Purchases have consequences

In various posts here starting in 2004, I have argued that home prices in Seattle, and probably the US as a whole, were unsustainably inflated. Tim Ellis made the same arguments (but more regularly, and with more data) on his Seattle Bubble blog. The implications were obvious then, and more obvious now.

The causes should have been obvious as well, but various liberal thinkers and polemicists are drawing the wrong conclusions and using these conclusions to fuel the wrong arguments. They are blaming the banks that lent money. The culprits are closer to home.

My family elected to stay out of the market and rent while the market boiled, and I tried to encourage my friends and colleagues to do the same. This was not just out of self-interest, but because of the probable impact to every sector of the economy linked to home purchases. It turns out that every sector of the US economy of the mid and late 2000s was linked to home purchases. We all benefit from a healthy economy. We all have a responsibility to our families, but as citizens we also have a responsibility to the country and each other. During the real estate boom of the mid 2000s, I saw friends, colleagues, and strangers make choices that contributed to the bubble, and hence to the outcomes when the bubble burst.

I'll make my argument as concisely as I can: mortgage lenders, real estate agents, appraisers, real estate developers, politicians, and others in the real estate ecosystem played a supporting role in fueling the bubble, but the leaders of the bubble were the families and individuals that bought and sold homes during this period.

President Obama famously said 'elections have consequences'. The lesson of the last several years is that purchases have consequences. Home purchases during the boom have had terrible consequences for our country. Businesses have closed. Tens of millions of people that might have otherwise had productive jobs are unemployed. Perhaps 100M people have lost most of the net value in the largest source of wealth that they have - their homes. The nation and the states are out of money. The mood is sour. The range and depth of services that government provides are getting descoped significantly.

Americans have the luxury of choosing where to spend money. This is part of the foundation of liberty - the freedom of contract. Nearly every business works hard to win business (purchases) from customers by offering good products, describing the benefits of those products, and encouraging potential customers to patronize their establishments. In a nation of free men, free trade, and vibrant businesses, in nearly all transactions consumers get to decide where, when, and whether to buy goods and services. Businesses don't get to mandate that consumers make purchases.

The real estate boom is notable in that for the most part, consumers bought homes from other consumers. There is no other large sector of the economy where consumers purchase goods or services directly from other consumers. It's fashionable to try to blame Starbucks for selling expensive espresso drinks, and although even in this case consumers get to choose whether to buy or not to buy, it's a true business (Starbucks) trying to encourage consumers to make a purchase. In the case of most home sales, it's consumers (home owners) trying to sell their homes to other consumers (potential home buyers). Yes, there are plenty of enablers - agents, advertisers, lenders, appraisers, etc. But the primary decisions - whether to put the home for sale, what price to ask, what conditions are allowable on the transaction, and ultimately whether to execute a sale with a specific buyer, are all under the control of the private citizen who owns a home. And home buyers are under no mandate to buy, they have free will and no law enforcement officer or civil servant ordering them to purchase a home. Renting, leasing, living hotels - these are all valid options. Selling a home is also a discretionary decision. There may be pressure to sell a home for legitimate reasons, but the decision to sell is made by the seller. Even in the case of selling a home to 'enable' a move due to a job transfer, it's a discretionary decision to trade off some benefits for other benefits.

During the boom, I met and read commentary from a lot of people who were boom cheerleaders. But I don't believe that a single person privately doubted that at some point, the boom would fade. I saw a lot of fear - fears of being priced out of the market as it went up and up, fears from regular people of not taking advantage of the unusual opportunity to make a lot of money before the opportunity passed. I also saw a lot of raw covetousness, greed, and selfishness - vacations, cars, gadgets, renovations, and all kinds of purchases funded with mortgage refinancing and HELOCs. A lot of people buried their concerns about the sustainability of these shenanigans, but the aftertaste of irresponsibility was there in every boom-enabled purchase.

For the last several years, there hasn't been that much soul-searching among the citizenry about the culpability for these personal decisions. There has been a growing list of writers, thinkers, and public personalities pointing fingers at politicians and at banks for the financial catastrophe. This is wrong, and dangerous, because it minimizes the responsibilities that are a necessary part of the liberties we hold dear. As individual citizens, we've got to recognize the culpability that each of us that sold or bought homes has in causing this mess.

If we allow ourselves to be led into raising pitchforks against banks and bankers before we recognize and accept our culpability, we won't approach the changes we think need to be made outside of our homes with an adequate level of humility and camaraderie. I have yet to hear of a single parent who has said to their child, "I thought we could afford your new iMac and Honda when we sold the old house in 2006, but in reality I knew the price we got was too good to be true. If it hadn't been for this inflated price we wouldn't have been able to pay for them then, and we shouldn't have bought them in the first place." I haven't heard a single home buyer get up at a town hall meeting and tell their city council, "I knew I was paying an inflated price for my home in 2007, and this contributed a 'comp' to the tax appraiser's assessments in our neighborhood, which probably went right in to an artificially high budget forecast for our town, which is why we're here today talking about why the city park has to close." Home buyers haven't started writing editorials in their local newspapers (or even on their blogs) accepting a modicum of responsibility for taking down our country's economy.

The Americans who lived through the Great Depression earned a reputation for thrift from those of us who came much later. For now, I can't see any recognition from contemporary Americans about their actions in this latest depression. We can't responsibly rebuild our economies and public finances until we consider our motivations and shortcomings, own up to our contributions, and change our hearts and minds about the causes and effects of this situation.

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