In the latest installment of Formerly Middle Class People Deserved To Lose All Their Money, the Wall Street Journal informs us of a study from the Federal Reserve Board’s Steven Laufer. Not too surprisingly, the paper says these longer-term FBs would have been fine if they hadn’t kept taking equity out of their houses just because they could.
The conventional wisdom of the housing crisis goes something like this: Too many people bought homes as the housing bubble inflated. Some were unlucky in their timing, while others overextended themselves by putting too little money down. All of these top-of-the-market purchases led to an explosion of foreclosures once home prices dropped sharply and the economy hit the skids.
Amid the current debate about whether a new bubble is forming in the housing market, it’s worth looking at a paper published in March that challenges conventional wisdom by showing that a significant share of foreclosures came from people who bought their homes before 2004.
So why did so many people who bought their homes before the housing bubble fully inflated end up losing their homes anyway?
The paper concludes that if only California had laws like Texas (which forbids borrowing more than 80% of home equity), not only would fewer FBs gotten F’ed, but homeowners (as opposed to homedebtors) would have had more money to spend because houses wouldn’t have cost so much.
Which is ridiculous, because why do you think these FBs borrowed all that equity in the first place? They sure as heck didn’t invest it in infrastructure. Heck, no. They spent it. We’re cheered to see Larry Roberts (OC Housing News) agrees with us.
Then again, that study also says people defaulted because (among other reasons) they assumed their home prices would keep going down. This shows why the study was in Los Angeles instead of the Real Bay Area. Everyone knows in the RBA, prices only go up.
There’s also a very important reveal in the paper. Laufer’s model shows that home prices would be 14% lower if all that equity extraction hadn’t taken place. And as we know, the Real Estate industry will simply not allow that to happen. They might as well throw away tax-deductibility of mortgage interest too.