Friday, March 7, 2014

Housing America and Michael Milken

At the request of associates of Mr. Milken minor corrections have been made to this post and inaccuracies fixed.

I have had, for more than twenty years, a very uncomfortable understanding of Michael Milken. After his conviction for violations of U.S. securities laws, a plea bargain, and his release from prison he returned to again champion and support those advancements necessary to increase survival from cancers (he is a prostate cancer survivor), and other serious diseases. Through his Milken Family Foundation his great work has helped to advance cures to many of the diseases.  (Wikipedia BIO Here) 

But I'm not here to praise Cesare or, for that matter bury him, I'm here to discuss one of the more interesting essays on the current American housing model that Milken posted this week in the Wall Street Journal. For the most part spot on.

According to the essay,  even with aggressive federal housing programs, the poor and middle class have not been helped but hurt, and the median net worth of Americans has dropped and is among the lowest among developed nations. The control (through mortgage lending) of the housing market has shifted from neighborhood banks and savings and loans to the federal government by the lending practices of Fannie Mae and Freddie Mac, who since 2008, have been involved in more than 95% of all new mortgages. Our illustrious congress has tried every trick to increase home ownership yet the national percentage of homeowners has not budged from 65%.

He points to what subsidized mortgages did do and none of them good:

1. The largest housing bubble in American history.
2. Misguided economic priorities.
3. Damage to the environment and public health.

I tend to agree with Milken that the programs and policies that led to easy credit, speculation, and poor lending practices eventually contributed (for some catastrophically) to the housing bubble of the mid-2000s. None of these were sustainable and proved that even smart people do very stupid things. I can quibble with his comparisons to the lifestyles of other regions of the world to American lifestyles, but it is critical that we rebalance the priorities of education, housing, transportation and medical costs.

I also have to agree that, as he points out in #2, we have become a nation that wants the easy way out. Make a housing mistake - like taking on too much debt, all is forgiven (the feds will cover it). Need money - take an equity loan, and when the bank fails for massive non-payments, the feds will cover it. Go bankrupt – no worries or embarrassment – wasn't your fault; you really needed that car, boat, RV, second home, etc.

What I do object to is his lazy social critique of the physical American home and its part in this problem. Homes did grow in size, my father's first new home in 1955 was about 850 square feet for a family of four. He was thrilled. Today he lives in a townhome in Florida that's maybe 1625 square feet for two people. Milken's implication is that this is just wrong, and that there is some socially set square foot of home per person ratio that is morally and economically correct.

Larger houses need larger lots that are usually farther from the home owner's job. Construction, heating, cooling, landscaping and extended commutes consume more natural resources. Because breadwinners spend more time in cars, they have less time for their families.

On the face of it this rant is childish logic. Crass assumptions are made about the housing-job relationship, the rapacious economic impacts of construction, heating, cooling and landscaping of the structures – all take, no give. Give, like the manufacturing of the products, the labor to build the house, the production of fuel for its heating and cooling, the retail and commercial support for these "consumers" of natural resources. And to throw in the old canard that long commutes are the end of the civilized world – please, we live in a world of individual choices, move on. I wish I had Mr. Milken's driver to help me commute from my Connecticut mansion to my high-rise office in Manhattan every day, I would have been so much more American. But I'll put that rant aside for now.

What Mr. Milken does do very well is throw on the table the real problem: federal meddling in loans, distortions in the banking system, and supporting bad behavior by the American borrower. And to make a serious point about the spread of housing (suburbia): Housing development and construction is the least of the economic worries he should be concerned about – it is the lack of it that is the problem. He also notes that efforts must be undertaken to reduce the federal government's role in direct capital investment. Greater and greater control and involvement must be returned to the private sector and the use of private capital. The world is currently floating in liquidity (his stated belief) and that this capital can best be used for more that commercial real estate, it has to go into residential real estate as well. One note though, now that the economy has turned, the two federal agencies (Fred and Fannie) are making significant profits on their control of the loan market – and I mean SIGNIFICANT profits, and there is a congress just rubbing its collective hands together waiting to get to it.

But and lastly, I still don’t see the connections of his last remark to his housing arguments:
Investments in quality education and improved health will do more to accelerate economic growth than excessive housing incentives. That will give everyone a better chance to achieve the real American dream.

There is also a video connected to the story, after which you may wonder where Michael Milken now lives and who gave him this podium.

Stay Tuned . . . . . . .

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