The NYT ran a story that connects two dots: the housing bust and a slowing economy. Because housing has been a big employer, as new home construction comes a standstill, the effects will reverberate through the economy. Thus comes the answer to the question posed by readers several times on this blog: So long as I’m not strung out on some crazy mortgage, why should I care if the housing market implodes? Because it affects the whole economy.
Now let’s add a third dot to the picture the impact of an effectively unregulated home mortgage market. Over the past five years, lenders have sold billions of dollars of mortgages that are designed to go into eventual default because the borrowers cannot possibly afford to pay them. These so-called creative mortgage products have two powerful effects: They fueled the boom, pouring more money into an overheated housing market. Now they will accelerate the bust, pushing more people out of their homes through distressed sales, thereby accelerating price collapses on the way down. In other words, a housing bust doesn’t just happen. Regulators who won’t regulate have an effect as well.
Note the irony: Much of the middle class takes the hit either way. When the housing market exploded, houses became unaffordable in many cities. Last week we talked about firefighters and teachers who cannot afford to live in many cities. (Great news get a second job, said a federal reserve economist.) Families took on terrible risks to try to get a home before they were completely closed out. We talked last week about 2/28s, one version of these products.
Now Vikas Babjas and David Leonhardt describe who will be hurt most by the housing implosion: people who work in the real estate industry. On average, real-estate jobs pay somewhat less about 7 percent less a year on average than those in other parts of the economy. But real estate has also been one of the only industries creating good jobs for workers without college degrees in recent years, especially in construction and contracting work. A big chunk of the middle class crumbles away.
Housing prices rise and fall for many reasons. The effects of interest rates are widely appreciated, but mortgage rules or lack of rules play an important part too. A boom and bust in housing may be hard to avert, but better regulation of home mortgage would have moderated the rise in housing prices as well as the subsequent contraction in the economy when housing cools off.
“Regulation” has become a dirty word, but many middle class people will pay a steep price for poor oversight of mortgage lending.
