Green Shoots in the Housing Market

With all hands on deck and a return to extensive subsidization of the housing market, the talking heads have been busy proclaiming that the housing market has bottomed and is destined for a rebound. Not only has the Fed embarked on massive quantitative easing (purchasing hundreds of billions in newly issued US Treasuries in an attempt to drive down interest rates), but also legislators have showered potential home buyers with tax credits all with the hope of preventing further correction of the housing bubble that burst in 2007. With government puppets Fannie Mae and Freddie Mac facilitating billions in low interest loans, the government hopes to stimulate housing demand and artificially support prices by driving down the monthly payment of potential buyers. One of the most significant contributors to the inflation of housing prices was the abundance of cheap credit that proliferated throughout the first half of the decade. Now the government is repeating its disastrous policy of attempting to stimulate the economy and prevent necessary market corrections by distorting the credit markets through the manipulation of interest rates and the availability of credit.

Ultimately, this policy is doomed to failure. Interest rates will inevitably rise and the pressure on housing prices will resume. The moratorium on foreclosures has ended, leaving banks with months of delinquent creditors that will no longer be spared their day of reckoning. This supply, however, is offset by the incredible declines in new home construction. The real pricing pressure comes from the disappearance of “affordability” mortgage products such as interest only, pay-option arms, and adjustable rate mortgages with low teaser rates. These products combined with government manipulated interest rates enabled buyers to pay higher and higher prices for homes because they were able to afford the artificially low monthly payments. Similar to the impact of the mortgage interest deduction on the cost of ownership, lower interest rates decrease monthly payments and ultimately inflate housing prices. As interest rates rise, however, the monthly payment becomes dramatically more expensive leading to significant pressure on housing prices. With the amount of new government debt and the impending increases in taxes, one can reasonably to expect future pressure on disposable after tax income further limiting the affordability of housing. It seems that the only green shoots in the housing market are the weeds overwhelming the abundance of foreclosed and abandoned houses.

The Seven Deadly Sins: Envy and the Populist Movement

The growing populist movement is largely a result of one of the most fundamental human emotions and one of the Seven Deadly Sins: Envy. Politicians, full of pride and greed for power, stoke envy among the masses by focusing attention on the disparities in wealth and income in society and vilifying the fortunate. President Obama, and those that share his populist ideology, feed upon the envy that is innate in man and promise to redistribute income from the “wealthy” to the “poor” and punish the individuals, companies, and organizations that have found success in life. Furthermore, the Obama Administration promotes vast social programs that are designed to create a collectivism that rewards sloth and mediocrity. By assuring the masses that their needs and wants will be satisfied at the expense of others, President Obama communicates that it is acceptable to be envious of the wealth generated by the hard work and industrious productivity of others and, even more damaging, that it is unnecessary to possess personal responsibility for your own well being.

Vilification of the symbols of success in our society is a cornerstone of the populist movement. Schadenfreude, or pleasure derived at the misfortune of others, is at the root of envy and the corresponding desire to dethrone those that have been successful or productive in life. The persecution of Martha Stewart or the various politically driven witch-hunts of over zealous prosecutors, such as Elliot Spitzer, epitomize the desire of the envious to relish in the misfortune of the successful. Politicians, especially those with left leaning philosophies, exacerbate this envy by stoking public outrage and fueling feelings of inequity.

Ultimately, the populist movement and the growing envy among the people will destroy the core values of American society. It will erode the rewards of industriousness and productivity while stoking feelings of guilt among the most creative and talented members of society. Populism will suppress ambition, decrease risk taking, and diminish private investment as the rewards for such behavior will be dramatically reduced. Centuries ago, theologians realized that envy of other’s possessions and good fortune was a fundamental evil of the human constitution. Populism ignores the collective learning of centuries of human experience and encourages envious coveting of the good fortune of others.