The Regional Great Depression Of 2009

So let's see if I have the myth right.

Way back under the administration of [insert name of last opposition party President here], and inspired by the legislative efforts of [insert opposition ideology bogeyman's name here], banks were [allowed/encouraged/required] to make high-risk home loans. These were profitable for the banks because they could charge higher interest rates due to the high risk, and safe because real estate values were assumed to constantly rise over time.

By [1995/2001], the prices reached out-of-sight levels for most would-be homebuyers, so the banks began to use more creative means to make it appear that home ownership was within the reach of high-risk customers. Adjustable rate mortgages and cliff financing dovetailed with a time of easy credit and rapid increases in real estate market values, and homeowners were told not to worry because they could always refinance before their rates adjusted up, since their property would continue to appreciate in value.

In 2008, the bubble burst and the whole system, predicated upon the idea that real property values would increase by 20% a year forever, failed. Suddenly, that 2+1 on a 4,000 square-foot lot wasn't worth $824,999 after all. Since everything is financially linked to everything else, everywhere, the global economy took a gigantic hit and the credit markets contracted and suddenly everyone was upside-down on all their debts.

Have I got that right? Well, that's the myth, anyway. Here's something else to consider. All those people who allegedly overbought and got snared by adjustable-rate mortgages -- they were mostly in California, Arizona, Nevada, Michigan, and Florida. The other 45 states experienced generally-predictable rates of mortgage loan failure and currently are experiencing predicted rates of foreclosures. This fits in nicely with my experience in Tennessee, where home prices were not rising precipitously during the "bubble years" of 2004-2006, and perhaps in a lot of America.

The unsolved piece of this puzzle to me is why foreclosure rates have not risen, and if market prices have not fallen so precipitously, on the Eastern Seaboard. If you bought a house in Brookline, Massachusetts in 2006, it's for sure you paid a pretty penny for it. What could you get for that house today? I browsed with Zillow and randomly found a really nice-looking place not far from B.U., a 5+3 on a lot with mature trees. The market price for the house in mid-06 was something like $1.4 million. Today, Zillow thinks it would sell for $1.11 million. Now, that seems like a loss of about $300,000, which sounds bad. But, if you'd bought the house in 2004 instead of 2006, you'd have bought it for just under $1 million even, which means you'd still be $110,000 ahead of the game today. This particular house doesn't look like it was sold at all during this time, so this is all sort of academic. And it's always been kind of pricey.

So I looked around Boston some more to find something that might have been a bit more within the reach of a first-time homebuyer. I went a little bit northeast of Cambridge and found another place that looks like a student special, a 1,725-foot 4+2.5 on a side street. Those bedrooms must be tiny, and there's basically no yard to speak of. This is priced at just under $400,000 today; in mid 2006, it would have gone for about $450,000, and five years ago, again it would have gone for about $400,000. So even at a lower price point, the historical price curve for the urban market circling Boston is shaped more or less the same -- the houses peaked a bit but did not fall below their pre-bubble values.

If you buy a house in 2005 and sell it in 2006, you're doing something very close to speculation, and that's a risk. No one is saying that a speculator shouldn't absorb the losses of that risk if things don't work out, just like the speculator could theoretically pocket the gains if the risk did work out. What about buying in 2005 and selling in 2007, a two-year ownership gap? That's still close to speculation in the residential real estate market. Five years? Ten? At some point it stops being a short-term speculation and starts being a long-term investment. Where does that line get crossed? I ask because in Boston, it looks like the longer-term your investment was, the less risk you faced, even in the middle of the go-go 2000's. The same was true in Tennessee, and I'm beginning to think that the same was true pretty much everywhere.

This is anecdata, but I'm wondering if maybe a more detailed, regional look at the housing crisis isn't warranted. It doesn't seem to me that Boston real estate consumers (or their lenders) need to be rescued from the precipitous collapse of housing prices in that market, because it didn't happen there. It happened in places like Las Vegas, Los Angeles, San Francisco, Phoenix, Grand Rapids, and Tampa.

So sure, I know that my own modest house in exurban Los Angeles County, bought in a falling market, has still fallen nearly $100,000 underwater even after the purchase. What can I say, I was optimistic and thought that things had reached a near-bottom. My wife also really liked the house and it was at a level we could afford, in a good neighborhood and we aren't planning on moving anytime soon.

So what do I care about the market price? What good does it do me if the market price rises, if I'm not going to sell? What harm do I suffer if my house is worth more than I owe, as long as I can make the mortgage payments? The answer is, even in one of the most impacted regions of this regional phenomenon, no harm at all. I don't need help from the government and neither does my bank (at least, not with respect to my loan). What I need is to keep my job and stay put until the market corrects itself. Is that really so bad?

As President Obama considers a $275 billion Bank Bailout Bill II (the first one became TARP under President Bush), let us remember that this may very well be a regional crisis, not a national one. A one-size-fits-all, Washington-has-all-the-answers solution may very well not be the right one. And that in a lot of cases, doing nothing may well be the right answer, as frustrating as that may be for some people to consider. The people most at risk of losing their houses are the people who were always going to be most at risk; a percentage of them were always going to be in over their heads and wind up losing their houses. That really sucks for them but it's how the market, imperfect in application but still the best system we've ever had, works out.