Among many other things, McArdle is ignoring the multiplying effect of securities. It's not just about her ability to get a loan to buy a house that will increase in value. That ship has sailed for a while.
Most perniciously, factoring in the risk of house price depreciation will not
focus bankers on whether lenders can make their payments; it will focus them on
whether the neighborhood is likely to appreciate. Bankers will strenuously
attempt to avoid lending into "marginal" neighborhoods, which is where, any real
estate agent will tell you, prices fall farthest during a bust. That means
some exurbs, and a whole lot of cities. The more they factor in home price
risk, the less your qualities as a buyer matter--ultra-responsible yuppies
buying in a gentrifying neighborhood still look like an awful risk if you know
that house prices might fall, and your principal might at any time be written
down by 10%. And, of course, that's a self-fulfilling prophecy--if banks won't
lend on houses that have recently spiked in value, the value of those houses
will fall back to the level where banks will lend. It's hard,
in fact, to imagine a deliberate policy that could more effectively
halt the urban renaissance that has taken place in neighborhoods like
Subsidized crack in schools, maybe.
The key problems here are bank capital and mortgage foreclosures. ForeclosedAs always, it's all about her. I don't know enough about economics to refute McArdle properly, but I know the dfference between thoughtful analysis and bullshit.
mortgages are approaching about 10% of total mortgages, with an average recovery
rate of only about 50% of the mortgage value when the foreclosed home is sold.
The resulting loss of value, approaching 5% of the U.S. mortgage market, has
thrown the economy into disarray, because the losses have been borne by highly
leveraged institutions. For many institutions, each $1 of their own capital
(equity contributed by the company's own shareholders) has often supported $10,
$20, or even $40 of loans, security investments and other assets. As a result,
wiping out a few percent of their assets completely wipes out their own capital,
leaving customers and depositors without a “capital cushion” and triggering
withdrawals. This process started with the most egregiously leveraged companies
like Bear Stearns and Lehman, and continues to put stress on enormous but capital-thin institutions like Citibank.