Let’s not argue about whether there is a housing bubble or not, or whether the housing bubble will burst or barely deflates. This post assumes a hypothetical scenario that is yet to happen (if at all).
So who do you think will be the losers? If the housing bubble does not burst, the losers are the renters obviously. If the housing bubble bursts, the real estate investors will suffer first, and then the homeowners who bought very recently, and then the other homeowners. But for those people who put down 0%, 2%, 5%, or 10% of their own money, they will probably try their best to walk away from a house when the deal is no longer profitable. Despite that due to deficiency judgment (click to see my post), they will be still liable for any losses besides the purchase loan (most likely 80% of the purchase price), you just cannot extract money from a dead beat who may or may not declare bankruptcy. The lenders may have their plans & risks calculated, but without any real assets to recover their loans from, a dead beat dried of money simply cannot magically pay back lenders any money. The “Assets”-back loans such as home equity loans are only good as long as the homes or the assets in this case are still valued at a lofty high price. Once the housing market moves south, these asset-back loans are more like credit card loans, backed by nothing, except lengthy legal recourses.
So not only the real estate investors are the dreamers here, who think putting 5% down means only liable for 5%, but also the lenders who think all the loans are “backed by assets”, and legal recourses if needed. When there is no money to be found, there is no money. It will simply be personal credits soured, debts written off, deflation of housing prices, and mortgage interest rate risen for everybody.
When the bank loses money, who do you think will be the real losers? It’s us, everyone of us, especially the ones who did not get benefited from the housing bubble. Banks are not charities. If they lose money, they will simply do what they do best, jack up the loan interests, and lower the bank deposit interests. So if you interact with banks (of course, you do), you will be looking at forking out more to patch up the banks’ bottom line, because all these would-be-millionaire real estate investors abandon and walk away from houses. Furthermore, the central bank lead by Bernanke, will print more money like crazy to counter the deflationary force by monetary inflation. When the general inflation picks up, everyone loses.
“Putting 0% down! Head I win, tail you lose! It’s OPM, Other People’s Money (who cares)!” When the banks in our nation reach such a low point in lending standard, as to encourage mass speculation and such moral hazard, there can never be anything good comes out of it. Throughout this crazy housing bubble or boom (whatever you want to call it), I have not partaken in any of the speculation. You can call me stupid, or but I just won’t walk away from a home under any circumstances, period! To the best of my ability, I will repay everything for any loans that I take out. My moral standard does not allow me to even consider such possibility even when it is legally allowed. To me, there was never “head I win, tail you lose.”
I couldn’t believe what Greenspan said in one of his speech: “price stability fosters economic growth” (sorry, I am certain that he said that in his speech, but I can’t google it out). This is THE MAN who single-handedly created moral hazards one after another by bailing out big financial fiasco, and have created the two biggest bubbles, NASDAQ in 2000, and housing market bubble since 2002. Greenspan, do you really understand what you said? I can’t agree more, except that Greenspan’s actions are probably the opposites. Without a price stability, speculation is heightened or encouraged. With speculation, there are big UP and big DOWN, both ramps hurting the psyche of the society. The society is filled with speculative thoughts, and speculative tradings that produce no real economic values. The good old moral values, to work and save diligently, are completely eroded by mass speculation. What good does it do for you to work and save diligently, when all of your neighbors who participated in the real estate frenzy or NASDAQ bubble, were getting paid big and easy money.
With the US saving rate staying in negative zone (when the asset returns fully cover any short fall), our society has turned into an asset-based society. Unfortunately, the real value of the asset is not how much money it is valued at, but rather how much utility and function it can bring about. Those later values are the true purpose for the assets, while how much money the asset is changes from day to day, or from month to month. Our asset-based society has truly lost its focus.
Truly the entire society loses, when the bubble began, not when the bubble bursted. A society in speculation is a society with time and resources mis-allocated for the wrong purpose. The job of the central bankers should be to minimize the magnitude of unavoidable speculation in capitalism. Instead, Greenspan has chosen to do patch work, encouraging moral hazards, and making every subsequent wave of speculation even bigger.
Truly the real losers are everyone of us. Our values on assets and money get trashed along with the creation and bursting of the housing bubble.