I’m waiting for the day when I can write upbeat stuff about housing…  when I can buy homebuilder and mortgage stocks and crow about my gains.  I hope I live two more years. ;)  (Many thanks to Calculated Risk for their excellent coverage of residential housing.)

1) The first thing to note is that residential real estate values are still falling nationwide.  That affects Mortgage Equity Withdrawal [MEW] and derivatively, consumption.

2) Now, housing prices are likely to fall another 10-15%, which is what I have been saying for a while.  That will lead to more situations where there is negative equity, and more defaults, as they happen with negative equity and negative life events.

3) Foreclosures are making up a larger percentage of all sales, which is not a positive in the short run for prices.  In Sacramento, and some other places in California, foreclosures are the majority of sales.  As a result, it is no surprise that housing sales are at a lowForeclosures have risen rapidly across the country, not boding well for future sale prices.  Even in Florida, foreclosures are gumming up the market, and are getting reconciled slowly.

4) The GSEs are in a tough spot.  The government pushes them to make suboptimal loans that their shareholders don’t like.  I guess that’s a part of their deal.  As it is, the GSEs are playing a large role in many loans today.  Private capital doesn’t step up in an environment like this.

5) Labor mobility is limited when housing prices fall.  Pretty normal, if infrequent, in my opinion.  I faced this back in 1989; employers offered limited housing perks to new hires.  In three years, this will be gone.

6) Now, it should be no surprise for lending standards to tighten now.  We always shut the barn doors after the cows are in the fields.

7) Mortgage rates are rising, largely due to the reaction of the bond market to Fed chatter.

8 ) Prime ARMs will fuel the next wave of delinquencies.  If home values fall enough, any class of lending is vulnerable.

9) It should not surprise us that housing starts are low in an environment like this.  The bigger the boom, the bigger the bust.

10) I am not generally a Tom Brown fan.  He is too perma-bullish for my tastes.  He may have a correct technical point on subprime losses, but it may misrepresent losses for the financial sector as a whole.  Subprime is small.  Alt-A and Prime are much bigger, and losses are growing there.

I’m generally against debt.  I’ve been debt-free for the past five years.  It allows me to take prudent risks with my investments.  So, when I read things like this in The Economist’s Free Exchange Blog, I shake my head.  Here’s the main quotation:

My friends who study humanities are shocked and do not believe me when I, a pension economist, tell them they should not be saving. Prudent advice has become: You should always save some fraction of your income. You should save not only for retirement, but also for adverse income shocks. But, Mr Becker points out, these new lines of credit help workers cope with income shocks.

The pension economist is wrong, mainly.  So is Dr. Becker.  It is reasonable to take on debt to gain an education for a career that is lucrative; it is not reasonable for something that does not pay well.  Following your heart into a career is a good thing, but if the field doesn’t pay well, don’t saddle yourself with debt to get there.  I know too many young people with large debts in their 20s with no reasonable way to pay them off.  They may be in the field that they love, but they are miserable due to the debt.

It is also reasonable to take on debt for an asset that will appreciate over time at a rate greater than the financing rate on the debt.  Note that I did not say housing here, though that is normally the case.

I counsel all of my kids, and all of my friends to avoid debt where it does not pay, particularly for consumption.  Pay off your credit cards in full each month.  If you can’t do that, cut up your credit cards, and learn to make do without them.

The advantage in life always comes to the man who has surplus, who receives a discount for paying upfront, rather than over time.  You should live below your means, and build up a buffer against the future.  Theoreticians like Dr. Becker essentially say, “Don’t worry, they’ll loan you the money.”  Ridiculous.  First, if they do loan, it is at horrendous rates.  Second, during a credit crunch, all cheap sources of financing disappear for all but the most creditworthy borrowers.  Credit disappears when you need it most.

Saving at young ages sets the tone for the rest of life.  The lifecycle saving hypothesis (of Milton Friedman) is wrong, because most people don’t possess the discipline to switch between being a borrower to being a saver.  Many do it, but not the majority. I saved money when I was a grad student, though most of my colleagues did not.

My advice to you is to develop careful spending habits, particularly if you are young.  What you do now will affect your ability to save for the rest of your life.  Borrow for things that have large long-term payoffs.  Delay purchases for short-term gratification.