As a Canadian who lived for 18 years in the US and who feels that our fates are closely linked I've been watching the latest US housing crisis with a growing sense of unease as it looks like the Bush administration is going to cap off a horrific performance with an equally short sighted encore. I've said it before but I'll repeat it now - housing prices and the related cost of living in North America are too high for us to be competitive. Normal folks, under what used to be sane and considered lending practices could not afford the 20% down and a reasonable mortgage rate of 7-9%. Instead of allowing normal market forces to correct this situation we allowed the bankers to continue the party by simply making money cheaper to acquire. Can't afford 10% down - we'll make it 5%. Can't afford that? We'll give you a package that gets you in for nothing and lowers your payments today - just don't have a financial hiccup in the next five years on your way to making the 20% more than you do today to pay the bills you are going to have. Is anybody truly surprised that five years down this mismanaged road we are seeing potholes the size of the Grand Canyon?
This situation, and the bailout, are inflationary practices that hurt the folks in society who do things like go to work every day and try to save money at the end of every month. Owning a home is a responsibility that carries with it on going maintenance costs. Figuring out how to create painless - or painless today but impossible in three years from now - home ownership is not in anybodies long term best interest. Furthermore, there is a wide wage gap between the US and many parts of the rest of the world. This gap is so large that many skills that I would deem critical to the nations best interest no longer pay enough to merit the effort required to acquire and practice them. One of the reasons an engineer can survive happily on 11K per annum in India is that they don't have a 4K per month mortgage - not to mention another $500 per month in property taxes and insurance costs. This problem goes up and down the job food chain but is most acutely felt in knowledge and IP work which flows cheaply and reliably through fiber. Houses that cost 250K instead of 500K would help North American workers to get paid back for developing and practicing skills that we don't want to see leaving North America for good. This isn't protectionism or tinkering with market forces - this is getting the financial hi-jinks folks straightened out so that market forces can do what they are supposed to do. And so we can get back to being competitive.
But instead of taking the blinders off and acknowledging that things are broken the current administration continues to practice what Thomas Friedman calls "dumb as we wanna be" politics and is preparing to add $2100 worth of debt for every man, woman and child (back of napkin math but it's in the ball park) in the US. This will enable the current situation to possibly totter on for a while longer while not really addressing the important fundamentals I have described above. The only way that current housing prices become affordable for many working folks is through serious inflation. Bravo Bush & Co., you have had a hell of a run and it was hard to imagine what kind of an encore you were going to come up with. This curtain call might just be worthy of your performance. Oh, and the punchline is that America is going to be better off, will potentially even make money, when housing prices go up from here. Good one, eh?
Peace,
L
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