Will a tax cut fix this mess?

Bloomberg.com: Opinion: "Moving is never pleasant or cheap, but that is the main cost to the subprime defaulter: He hands back the house, whose value has presumably plummeted, to the people who lent the money to buy it, and walks away. He rents. (Shrewdly!) In effect he bought a very cheap call option on the U.S. housing market. While he waited to see if his call option made him richer, he lived in a much nicer house than he could otherwise afford and probably wondered why rich people had become so recklessly open- handed. "

Why is this the only time I have seen the media report this particular kernel of truth? Lewis goes on to say:

"A more convincing victim, I would have thought, is the person with weak credit
but strong resolve who stood to benefit from a subprime loan -- and who now
can't get one because the market is scared of his shadow. "

You can't contain this mess with a tiny little tax cut. And you aren't doing anybody any favors, anyway, because the truth is a lot of people just plain overpaid for their homes these past few years. I was tempted to do it, too - when life says "it's time to buy a house, buy a different house, sell a house", it's pretty hard to tell life "lump it - the market's bad right now". But that's exactly what a lot of responsible folks did.

Plenty more went ahead and bought houses that, in Sacramento, were probably overpriced by an average of $150k. The people who keep their houses will never come out ahead on that - even if the market eventually comes back to that price, they'll still be $150k behind their neighbors who bought AFTER the correction or BEFORE the bubble. And since most Americans seem to focus on monthly payment and completely ignore actual purchase price, let's put that in terms folks can understand - on a nice, sane, 30-year fixed mortgage at 6%, including property tax differential - that $150k equals about $1,000 a month, every month, for 30 years (or a total of $360k). I know - almost none of my neighbors paid as much for their homes (even the larger homes) than ours cost. The difference, though, is that our neighborhood priced out at $20-30k difference in purchase prices back in the 90's, while today's purchasers have much, much bigger losses in equity. $150k is a couple year's salary for many of them.

The mess has been made. Blame lies everywhere. The cleanup will be long, slow, and painful. People believed that their homes were "worth" whatever their neighbors' homes sold for during the bubble. Lots of existing homeowners spent that money through HELOCs and refis. But those prices were based, in part, on people who didn't care WHAT it cost, as long as they could afford the payment. And the payments were ridiculously low, because no one seems to have cared that the teaser rates would reset, and the banks let them get away with that, but no more. That cat's out of the bag, and nobody's going to get her back in there. Still other comps were based on cash-back deals. Some were outright fraud. Spend 15 minutes reading ocrenter's blog to get an idea of what I mean. So bubble peak prices in many, many areas were not real prices to begin with.

I was at an auction a few years ago, where some one-ounce gold coins were being sold. Gold traded at about $450 an ounce at the time. Some idiot bid $650 each for a lot of 10 gold coins. He overpaid by about $2,000 on ten ounces of gold. Today, gold trades at about $650 an ounce, so the guy broke even, except that 1) he would be up $2,000 if he'd just gone down the street and paid market price at a dealer, instead of trying to impress his friends at an auction, and 2) he had $6,500 tied up for two years before he broke even - at a bank, he would have made $462 in interest on $6,500. Of course, the key point is that gold was worth what it was worth, and having some idiot pay too much for it didn't change that fact. With housing, it takes the collusion of banks to enable a whole bunch of idiots to drive up housing prices, and the banks aren't playing that game anymore.

Here, kitty, kitty. I've got a nice bag for you, kitty. Be a nice kitty. Get back in the bag. Damnit, get back in the bag. Ouch! Bad kitty. Bad kitty! If you don't get back in the bag, the Fed is going to declaw you. I mean it this time.