taxes across the board.
In fact, a tax panel appointed by President Bush recently called for
the mortgage deduction to be replaced by a smaller and fairer tax
break.
Unfortunately, Mr. Bush shows no interest in getting behind his own
panel's ideas. He seems more inclined to listen to the National
Association of Realtors, which has warned that reducing the mortgage
deduction would surely cause house prices to fall.
To which the rest of us should say: And what's so bad about that?
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