The Case Against Propping Up Housing Prices (video)

Wharton School of Business is Wrong

Susan Wachter

It is painful to see an interview of a tenured professor from the Wharton School of Business, completely display ignorance of the economy and get the issue of the federal government’s continued interference with the housing market wrong.  This “professor”, proposes that we should keep the housing bubble propped up as long as we possibly can.  And, if you read into her responses in a certain light, you’ll come away with the notion that she does not think the federal government IS involved with propping up the housing bubble.  There is no way to argue for or against the federal government’s continuous meddling in, what should be, a personal market, if you have no idea that the basis, home prices, of the market is systemically flawed, a bubble.  Susan Wachter, a professor of real estate at the Wharton School of Business, got every point wrong.  Her smarmy and sarchastics remarks served only to show her complete ignorance of the issue at hand, the housing bubble.

But, don’t think I relied on this single interview to determine if this person is aware or not aware of the egregious errors in the housing system.  I perused about 20 of her own personal writings, and interviews.  I think 20 is a sufficient number to understand a person’s point of view and to understand whether or not they are aware of basic facts.  Sarcasm aside, it is my contention that Susan Watcher has no idea what the federal government has been doing for the past 97 years.  [for those who can do simple math, I leave that number there to separate the truly ignorant from those who are awakened to the fiasco we find ourselves in 97 years later]

The basic premise of power is that, the one with the power has the capability to execute such power.  But, that is not the whole of the actuality.  The true basis of power is not that you have capabilities to execute your abilities, but that you have those who come to you seeking for you to exert a power that they themselves do not have and that you can execute those abilities over and above those who have given you the authority of such power.

The federal government continuously usurps power from people.  Particular to this housing issue, we had the policy, ostensibly benevolent, and there’s a saying somewhere about the road to hell being paved with good intentions, that all Americans should own a home.

Let’s look at that notion for one, realistic, moment.

All Americans Should Own a Home

If all Americans should own a home, then by definition, all Americans should be able to afford a home.  But, wait, if all Americans can afford a home, then the notion of a cheap labor pool should be nonexistant OR … OR… housing should be so cheap that everyone can afford it.  You cannot have it both ways.  You cannot have a cheap labor pool AND have housing everyone can personally, without government intervention, outside of this being a socialistic government, afford.  Unless America is willing to suddenly change to pure socialism, everyone cannot afford housing.

So, if everyone cannot afford housing, and I’m sure President Clinton knew this, then something else must be up when the government suddenly puts forth the policy of “all Americans should own a home.”  Let’s look at what they did to “make it so.”

  • exploded the quasi-governmental agencies like fannie and freddie
  • government backed guaranteed loans [ yes that means tax dollars would guarantee to the BANK that no matter what, they’d get their money ]
  • completely reduced the strictures under which those government backed guarantees were handed out [ yes, “we’ll take NINJA (no income no job apparent) loans”
  • the non-quasi-governmental agency, A.K.A. private bank, the federal reserve bank, reduced interest rates from 5.25% to 0.00%
  • a plethora of system practice of the S.E.C. not prosecuting nor even investigating any real estate industry cogs, i.e. banks on down to appraisers
  • FDIC steadily increasing its deposit guarantee
  • bank reserve requirements being reduced, such that they could then lend out millions instead of thousands of dollars, backed by government guarantees on payment
  • explosion in the rise of exotic loan terms, such as interest only loans and ARM loans among others

With this list, one can easily see that this cheap labor pool doesn’t need socialism to get into a home, they simply apply for a home loan without consequence nor care, since they could go to a bank, pay nothing down, not show any income, and pay half of what they would pay in rent for the first 1-3 years.

With houses selling like hot cakes then, who cares what the price of a house was.  You have a perfect storm brewing.  You have the maid, being able to buy the mansion, money no object.

Money No Object

With poor people being able to afford million dollar price tags, and I’ve personally heard this story many times in the past 2 years, home prices going up by 19% raised absolutely no red flags.  In fact huge housing developers would be so brazen as to put in their brochures that your home price would double in 6 months after sale from the developer.  I personally had a friend who’s parents bought one of those homes, and indeed cashed in a year later, doubling the initial price, but then not being able to afford a home of their home because the market was so inflated.  They had to take a condo 1/3rd of the size.

And, we come to home prices, obviously it was inflated, obviously it is inflated, obviously people were in, and are in homes they could not afford or shouldn’t be in a home at all.  So if the market is trying to correct itself, you have to do some big math here.  If home prices are inflated, how should it be corrected?  This is where Professor Wachter completely fails.

  • given that a huge percentage of the population should not have even been in a home at all, what would home prices be if they had never even bought a home
  • given that there would not have been that much exchange of homes and the population would not have been trading homes anywhere near as much, what would home prices be if this exchange had not gone on
  • if we come to the realization that the government was a huge player in people that could not afford homes, getting into home, what would home prices be if all of those policies and guarantees were eradicated
  • the federal reserve needs to recuse itself from usurping the power of the congress of the united states, in that it sets interest rates, which ultimately led to people who could not afford houses via a realistic market interest rate, get into a home.  What would home prices be if the interest rate were set by the market, without interference by the federal reserve

This is why those who are for home prices falling are correct and those who are not, do not realize that home prices are NOT natural.  Home prices should be nowhere near their current value.  What investment do you know of that earns 19%, for over 10 years, and is not investigated by the SEC?   A 19% annual gain is not an organic gain and should send out red flags to anyone caring to pay a modicum of attention.  Any idiot knows that if you get 20 cents on the dollar over above your investment, that something is wrong, normally illegal activity is a sure bet.

So if we have housing prices going up by 19% every year for at least 10 years, why would you argue against, in a depression, housing prices falling.  This argument, of course, can be put exactly to the fed for not letting the zombie banks fail, or interest rates to rise naturally or the overall correction that is necessary at this time, i.e. prices to fall in every market.  Unless Susan Wachter is in an investment home that she is thinking she is going to get out of in the next year, she is arguing a point in favor of artificially highly inflated home prices.

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Ex law school student. I was kicked out for revealing I had a heart actually beating inside. I used to be in a modern dance company. I'm working on my 7 miracles to be proclaimed a saint by the pope. #1 is really hard, but once i get over that hump the other 6 will be a cinch.

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