Tuesday, March 3, 2009

Change in Perspective

"My fellow Americans! We must unite in common purpose to keep housing expensive! Homeowners are suffering! Their property is loosing value through no fault of their own!"

That seems to be the prevailing perspective on the collapse of the real estate market. But consider: mortgage holders are not "homeowners." They are debtors, paying the owner of the property for the privilage of using it. The cause of their suffering is having taken on a risk with a downside for which they're not prepared in the form of a contract that obligates them to continue paying for their privilage for the majority of their useful lives.

Some of the upper crust have had to come to the realization that they have been the victims of a classic ponzi/pyramid-scheme in the Bernie Madoff case. Its as old as the "borrowing from Peter to pay Paul" cliche, though I can't honestly say I'm sure that the saying dates back as far as the actual Peter and Paul. Eventually, the general populace will have to come to the same realization about our housing situation. We've been signing contracts to work our entire lives for an asset on the assumption that it will get more valuable; and that assumption is based on... what? That other people will buy it for more later? Why would they? Unless there's scarcity of supply, there's no reason that the price of something should continue to rise. Land is relatively plentiful in the US outside the major urban centers. As the population becomes more distributed, there's less pressure even on those dense areas. And as the overall economic competetiveness of the nation declines relative to the other up-and-coming areas of the world, we can count less on immigration to increase the demand for housing.

The bottom line: the house as an ever-more-valuable peice of property was a trumpted-up dream, sold to the populace by an elite with a social adgenda.

So stepping back from the poorly-advised contracts that the unwitting have been encouraged to sign; shouldn't we be cheering decreasing home prices? More income for productive investments and leisure, right? Well, unfortunately for everyone with a mortgage the picture doesn't look so sunny; they're locked in to the inflated rate.

Moral of the story: as the future gets more uncertain, we should be scaling back the length of time over which we're confortable making binding commitments.

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