Eric

Baerren

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October 22, 2007

Housing Bubble Bursts, So Maybe Growth Isn’t Always Good

This week, the housing mortgage arm of GMAC announced its intentions to lay off about 25 percent of its workforce, a reflection of the hard times for the housing industry. The announcement came shortly after another piece of news related to the downturn that prompted the layoff – housing construction in September had hit a 14-year low.

That a downturn would happen was inevitable. Everything runs hot and cold from time to time. But the pop of the housing bubble – as so many bubbles before it – was as predictable as the rising sun. The signs were there, and as is typical, ignored.

The most obvious were the new, creative mortgages designed to put people in homes they couldn’t afford. It was only a matter of time before the music ended, and those holding the potato would be those least able to stand the heat. As a result, not only did GMAC’s mortgage unit get whacked but so did the families who found themselves confronted by foreclosure notices.

Those people bear some of the responsibility for the mess in which they find themselves today. It’s unwise to make a major investment without first researching what you’re getting into. The same can be same of the lenders, who knew that there are reasons people who make no money and have streaky credit histories don’t typically get mortgages for $150,000.

But, the real question isn’t whether the bursting housing bubble could be avoided, or how far the blame spreads. The real question is whether this isn’t a sign that our basic assumptions about economy – more, more, more is better, better, better – are based more on fantasy than on reality.

The real reason for the housing bubble isn’t that a bunch of suckers got tricked into signing mortgages they had no chance of ever seeing through. It was because too many homes were built.

Most people would understand this as basic economics – too few customers or too much product either means falling prices (and profits) or finding new customers.

But, there is another, underlying truth there – we didn’t need the houses. The reason the housing bubble was just that is that we already had plenty of housing. For those who couldn’t afford big houses, there were small houses. For those who couldn’t afford small houses, there were apartments, and building McMansions had nothing to do with homelessness. The housing market became as hot as it did only because they found new and creative (and stupid) ways to fill the new houses. It was doomed to failure from the beginning.

That failure has unfortunately resulted in soaring foreclosures, slashes in the workforce of the home lending industry and tightened restrictions on who banks will lend money to buy homes.

This means an apparent shrinkage in the pool of customers the industry can tap. Under our system, there are some people who will simply never have the means to own their own homes. They are poor, which means they are also bigger lending risks. That means any loan they get will always be accompanied by a higher interest rate, which itself increases the odds that they’ll eventually find themselves unable to meet their obligations. So the size of the customer base isn’t so much shrinking as it is aligning itself with reality.

The problem is that houses built, unsold and unoccupied remain built, unsold and unoccupied. It doesn’t mean that there are more houses than there are people, but that there are more houses than there are people who can afford them. It’s like having a luxury car lot in a town peopled entirely by fast food service workers too poor to afford cars. In this case, however, the car lot happens to be spread all over the countryside on former farmland and in former forests and fields.

It can be expected that news about slow housing construction was supposed to be taken as bad. Downturn as a word is never used as a positive. It means a slow in economic activity, and in a sector that in the last several years has been red hot. But there is desire and there is reality. In this case, it’s the desire for growth meeting the reality that building a house on a shaky foundation will eventually lead to the rafters coming down around your ears.

© 2007 North Star Writers Group. May not be republished without permission.

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