Matt Stoller is a fellow at the Roosevelt Institute
Last week, Warren Buffett made some news with his folksy, charming as always shareholder letter. Most people focused on his admission that he was wrong about the housing crisis. Buffett pointed to his year ago statement that “a housing recovery will probably begin within a year or so.” And he said, graciously, that this prediction “was dead wrong.” This is rhetorically notable, because it’s so rare that our masters of the universe ever admit error. But it is just more PR dressing up bad policies.
Buffett is a very important man, not just because of his immense wealth, but because he has the ear of policy-makers and the President. I once went through a pile of phone records of Treasury Secretaries Hank Paulson and Tim Geithner, and Buffett seemed to be on speed dial (he was contacted more than George Bush, for instance). Buffett’s advice to the President over the past few years has been that America built too many homes, and that the country is working through this excess supply naturally. Eventually, that will lead the economy to turn around (a thesis Joe Weisenthal has tracked for months now in the data). It’s actually not so different from Alan Greenspan’s somewhat-kidding-but-not-really advice to burn excess housing stock. So when Buffett talks, it makes sense to listen.
Here’s what he has to say about the housing sector today.
This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.
Buffett himself italicized depression. He wanted this picked up by all of us. But what I found most interesting is his cure for the housing market.
That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.
Essentially, he argues that household formation is artificially low, and that this will naturally be cured by hormones, as it has in the past. Only, the lack of family household formation is actually a new phenomenon.
Family households have been forming at an average rate of 651,000 per year since at least 1947 (when the first annual household data became available). During that whole period the only years showing “negative formation” are 2008, 2010, and 2011.
And what is behind this lack of household formation? There are possibly many reasons, but one sure driver is student debt. The average college graduate now carries $25k in student debt after graduation. It’s no surprise that young people aren’t buying homes, but are increasingly renting and doubling up with others.
According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier.
Student debt is just one facet of the punitive infrastructure we have set up towards debtors. Another facet of this infrastructure is that housing market itself is broken because creditor middlemen known as mortgage servicers are skimming from both homeowners and investors. These problems have created an atmosphere of deep uncertainty, and there is simply no private investment in the sector (the existing market of private MBS is likely overvalued, as deeply in the red as it is today). The housing market is at this point nearly entirely backed by government guarantees through the FHA and the GSEs, aside from the hundred plus billion in direct government infusions. One shock (like a war with Iran or something else on the radar) could tip it over once again.
You can be sure that Warren Buffett’s explanation, that all will be well soon, is the official line in Washington, DC. Republicans don’t want to talk about housing, period. And the administration has successfully purged all official dissent out of the Democratic Party infrastructure with its settlement. This won’t hold, because reality, like a fart in church, will eventually and successfully intrude on the party in DC.
How long they can keep this afloat isn’t clear. But there is a reason that hope, or in this case hormones, is the plan for housing. Here’s more of Buffett’s letter, justifying some of his large investments.
The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels. At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire.
Buffett helped cause the housing crisis through his massive ownership stake in Moody’s (he is the single largest shareholder), and he profited immensely from the government bailouts. His assertions that the financial crisis was an “economic Pearl Harbor” was a similarly self-serving explanation that diverted attention from a crisis resulting from events he helped shape to some sort of external causation. He is now profiting from legal and regulatory forbearance against entities he owns. If Wells or BofA were held accountable for their systemic abuse of the property rights system through foreclosure fraud, or if they were forced to reserve against second liens more accurately, it’s unlikely they would be good investments. On the other hand, if that were to happen, we could begin to fix our housing market.
There is no honesty among our political elites, and by that statement, I don’t mean that they are liars. There are liars everywhere, and truthtellers as well. Most of us are concurrently both. What I mean is that the culture of the political elite is one in which a genuine conversation about the actual problems we are facing as a society simply cannot be held with any integrity. Instead, we have to chalk up problems in a very busted housing market, and a generation saddled with indentured servitude disguised as a debt, as one of “hormones”.
It sounds cute that way, I guess. Eventually, we will see integrity in our discourse. It’s unavoidable. You can’t operate a society solely on intellectual dishonesty because eventually all your bridges fall down, even the ones the rich use. For a moment, from 2008-2009, there was real discourse about what to do. We’ll see a moment like that again. Only, the environment won’t be nearly as conducive to having a prosperous democratic society as it was in 2008. There will be a lot more poverty, starvation, violence, and authoritarianism when the next chance comes around. Catastrophic climate change, devastating supply chain disruptions, political upheaval, geopolitical tensions and/or war – one more more of these will be the handmaidens of honest dialogue.
The tragedy is not that our circumstances will worsen dramatically, but that it just didn’t have to be this way.
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