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Michael David White
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I bring a ton of real world experience to my commentaries on real estate prices and mortgages. My work in real estate is as a lender, owner, mortgage originator, and commentator. I have owned more than 285 properties. I have made hundreds of real estate loans for my portfolio. I have reviewed... More
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  • Mortgage Default Is A Patriotic Duty 0 comments
    Jan 12, 2010 5:52 PM | about stocks: , FNMA, FMCC, FRI, ICF, ITB, IYR, RWR, RWX, VNQ, XHB

     I read a mysterious statement the other day.

    “My data show that between 1890 and 1990 real home prices actually didn’t increase,” said Robert Shiller, in Newsweek (Dec 30, 2009), Why We’ll Always Have More Money Than Sense.

    We have all been in a long state of delusion. Our psychosis is simple. We are married to real estate which increases in value. I can get rich. You can too.

    The belief in increasing values of real estate is the president of our financial crisis. Now we know he didn’t deserve the office. The price will be paid. We can all confirm the high stupidity of the crowd which we are in. Of course I’m a member, but I’ve decided I’m done, and you have too.

    Now we are cured. Or some are. Or a few maybe.

    price my data show

    If real estate is a “flat” asset, with price changes created only by inflation, and not true increases in value, than you know we still have quite a big fall to go ahead of us. And if we don’t fall, that’s almost certainly worse. The graph above shows Case Shiller through the third quarter of 2009. The numbers are adjusted for inflation.


    Take a minute and pick out the most striking feature of the graph. Study it a minute. What do you think it is? Do we agree?

    The striking feature is that the current breaking bubble is a bubble which was a King Kong bubble. Any predecessor bubble in the last 120 years was a hiccup. Now we have gangrene. At least one limb must go.

    The best numbers, which are Case Shiller, predict a fall of 22% from current levels. And that’s if we don’t overshoot.

    Over the last three or four months I have been looking closely at the data on pricing from Case Shiller, Freddie Mac, The Federal Housing Finance Agency, and First American Core Logic. I have been surprised by how negative the forecast is based upon long-term price trends.

    While there are variations, all of the different data sets point to patterns very much like what you see above from Case Shiller. If history has a pattern, and the most educated voice on the matter says it does, then a fall is written in stone. The critical question: Should we respect what the stone says? Or should we try to break the tablet?

    Who can imagine the perverse effects of a policy which successfully circumvents something as towering as the pricing of all of our 129 million residential housing units?

    If successful, the most obvious perversion of our current policies on housing is that we will continue to pay too much for the most expensive cost which each of us shell out for every day and every month and every lifetime. We are fighting an ocean’s tide retreating. How will we hold the water on the shore? We are forcing a more expensive lifestyle across our entire economy. Rich and poor. Young and old. All are scheduled to pay more if the bubble doesn’t pop completely.


    We live in a world of radical price competition. The obvious competition we are losing is the competition based upon the price of labor. Expensive housing exacerbates our competitive disadvantage.

    Our focus should be on providing our services for a lower cost. Does anybody think it makes sense for us to increase the cost of housing when the price of labor is too high? If housing costs are high, will that help our competitiveness?

    rate federal home bank data 1971 to 12 2009

    Those new to this argument about the price of housing should consider that the government effort to artificially inflate prices includes radical intervention. Fannie Mae, Freddie Mac, and the FHA, all government banks, are the entire mortgage market today. Private investment in mortgages is gone. No sane banker is going to make a loan on an asset that has fallen 30% in value.

    The federal government is also literally giving money to buyers through a tax credit. And the federal government is buying a huge percentage of mortgages to artificially keep interest rates low (see above). And the federal government has issued an unlimited credit line to Fannie and Freddie so they can write as many mortgages as they want.

    unit sales NAR 1999 to 200911

    sales units

    If you don’t understand all of these names and programs, trust me when I say that nuclear bombs have been used on the housing market.

    Think about that for a minute, and look at the pathetic unit sales above. The government is dropping nuclear bombs on the mortgage market and nobody is dying. They can't move the product.

    What has been taking off are foreclosures. They are soaring. The general feeling is that foreclosures are terrible and should be stopped because of the distress they bring both to a family and a neighborhood. The more important truth, widely ignored, is that foreclosures promise to bring back cheap prices. We know from the first chart in this story that lower prices are natural.

    In our post-bubble world, foreclosures are the surest mechanism for creating affordable housing. Consumer advocates should now welcome this method of price correction. Those true to their mission will embrace a mass-foreclosure remedy.

    In a credit bubble, the smart economist makes the highest goal a true reckoning with phony debt. The common man now has a chance to play the smart economist.

    Let the house go back to the lenders. The bank will throw the mortgage in the garbage. Reality will return. Prices will fall – perhaps dramatically. Systemic mortgage debt in the United States will be reduced.

    Default is now a patriotic duty. It is a courageous intelligent act. Take the right steps so we can beat the Chinese. We need the jobs. We need to get back to work. We don’t need the phony debt issued to buy a bubble.

    The government has screwed up management of the financial crisis by granting debt assets special status. What the owners of debt assets deserve are losses. It’s time for the people to fix the financial crisis.


    Michael David White is a mortgage broker in Chicago.

    Disclosure: None

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