October 30, 2007
A Contrarian View of the Housing Slump
John E. Tamny provides a look at the housing slowdown that I had not considered. At first glance, it makes a lot of sense to me. One of the market's most important functions (you could call it the most important) is to direct capital to its best use. Tamny suggests that real estate is not the best use of capital and that a downturn might direct it to more productive purposes:
For one, it has to be remembered that one man's mortgage loan is another man's savings. There's no net consumption gain to speak of given the certainty that someone has to be foregoing consumption so that the borrower can borrow. Also forgotten is that heavy consumption at the expense of savings diminishes the capital base such that productive businesses of all stripes go wanting in their search for investment, or are forced to pay a higher rate of interest while competing for funds with prodigal homeowners.If the owner of appreciated property sells the asset to a wiling buyer, the former is surely enriched by the sale, while the latter is that much poorer. Furthermore, as Adam Smith taught us, investments in property are "sinks of wealth" in that while a house may yield revenue to its owner, it cannot yield any to the public.
He also has a nice riff on tax policy: the liquid, and easily transportable investments lend themselves to competition in tax rates, whereas real estate is captive to its geography.
Superb.