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Home Publications Blogs Beat the Press Owning Versus Renting: It Matters If You Are In a Bubble

Owning Versus Renting: It Matters If You Are In a Bubble

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Wednesday, 21 July 2010 07:33

This article discusses the Obama administration's housing policy, which seems to be moving away from an exclusive focus on homeownership. The article notes that many moderate-income people who bought homes in the last decade ended up losing them.

It would have been worth mentioning the housing bubble in this context. In many cases, it might have made sense for families, in principle, to become homeowners in the years 2002-2007, but not when it meant purchasing homes at bubble-inflated prices. The bubble could have been easily detected by a simple examination of price-to-rent ratios and other fundamentals. Unfortunately, the vast majority of housing professionals, including the people at HUD and Fannie Mae and Freddie Mac, were too lazy to do this sort of assessment. As a result, millions of moderate-income families bought homes that they were not able to keep.

Comments (5)Add Comment
I don't get it.
written by Eric, July 21, 2010 11:03
"In many cases it might have made sense for families in principle to become homeowners in the years 2002-2007, but not when it meant purchasing homes at bubble-inflated prices.....As a result millions of moderate-income families bought homes that they were not able to keep." This infantilizes the individuals and families involved. One has to assume that they understood what their income was and what their debt ratios were when they bought the property. Even if they relied on no-doc mortgages, they still knew what their financial capacity was, so even if their negligent lenders didn't care, they had perfect visibility to what they could afford. Now if they lost income that understandably could lead to default, but that is a process that's got nothing to do with the "quality" of the original pricing - bubble or non-bubble. The truth is that hundreds of thousands of folks took loans that they knew they could not service over the full course of repayment to get a shot at obtaining what they hoped to be significant and rapid asset appreciation....i.e. they speculated. This doesn't make them bad people, but since the only reasonable interpretation of their actions is that they considered their houses to be investments they should have about the same expectation of sympathy/help that investors in equities get if they end up on the short side of the trade: not much.
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written by izzatzo, July 21, 2010 1:04
The truth is that hundreds of thousands of folks predatory parasites took lied about sub-prime loans that they knew they could not service be paid over the full course of repayment even absent a bubble to get a shot at obtaining what they hoped knew to be guaranteed parasitic fees and commissions regardless of whether or not there was to be significant and rapid asset appreciation....i.e. they speculated didn't take any risk at all by shifting it onto their customers.
Assoc. Prof. of Law & Real Estate, Baruch College
written by Jay Weiser, July 21, 2010 3:50


This is way too kind to the residential real estate industry. They weren't too lazy to do the analysis. The higher and faster prices rose, the more house flipping, the more transactions and the higher their commissions and bonuses.

The behavior wasn't always consciously malign, but beliefs were closely aligned with monetary interest. If you weren't a cheerleader for ever-rising prices and told people not to do deals, you got fired, like the two senior Merrill Lynch mortgage securitization guys whom then-CEO Stan O'Neal axed and replaced with more tractable, younger folks. They did as instructed and kept on pumping out the bad securities in 2007. O'Neal got a giant bonus.
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written by skeptonomist, July 22, 2010 8:52
Misinformation about trick mortgages was dispensed at the highest level - Alan Greenspan. He had his own ulterior motive, as did all those who support monetary policy as the answer to any economic problems. Low short-term rates make it easier for banks and other institutions to offer these mortgages, and boosting housing is a fast way to boost the economy, as it brings in a large number of small entrepreneurs and creates many jobs. In other words, creating a bubble was the fastest way for the Fed to accomplish its objective of countering the recession of 2001. Greenspan, and later Bernanke, maintained that popping bubbles was not their job and they couldn't recognize them anyway, but unfortunately creating them can be part of the job.
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written by PeonInChief, July 22, 2010 9:01
People didn't just buy houses they couldn't afford because no one told them about the housing bubble. They did it because tenants are second-class citizens in most areas of the country. One need only look at the appalling treatment of tenants in foreclosed properties by lenders and their representatives. Worse than that, tenants have internalized this status. I had one tenant ask me if she had to give tours of her house to the realtors who circle soon-to-be-foreclosed properties.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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