Thursday, July 27, 2006

And now, from the annals of the financially imprudent:

It is the latest twist in the gravity-defying world of the high housing prices and exotic low-rate mortgages: As monthly payments on adjustable-rate mortgages are starting to balloon, many Americans have found a way to put off the day of reckoning.

They are refinancing with new adjustable-rate mortgages that keep monthly payments low --- for now, that is, though their payments will likely rise even higher in the future.

They also most assuredly think it's a good deal to buy furniture on those plans that promise "no payments until 2008!"

But this kind of imprudence is increasingly what it takes to sustain a middle-class residence in American cities:

In New York, the supply of apartments considered affordable to households with incomes like those earned by starting firefighters or police officers plunged by a whopping 205,000 in just three years, between 2002 and 2005.

Some might say this is a bad thing. But there are plenty of economists to argue otherwise:

In the San Francisco Bay Area, the percentage of households earning more than $100,000 a year rose to over 30 percent in 2000 from approximately 7 percent in 1970, said Joseph Gyourko, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. "Is that area worse off?" he asked. "At least so far, there’s a lot of evidence that economically they’re better off."

And if the city is economically better off, who really cares about the people? After all, says Prof. Edward Glaeser of Harvard:

There’s a whole lot of America that does a very good job of taking care of the middle class. The great sprawling edge cities of the American hinterland provide remarkably cheap housing, fast commutes, decent public services and incredibly cheap products available in big box stores. As a New Yorker, I understand the view that exile from New York is consignment to hell; but that’s not accurate. The majority of middle-class people that have moved out have presumably found themselves better lives out there.

So, Prof. Glaeser presumes that people are not being forced away from the neighborhoods they grew up in by rising housing prices, but rather lured to the hinterlands by the prospect of buying cheap plastic crap at Wal-Mart. They're maximizing their utility, after all. If they found it preferable to remain where they were, they would have just plucked the required funds off they money tree...


Blogger TNH said...

I find the new adjustable-rate mortgages terrifying. Working-class and middle-class Americans expect to make monthly mortgage payments throughout their working lives. For many of them, paying off their house is the only real capital accumulation they'll ever manage.

What the new adjustable-rate mortgages create is a system where they can go on making monthly mortgage payments all their lives, without necessarily winding up owning their house. All their payments will have gone to service the interest on the debt.

These mortgages are a mechanism for letting consumers buy more house than they can afford. This is camouflaged by the fact that buyers aren't actually getting that much more house. They're just paying more for what they get. The extra is going to feed the continuing real estate boom.

The rich aren't the ones taking out these hideously disadvantageous loans. They'll go merrily along, just like they always do. It's the sober, industrious middle- and working-class homeowners that'll be scrod.

8:28 PM  

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