Interesting article by David Wessel in today’s WSJ about how he believes (and Greenspan too) that the economy can only rebound if housing prices rebound. From the article:
For the two-thirds of American families who own their homes, a house is their biggest asset. The lower house prices go, the less wealthy they are and the less they can or will spend and borrow. For home builders, the lower home prices go, the fewer new homes they will build and the fewer workers they will hire. And for many American banks and other financial institutions, mortgages, mortgage-backed securities and financial instruments that rest on mortgages remain a huge headache. The lower house prices go, the less these loans and investments are worth and the weaker the foundations of the financial system are.
Although I understand the importance of housing prices, I’m concerned that as a nation we will return to our former ways of using home equity as a piggy bank for consumer spending. From what I have read it’s clear to me that that was what led us to this predicament in the first place.
I guess my real question is…
What’s to stop this from happening all over again?
I mean, we have laws against fraud, but they weren’t enforced when people lied about their income in order to get bigger mortgages. What’s to stop this from happening again? Clearly we can’t rely on homeowners or potential homeowners to not take on too much debt. Nor can we rely the ethics of the mortgage brokers and bankers to not allow customers to take on more debt than they can handle since they [the mortgage brokers and bankers] are worried about the potential customer getting financing from a competitor.
I’m also concerned that so much focus is placed on consumer spending. Yes, we need consumer spending but shouldn’t we be more concerned with the incomes necessary to support that spending? We saw in the last eight years that consumers were simply borrowing money in order to spend.
Maybe we should have some standards in place. Things like…
• No more than 30 – 35% of your income should be spent on housing.
• Your income MUST BE VERIFIED!
• You need at least a 10% down payment when purchasing a house.
• No more than 80% (or maybe even less) of your equity can be withdrawn via a home-equity loan.
I would even like to see new homeowners attending homeownership classes or something of that nature. Purchasing a home is a HUGE decision and people should be getting their education from someone other than those who stand to gain from their decision.
Those are my thoughts? Do you have anything you’d like to add?