Wednesday, March 26, 2008

Blaming the Victim (Again)

Henry Blodget's latest blog post on The Huffington Post, "US Homeowners Still Living in Dreamland," may well be living in a dreamland of its own. It is short enough to be reproduced in its entirety to make sure that its argument is fairly analyzed:

When will our economy begin to recover? Not until US homeowners wake up and realize that their houses are worth what all assets are worth: what someone will pay for them.

The NYT's David Leonhardt chronicles the dreamworld inhabited by most US homeowners, a bright cartoon-land in which the value of their neighbor's house has dropped by 30% but theirs is still worth more than they paid for it at the 2006 bubble peak. These homeowners refuse to move or sell until they can "at least break even," which means they'll stay in their depreciating assets for years while skyrocketing inflation reduces the value of whatever they eventually get by about 4% a year.

Of course, those who inhabit only the digital world shouldn't cackle too loudly: As Fabrice Grinda observes on Silicon Alley Insider, start-up owners behave just the same way--refusing to sell a dollar of equity as prices drop...right up until they run out of cash.

In any event, our economy won't truly recover until house prices adjust. And in the housing market, at least, price-to-income and price-to-rent ratios suggest that that "adjustment" is likely to be down.

As often seems to be the case with my analyses, I would assert that the best way to uncover the flaw in Blodget's reasoning is through a scrupulous examination of his text. The problem in this case is that his argument trips over a conflation of two separate motives for "investing" (by which I mean the commitment of financial resources, whether "hard" or "soft," as in loaned or otherwise promised). The simpler motive is "acquisition for use;" and the other is "speculation." Most of us buy real estate because we want to live in it. Some of us can even afford a second property for use. (While living in Palo Alto, we purchased a condominium in San Francisco for weekend use, primarily for its proximity to three of the major performing arts spaces in the City. We also saw it as a good retirement residence, which is what it became when we sold the Palo Alto property.) My point, however, is that "acquisition for use" has been normative probably since the end of World War II, when having your own place became a fixture in the American dream.

Speculative investing is another matter, since it is basically a gamble on Blodget's fundamental premise: assets are worth "what someone will pay for them." Think of it as a "gamble on the future tense," which means that it is just like any other gamble, whether it involves which horse wins the race or what the price of Google will be at the end of the calendar year. Most gambles thrive on the premise that "anyone can play;" and those who run the gambles profit because, when anyone plays, most of them are going to lose. In other words investing in real estate for its future value is no different than buying stock for its "anticipated growth." It is risky, but it is promoted by those who do everything they can to get you to ignore the risk.

Whether or not homeowners are "still living in dreamland" is not the real issue. The real problem is that their dreamworld was imposed upon them by predatory lenders, who forced them into a speculative investment to support acquisition-for-use. When the speculation went south (as most speculations do), the victims no longer had what they thought they had acquired for use. The current response of our Administration appears to be that these victims should have remembered the caveat emptor rule; but to what extent can this rule be imposed upon those who have been force-fed under pressure with deceptive information? I suspect that economic recovery is going to depend less upon a readjustment of housing prices and more on a general readjustment of the "rules of the game" under which the majority of our population can engage in acquisition for use.

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