Giving Credit Where Credit Is Due

Sometimes we think there is no justice in the world. There are no gods and goddesses, no system of divine judgement, reward and punishment, and therefor no heaven or hell. We forget that people make their own hell and must live in it every moment of their lives. Let's watch Megan McArdle twist herself into knots as she tries to justify her decisions without accepting any responsibility for her actions.

Case in point:

In April, 2010, McArdle was eager to buy a home but couldn't find an affordable one.

We've been dipping our toes into the DC housing market recently, but after this weekend, I think I'm just about ready to give up. Anything that comes on the market at a decent price is snapped up almost immediately--by my count, mean time from listing to contract is under seven days..... This should be a golden time for buyers with decent credit, stable incomes, and modest requirement for neighborhood safety. But there's almost no inventory, and what there is, can't be sold.

It's not totally unreasonable to think that prices will go up in DC, eventually; huge swathes of Northwest and incresingly [sic], Northeast are gentrifying at a pace faster than anything I've ever seen--and before I moved here, I was a lifelong New Yorker. But even here, that shadow inventory means it's not going to happen for a few years.

Nationwide, we're probably looking at a long period over which house prices don't fall, but they don't really rise much, either, and the market sorts itself out by letting inflation eat away the nominal value of peoples' outstanding mortgages. And over here on Florida Avenue NW, we're probably looking at a few more years crammed into an oddly-laid-out one-bedroom-plus den flip house.

In August, 2010, McArdle informed the world that she was going to buy a house "on the cusp of a double-dip recession" because she could pay less on a mortgage than rent and she had no plans on moving away from DC. She also told herself that the rush to buy before the homeowner's tax credit expired was over:

6. Interest rates are low, and housing is in a post tax-credit doldrums. If you have the down payment, it's a pretty decent time to buy a house in DC.

So she did.

So the McArdle-Suderman household are about to become householders. We're in the process of buying our own little 3 bedroom, 1.5 bath slice of heaven....

She expected DC housing to appreciate but said that it was okay if it didn't; she didn't think of the house as an investment.

Step One: Why buy a house?

I have spent enough time reporting on the financial crisis to have made very sure that the answer to this was not "Because renting is just throwing your money away!" All calculations, mental and otherwise, were based on an assumption of no house price appreciation. I actually expect that the house we're buying will probably appreciate in value, as it's on the border of one of DC's hottest "emerging" neighborhoods. But one never knows what is going to happen, and any house that is a stupid purchase unless the value is going to rise at a steady clip, is a stupid purchase. We figure that as long as the thing doesn't lose too much value, we're okay.

The plumbing had broken on her rental and she wanted to take advantage of the tax credit like everyone else.

7) The house had to work, financially, without the tax deduction Given that we do freelance, we already itemize, so we're glad to take the home-interest deduction. But we were not interested in a "stretch" that was only really feasible with a big tax deduction; we wanted a payment that was the same as, or less than, the rent we were already paying.

Just because McArdle doesn't like government assistance doesn't mean she'll turn it down; for example, see her student loans, mortgage deduction, and employer-provided, government-subsidized health care. She wanted that house and the tax credit so she ignored the fact that everyone else wanted the tax credit as well. But there was trouble in paradise. Prices on desirable DC property didn't go down as much as McArdle wanted. She decided to blame the homeowner's tax credit. What else could she blame? It wasn't her fault that she couldn't have both the tax credit and lower house prices. It was the government's, for danging tax credits in front of people who were impatiently waiting for housing prices to go down enough so that elite young(ish) journalists can buy socially enviable housing.

While I haven't compiled scientific data to back me up, my experience in going through the listings is that the housing tax credit grossly distorted the market. Almost anyone who wanted to buy, or sell, in the next twelve months, hastened to put their property on the market before April 30th. The market still clears--the few houses that are priced where the market wants to buy get snapped up immediately. But there are precious few of these. Most of the market, at least in the neighborhoods where we can afford to live, is the stuff that's hard to sell-- beautiful fixer-uppers that require more capital than we have, and overpriced places that won't appraise for where they're listed.

As always, McArdle forms a theory based on ideology and wishful thinking and then blames the government when reality doesn't mesh with her fantasy life. For it turns out that Megan McArdle was (gasp!) wrong and the housing market has not bottomed. House prices started going down. Not that she cared, mind you!

Since we bought our new house, we've had to confront the possibility that we've already lost money. Over at our sister publication, I explore why that doesn't bother us:

Although I may spend odd moments cruising through the listings to see what neighboring houses have sold for, my husband and I agree on one thing: "Who cares? We're not going to sell," he said the last time I told him about a comparable house that sold for less than ours.

We didn't buy our house for an investment; that's what our investments are for. Our house is to live in. We bought mostly because we wanted to commit to a place, and to make it over to suit us exactly. Landlords get testy when you rip out walls and replace the stove; besides, who wants to spend money installing custom blackout curtains only to have the place sold out from under you?

She didn't care at all!

The housing market still isn't clearing. In my neighborhood, almost nothing is coming on the market even though we're well into spring, and half of what does appear is either utterly decrepit, or wildly overpriced, or both. People are not selling unless they absolutely have to. Nor are people buying. I think the value of our house has dropped, but I can't be sure because nothing's moving on the market.

[yip yip]

Where does it end? By historical standards, prices should have bottomed by now. But we had the first-time-homebuyer's tax credit, which temporarily buoyed prices by moving a lot of demand forward. Given that, I'd say we have at least another year for the price collapse to run.

As I wrote earlier, this doesn't particularly bother me.

Nope, watching her house become less valuable doesn't bother her in the least.

Words to strike terror in the heart of any homeowner: "And Now House Prices Will Now Drop Another 20%".

[yap yap]

Given that we just bought a house a few months ago, I'm sure this post will inspire a couple of readers to ask whether we regret that decision. The answer is that no, we don't, for several reasons.... 2. Washington DC is a slightly weird market, because government employment is stable, and government activity has been increasing. The ratio of rental prices to home prices isn't particularly high, and has actually fallen somewhat over the last year. Meanwhile, the population of the city has now increased for the first time in 50 years. Our neighborhood, which has had few services, is now gaining crucial commerce like restaurants and grocery stores nearby, which should help support prices.


3. We're in it for the long term. We expect to own this house for longer than the seven-year average; for us, even in a worst-case scenario, eventually inflation will erase at least some of our equity losses. If we stay in the house as long as we hope, ultimately we'll have locked in a housing cost that will end up being well below the current market. We won't have bought at the bottom, of course--but the universe is too complicated for me to think that I can reliably buy anything at the bottom.

You know, for someone who doesn't care, McArdle sure does worry a lot about losing money on her house.

Many economists have been saying we would have a second drop; one look at McArdle's chart shows why. Prices rose astronomically during the bubble and it's a long way down to normal levels. McArdle knew this.

Four years on, why is the housing market still falling? The obvious culprit is the homebuyer's tax credit. Even as it was enacted, a lot of people were complaining that gimmicks like this (and the Cash for Clunkers program) weren't providing useful stimulus; instead, they were distorting the market by pulling demand forward from future years.

As a couple of commenters note, McArdle is being deeply dishonest here. Nobody expected the tax credit to solve the housing problem, they just hoped it would slow down the housing market enough to keep it from going into free fall. The tax credit's effect was, as McArdle's chart plainly shows, quite small.



This chart was created by Steve Barry and appeared, as McArdle noted, at The Big Picture. McArdle did not note the tax credit blip as Barry Ritholtz did, since that information was on a need-to-know basis and McArdle decided you did not need to know.

That seems to be even truer than most people expected. In DC, this actually caused an uptick in prices, because the buyers were concentrated into a pretty short time frame. A lot of the properties coming on to the market were short sales and foreclosures, which take a very long time to close. That meant that a lot of people were getting into bidding wars over the relatively small number of properties available. The bidding war was frantic enough to cost them money--but not to clear the short sales, which were often more than $100,000 underwater. I myself got caught by the tail end of it--because the comps that we were using were inflated by the tax credit, we probably overpaid for our house.

McArdle was the helpless victim of government perfidy! She chose to take advantage of the evil, price-inflating tax credit. Nobody held a gun to her head and told her to sign the contract.

In most other places, the tax credit was simply keeping prices from falling too much further. But the mechanism was ultimately the same: we crowded a larger number of buyers into the market without enough time for supply to really respond, because too many of the houses that needed to be sold were encumbered by underwater mortgages.

After the credit, it all collapsed again. There were a few months of confusion, because it took a while for prices to adjust to the new reality: supply was higher, but all the buyers were gone. Almost everyone who had intended to buy in the next few years had moved their purchase forward in order to get the tax credit.

Or they could have waited for the expected double dip in housing prices. McArdle took a gamble that the tax credit was larger than any dip in housing price and lost. She could have waited but didn't want to. She made a choice but instead of accepting responsibility for her decision she blamed the government instead.

The tax credit was no doubt a fine thing for people who managed to sell their homes in that narrow window. But of course, there are parallel losses--the people who have lost jobs, or gotten transferred, or gotten a divorce, in the intervening year, and need to sell their houses, and face a market with virtually no buyers. It's hard to argue that the program improved much. I mean, you could posit that it somehow allowed us a more orderly transition, but we still have a large backlog of foreclosures, and judging from the recent declines, we simply moved moved some of the pain into the future. We didn't actually make the process less painful.

Damn you, Government Menace, for forcing McArdle to take advantage of your tax break and for not solving the housing crises at the same time!

As this graph from Barry Ritholtz shows, house prices are still well above their historical levels. The government cannot legislate that imbalance away. You don't have to be a "Work the rot out" liquidationist of the Andrew Mellon school to think that eventually, prices have to fall to market clearing levels, and that slowing the process down might not improve it much.

In conclusion, governments are incompetent and we all should just get rid of those troublesome rules, regulations and entitlements as the Koches are always telling us to do.