President Obama announced a mortgage plan aimed at giving relief to homeowners that are facing problems with their mortgages. Yet, this is just putting a finger in a hole in the dike.
The problem is that after fifty years of governmental credit inflation many homeowners are facing the reality that their homes were grossly over-valued and that they assumed too much debt to finance their “American Dream.”
One out of every four or five houses has a mortgage on the property that is greater than the market value of the house. Many of these homes are now valued at only 75 percent or less of their mortgage value.
Regardless of a government “solution” to this situation, either through debt relief or a renewed bout of government-induced inflation, the attitudes and expectations of homeowners have changed. These homeowners have been “burned” and are unlikely to expose themselves to this possibility again in their lifetimes.
Even if the market stabilizes in the near term and housing prices bottom out, many potential home buyers will be much more financially conservative in the future given the experience that they have just been gone through.
The reluctance to buy a home will also be affected by the situation in the labor market. And, here again there is a longer-term problem that will not be resolved in a matter of months.
One out of every four or five people of employment age are either unemployed, employed in a part time job but would like to be employed full time, or are not seeking employment. The percentage of working age people in the labor market has recently dropped to a level not seen for several decades.
With conditions in the labor market so tenuous, people will not have the same resources to purchase housing as they have had in the recent past.
But, how is this under-employment situation in the labor market going to be resolved in the short-run?
The fundamentalist preacher Paul Krugman cries out for short-run government “solutions” to put people back into the jobs that were in existence at another time. Krugman writes, “We have become a society in which less-educated men have great difficulty finding jobs with decent wages and good benefits.” For example, “Adjusted for inflation, entry-level wages of male high school graduates have fallen 23 percent since 1973.” (link)
Maybe, part of this problem is that the government has emphasized putting high school graduates into what have historically been entry-level jobs, jobs that are shrinking as a proportion of the jobs available due to changes in technology and needed training. And, what about those that do not graduate from high school…they are in an even less-favorable position.
Elsewhere in the New York Times, we read that “Rich and Poor Further Apart in Education.” (link) “Education was historically considered a great equalizer in American society, capable of lifting less advantaged children and improving their chances for success as adults. But a body of recently published scholarship suggests that the achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.”
This is a gap that cannot be overcome quickly. And, it is a gap that cannot be overcome by national tests and government spending.
Since the end of World War II, politicians have generally believed that they could get elected and re-elected by keeping people employed and by helping more and more people become homeowners. This underlying emphasis has resulted in the fifty years of credit inflation the United States has experienced since the early 1960s.
People were kept employed by short-term government economic programs that put the unemployed back into the jobs that held previously before becoming unemployed. And, why should someone going through high school be concerned about employment when they knew that the government would continue to stimulate jobs in heavy manufacturing and industry and keep them employed.
The government continued to promote these kinds of stimulus programs even though under-employment increased steadily over the past fifty years and the capacity utilization in manufacturing was declining over the same time period.
The federal homeowner programs and credit inflation created in the housing sector over the same time period created a “piggy bank” for many people not only helping them to own their own home, but also to allow them the ability to borrow more and more money to binge on consumer goods.
So, we ended up with the “less wealthy” being under-educated and hence not readily employable in the labor markets of the 21st century and with many of these same people owning homes and over-their-heads in debt.
This is a situation that does not have an easy or ready solution.
Under-employment can only be resolved over an extended period of time. The same holds for people with too much debt. Short-run stimulus is not the answer. In fact, the emphasis on short-run stimulation has created and further exacerbated the situation.
A safety net may be necessary for many of the under-employed and overly leveraged. In fact, the efforts to keep people in “legacy” jobs and to put families in homes to make their life better may have resulted in a whole generation of individuals being excluded from the mainstream. They are going to need some economic support.
But, the only real solution to the labor market situation is a long run one and it begins with education and the environment that surrounds the culture of education.
The situation in the housing market will only get better as people lower their expectations and get their balance sheets back in order. This, too, will take a substantial amount of time because it is related to a major change in expectations. People, in the future, just cannot expect a “free ride.”