Save the Grasshopper?
By Chad on May 21, 2008 in Real Estate
Recently a blogger on Wisebread wrote a post comparing the old fable of the Ant and Grasshopper to the current mortgage crisis. I liked the comparison, but the story ends before the question is answered. Should the ant help the grasshopper?
This question is pertinent at this time as a mortgage relief bill is working its way through congress and raises even more questions.
How will the grasshopper learn if they don’t experience any real pain? This bill will require the ants to pay for the grasshoppers’ mistakes and spread the burden over everyone. The argument for this sacrifice is that it will help stabilize the credit markets. In turn, this will help the economy and benefit everyone (not my argument).
As a renter, who purposefully rents because it’s the financially responsible choice in my area, I see no reason I should have to help other people stay in their houses. No one helps me out when a stock I took a chance on tanks 40%. Why should they? It was my choice and I have to live with it. The grasshoppers should now live with their decisions and be the adults they profess to be.
Take a look at these two charts (courtesy NYT). One comparing the current U.S. housing market with the previous Japanese housing bubble, and the one showing how outrageous the current house prices are to the historical standard:
On top of the moral/responsibility issue there is the question of when do the ants get to buy a house? If the ants are forced (key word here) to help out the grasshoppers housing prices may stabilize at an abnormally high price. Admittedly, the price will be better than it was 18 months ago, but in many places it will still be much higher than the middle class can comfortably afford.
We are nowhere near where house prices should be. These are homes, not stocks. Some would say that an increased population has legitimately pushed real estate to this level. Ok, if that’s true, then the same theory will hold true in another country with a 1st world economy and a much higher population density…Japan. The above chart shows that this is not the case.
The ants should not have to bear the brunt of this by paying for the grasshoppers’ mistakes with higher taxes (more government debt), while pricing themselves out of the housing market with their own money.
I realize I don’t have many readers yet, but I’m hoping for a decent discussion on this one. What do you think? Remember….think for yourself.
I’m a renter too and I wouldn’t willingly help people who made poor financial decisions stay in their homes. I chose not to buy because I couldn’t responsibly afford it. Would the same owners we’re bailing out share their financial windfall with me if prices had kept rising? Absolutely not.
I do think there are some cities in the midwest that face a foreclosure crisis that extends beyond just housing. It’s not fair for people who _did_ make responsible decisions to see their homes’ values plummet because of their neighbors’ poor decisions.
I would support a bailout if it were carefully tailored to only help people who made responsible decisions when they bought their home, but got caught up in the mortgage mess anyway. I have no idea how to craft such legislation, though. The current proposals in congress are too broad and bailout too many speculators.
Dale | May 21, 2008 | Reply
I haven’t even looked at the bailout legislation. By default, I expect that it is an unwise course. People can generally produce better results as private citizens than as a collective public. But what good does it do for us to sit around and yap about and agree with each other? Maybe it’s just good fun, but otherwise…
The only thing that you can actively do to affect this is to send your post or your comment to your elected representative(s). Tell them that their vote for the bailout dung will be such an indicator of poor judgment on their part that you cannot vote for them again.
A comment on Dale’s comment: owners do share their house price windfall with you. Their assessment goes up so they pay more in property taxes, which goes to pay for services that you presumably may (perhaps someday) enjoy. When the windfall owner sells, states or local municipalities often claim some sort of sales tax (or “stamp”), so again you indirectly share in the windfall since the proceeds of those sales go to government services.
Disclosures: I’m a renter, too. I oppose any such public bailout. I also oppose capital gains/losses taxes, on any assets. (I’m undecided about property taxes.)
Steve Austin | May 22, 2008 | Reply
“owners do share their house price windfall with you. Their assessment goes up so they pay more in property taxes”
I disagree. Your argument assumes that renters do not pay property tax. Part of my rent does go to pay the property taxes on my building. My rent was increased by $100 last month (it’s still a good deal though) and my landlord’s excuse was that his property taxes had gone up.
So you can’t argue that owners share their windfall profits by paying property taxes. Renters pay them too.
Who pays for the local services that I enjoy? I do! It’s silly to suggest otherwise.
Dale | May 22, 2008 | Reply
Your right there isn’t much to do other than write your Senator or Representative, but they do listen sometimes. Plus, it’s nice to get this kind of stuff off your chest…lowers the blood pressure.
Chad | May 22, 2008 | Reply
Dale, I wouldn’t listen to your landlord in that regard. The only reason rents get raised is because they can be, i.e. the market will bear it. He knows the good deal you’ve got as well — or better than — you know it.
My apologies for any implication I may have made, but I just didn’t take your 1st comment the way you may have thought I did. I took your comment to mean that as a Federal income taxpayer you wouldn’t willingly help out distressed, speculative owners. I didn’t imagine that you would even have to verbalize that sentiment as a renter helping out your property owning landlord.
But now that we’re here and Chad wants some discussion, I’ll continue to press the idea anyway: in an environment where real estate gains seemed guaranteed (2000-2006), the demand for condos (conversion) went up, the supply of new owners went up, and the supply of available renters went down and thus the demand for them went up. Once this supply-demand discrepancy begin to manifest in the marketplace, rents went down or at least didn’t go up — or up as fast — as they had been in the late 1990s. (That was my experience on the US East Coast.) So, as a renter, didn’t that work out (or wouldn’t it have?) to be the speculative owners unwittingly sharing their gains with you in the form of lower rental rates?
Steve Austin | May 22, 2008 | Reply
Steve, you make good point with supply-demand argument concerning rent prices. It is possible they will remain the same, drop a little or maybe rise very slowly. Now the question is, are the rent savings equal to or greater than the cost of the bailout. That would be an extremely difficult question to answer.
Also, it’s not out of the question for rent prices to increase more rapidly as foreclosed owners jump into the rental market, and houses sit empty.
I would still have to be against the bailout financially (too many variables) and morally. Without the bailout I will probably be able to buy real estate cheap over the next few years.
I like the idea of getting my rental empire (kidding) started near the bottom of a downturn.
Chad | May 22, 2008 | Reply
I don’t buy into the idea that rising home ownership did much to hold down rents in my area (Boston). In my neighborhood many large apartment complexes were sold as condos. This reduced the number of rental units on the market and help push rents up.
I have a good deal on my apartment because my landlord values tenants who pay their rent on time every month. He owns 50 units and he has a problem collecting from at least one of them every month.
Dale | May 22, 2008 | Reply
I was in Boston, too: 1988-2006. Boston and Cambridge are exceptional due to the heavy student populations that are a steady baseline of renters for the landlords. You’d have to get outside of those cities a ways to see that the rental market did soften during the housing booms (late 80s, early 00s).
Steve Austin | May 22, 2008 | Reply