Monday, October 22, 2007

The market corrects itself and politicians call it a "crisis"

From The New York Times:

MINNEAPOLIS, Oct. 21 — In a down real estate market, they came to buy. They came early, they came in numbers and they came with bank checks for $5,000.

By 10 a.m. Saturday, more than 700 people filled a hall in the convention center here for what real estate agents say is the largest auction of foreclosed properties ever in Minnesota, with more than 300 houses or apartments for sale in two days. Opening bids ranged from $1,000 — for a three-bedroom house — to $729,000, for a five-bedroom house on 11.9 acres. The crowd was standing-room only, with more waiting to enter. Some were looking for homes, others for investments.

“It’s a symptom of the foreclosure crisis,” said Jim Davnie, a Democratic state representative in Minnesota. Mr. Davnie said he had concern that areas already hit by the foreclosure crisis would now be hit by investors buying properties to rent them out, “which makes neighborhoods less stable than owner-occupied housing.”

It's almost funny. Politicians, mostly liberal Democrats, bully lenders into finding ways to give home loans to people who do not qualify for mortgages (that is people who stand a high likelihood of not being able to pay back the loans) and a few years down the line when enough of those people who should have never been given mortgages have been foreclosed and more are in danger of foreclosure those same liberal Democrat politicians declare a "crisis".

What is happening here is that the market is doing what the market always does. Correcting itself. This process of market correction will happen even where there is a totalitarian state which is doing its best to stamp out the free market. An excellent example of this is the old Soviet Union whose collapse was a giant market correction.

What's happening in Minneapolis is simple. Some people either because they do not make enough money or because they are not capable of coping with the responsibility should not take out a large long term financial obligation like a mortgage. What they should do is rent until their financial situation improves and they have gained sufficient maturity to accept the challenges of owning, and paying for, a home.

This is how it has traditionally worked in the Unites States. Young couples would rent until they could afford what was known as a "starter home". This would be a utilitarian box in a working class neighborhood or someplace out in the county without much of a view and they would spend several years there while they improved their job skills thus becoming more productive and earning more money. While they were becoming more valuable employees they would also be proving their ability to manage their finances and be trusted with credit. By making their small(ish) mortgage payments and their car payments and their department store credit cards and such they would be showing potential lenders that they were a good risk.

After about ten years of this they would be ready to move up to a better home with some of the amenities, like maybe a garage or enough room for each of the kids to have their own bedroom. Over the years they would improve the home with additions like a swimming pool and various home improvement projects. Then as the couple moved into middle age and reached their peak earning power they would trade up again to a truly fine home in a truly fine location.

That's how it used to be. Then young couples started wanting the skip the rental phase and then even the starter house phase and all too many politicians were there to arm-twist lenders into making it happen for them. And what we are seeing now is the inevitable and easily predicted results of politically motivated distortion of the market.

What will come of this, if the government can have the wisdom to stay the hell out of it for once, is the return to the old sane and sustainable pattern of people renting then buying a cheap home and then moving up the ladder only as their earning power increases.

Some people are hurting now and that's sad. However the pain will have been worthwhile if the lesson is learned.