Published on naked capitalism, by , January 24, 2012.
As an aside, Krugman has written a lot of good pieces lately that we’ve linked to on income inequality the disastrous austerian policies in Europe, and Republican derangement and duplicity. But he tends to cut the administration far more slack than it deserves.
His current piece voices cautious optimism on the prospects for the economy based on some strengthening in various economic indicators. But astonishingly, the core of his argument rests on the outlook for the housing market: … //
… There are large numbers of homes NOW where the borrowers are severely delinquent, and in some cases have been foreclosed on, yet the bank has not taken the house (usually on behalf of a trust in a mortgage securitization). Why? It would be nice to believe that the servicers are trying to help investors by slowly bleeding the housing overhang into the market, but this instead appears to be a cynical effort to milk investors of the maximum amount of fees. Even when a borrower languishes in the zombie land of non-payment, the servicer keeps ringing up his servicing fee and various other charges, such as late fees, broker price opinions (sometimes impermissibly charged to both the borrower and the investor). He eventually pays himself back from the sale of the house.
Now there are also reasons to question whether we will return to historical patterns of homeownership. High unemployment among recent graduates and the great difficulty unemployed middle aged people have in finding work means we may see a sustained reversal of household formation rates, and it may even go as far as leading to larger average household sizes. Extended families living together used to be not all that uncommon; it may go from being a sign of desperation to being seen as a smart way to economize and conferring other benefits (sharing child care duties, for instance).
Finally, the 30 year mortgage does not fit with job tenures that now (per a Yankelovich survey commissioned by McKinsey in the mid 2000s) of under 3 years. The traditional mortgage assumes that the borrower has a rising, or at least stable, income over his working years. We now have shorter jobs and longer periods of unemployment, which sap savings and make defaults more likely. And that’s before you factor in that the mortgage was normally a household’s top priority payment, but the inability to discharge student debt in bankruptcy effectively makes it “senior” to mortgage payments. All this suggests that it may be necessary to go against the pet wishes of the mortgage industrial complex and implement housing policies that do more to promote rentals.
It would be better if Krugman were right, but the monumental legal mess in the housing market, along with the terrible incentives built into the servicing business model, means a housing recovery is likely to be much slower in coming than he hopes. (full text and chart).
Chart: Share of Finance Industry in the U.S. Economy, on MacroHistory and World Report;
Chart: Gross National Debt, 1950 to January 2011, on MacroHistory and World Report;
Nations of Europe with hotspots, statistics and news, 1945 to 2011, on MacroHistory and World Report;