Comment on: Janice Eberly and Arvind Krishnamurthy: Efficient Credit Policies in a Housing Debt Crisis

Comment on: Janice Eberly and Arvind Krishnamurthy: Efficient Credit Policies in a Housing Debt Crisis:

The banks got at lot of money very cheaply–5%/year preferred-stock money giving up neither equity nor debt control rights at a time when Warren Buffett, front-running the Treasury, was able to extract 10%/year plus enormous option kickers for the money he committed to bank rescue. The auto companies–they got money, but the unions took a substantial hit, and the top executives lost their jobs. The homeowners got…

It still is a mystery to me why we did not offer all underwater and above water homeowners a conforming-loan refi with equity kickers depending on how far underwater the homeowner was. We didn’t do that. We got rid of the debt overhang via foreclosures and (some) case-by-case renegotiations, and as Paul Willen says it was brutal and ugly.

But right now… we built, during the housing bubble, about 1 million single-family houses above trend. Since 2007 we have built between 500 and 600 thousand houses per year when long-run trend used to be 1.2 million a year. Netting out the 1 million extra houses built, we are now 4 million single-family houses short–4 million families who in a normal economy would be in their own homes are now living in their sisters’ basements, with little sign that the by-now enormous underhang relative to 1948-2008 housing trends is exerting any pressure for a single-family housing construction recovery.

SO why is this? Are potential homeowners unwilling to take on the types of risk they routinely took on? Is it lenders who are unwilling to take on the types of risk they routinely took on? Of course it is both. But what is clear is we haven’t unclogged the single-family housing credit channel. And the question is: is this an enormous social loss? Or should we never have established the previous housing-finance pattern in the first place?