Great Advice, But Also Maybe Bad Advice – Politics of Free Money

I’ve been seeing this all over Facebook from well-meaning, responsible REALTORS. It’s possible that people other than REALTORS are posting these things, but so far, I’ve only seen it from REALTORS… because that’s kind of who my sphere on Facebook is.

They are posting advice to people, telling them to do the smart thing:

So here’s what’s up:

  1. To Tenants: If the government says you don’t have to pay your rent and there’s a ban on evictions, you better do whatever you can to pay your rent. There will be major repercussions when evictions bans are lifted. Don’t think you’ll get a free ride out of this. PAY YOUR RENT! Your landlord has bills to pay too.
  2. To Homeowners: If the government tells banks to stop mortgage payments, DO WHATEVER YOU CAN TO PAY YOUR MORTGAGE!. Some lenders are saying you don’t have to pay for 3 months but on the 4th month, all four payments are due in full. Do not take a chance and not pay. Major foreclosures will come from all this. The banks didn’t help homeowners in 2008-09 and in 2020, it’s still the same. Pay your mortgage.
  3. If the utility company suspends payments, you.better. PAY. ANY. AMOUNT. YOU . CAN! They are like banks, they will want their money eventually and when all this clears up, you’ll owe an exuberant bill and still won’t have any utilities. Pay whatever you can.
  4. If you get a government stimulus check, this check is to help pay your bills. That means you pay your rent, your mortgage, your utilities, your insurance, your car payment, y.o.u.r. b.i.l.l.s. This is not for frivolous spending.
  5. The real problem is, many who will get the stimulus check….you won’t pay your bills then be crying and wailing saying “They evicted me. They cut off my power, they repossessed my car….” All while you’re broke and carrying that empty purse you bought with your stimulus check.

This is, of course, good advice. Government is spending $2 trillion to try and prop up our dying economy. The idea is to help people pay for essentials: food, housing, utilities, car payments, etc. until we all can get back to work at some point.

It’s also the responsible thing to do. Moral thing to do, even.

It might also be a dumb thing to do, if the politics of 2020 and beyond go the way I think it will.

It’s worth thinking about and talking about since REALTORS are heavily involved in politics.

The Old Rules

Before February 2020, every single piece of advice above would have been solid gold.

You owe rent? Pay it. You have a mortgage? Pay it. You’ve got bills to pay? Pay them.

Work hard, do the right thing, take care of your bills, and keep your promises. Those are the values on which America was built.

But then again, in the entirety of our nation’s 243 year history did we ever shut down the national economy. The closest we’ve come might be the Civil War and nobody shut that down voluntarily; it just got shut down because we were shooting at each other. That we had to shut it down in order to fight a pandemic is irrelevant to the analysis. We still did it. And COVID-19 has killed not just people, but numerous social and cultural norms.

For example, remember when we cared about things like privacy? We used to be freaked out that the NSA was collecting cellphone data on millions of Americans. Edward Snowden became a celebrity because of that scandal back in 2013. After coronavirus?

I’m sure you’ve seen this map of how irresponsible moron college kids who went to party for Spring Break in Florida spread COVID-19. Yes, they’re idiots and irresponsible. Like college kids can be. But it is kind of amazing how only a few privacy nerds are raising an eyebrow about it. I’ve seen that map and the video it comes from being shared all over social media.

Or the “shelter-in-place” orders. There was a time when most Americans would have considered these orders the equivalent of house arrest and have bristled. Not anymore. Not after coronavirus.

I’m not mentioning those things to suggest that those were wrong policies or wrong decisions. I am mentioning them to point out that old social and cultural norms have been thrown out the window.

The Politics of Stimulus

If you have been paying attention, you should have recognized that before COVID-19, politics of the West were starting to trend against the rich, particularly those who got rich through real estate.

In what seems like another world, another era, which is to say March 6th, I wrote a post about the shape of housing politics to come. In it, I wrote:

If you were the average Millennial in any large North American city (which is where most of the jobs are), would Farha’s message about private equity funds and Black Rock making enormous profits on housing resonate with you? I know it would with me, and I understand economics. It might still be, “Screw them! I can’t find a place to live.”

Since Millennials are the future consumer, it also means that they are the future voter. How do you imagine they’ll be voting in the years to come when the issue of housing, housing regulation, or for that matter, defining housing as a human right and taking “The Shift” as Farha advocates, comes to the forefront? Especially when the intelligentsia in universities, the media, policy think tanks, and governments all agree that housing is a human right, and not a way to make money?

In March of 2020 B.C. (Before Coronavirus), You might have read this story in the New York Times excoriating the “Wall Street landlords.” In it, we find this entirely neutral (ha!) paragraph:

Landlords can be rapacious creatures, but this new breed of private-equity landlord has proved itself to be particularly so, many experts say. That’s partly because of the imperative for growth: Private-equity firms chase double-digit returns within 10 years. To get that, they need credit: The more borrowed, the higher the returns.

Now, in these new plague years, we have $2 trillion giveaways. We have new government rules that prohibit evictions, pressure banks to allow mortgage deferments, and the like.

Progressives are already up in arms about the CARES Act. Here’s Common Dreams for example:

The legislation has been denounced by progressives as a cash giveaway to corporations and the rich. It contains a $500 billion slush fund for large corporations to be overseen by Treasury Secretary Steve Mnuchin including bailouts for the airline and other industries.

Keep that in mind… as we travel back in time to ancient history: 2008.

Remember The Bailouts of 2008?

When the housing bubble collapsed, it threatened to drag down the global financial system. The Federal government bailed out the big banks. If you’re a younger person and don’t remember those bad years, but you remain interested… you could do worse than starting here.

Not only that, the government bailed out people who didn’t pay their mortgages. Whatever the reason why they didn’t pay their mortgages, there were programs for debt restructuring, preventing evictions, and rehabilitating people who had been foreclosed on.

At the time, first a trickle of people and then a stream of them, would start doing strategic defaults: they would just stop paying the mortgage, even if they could afford to, because their houses were underwater. They would dare the bank to come foreclose, knowing that they could stay in their homes cost-free (except for utilities), until the bank did something about it. Most of us were outraged. Paying one’s debts is fundamental to the American character.

In a 2010 article, City Journal talked about strategic defaults:

What does prevent people from strategic default, it seems, is their sense of what’s right. More than 80 percent of Americans think that it’s immoral to default on a mortgage if you can afford to pay it, according to a recent paper by Luigi Guiso, Paola Sapienza, and myself, and these people are 77 percent less likely to declare their intention to default strategically than people who don’t find the act immoral.

And then… the government bailed them out too. It pressured the banks to drop the loan balance, to forgive big chunks of the mortgage, and not to punish people who walked away from their underwater houses for too long. Those of us who lived through those years remember story after story about some buyer who had been foreclosed upon in 2009, but was buying a house in 2012, because some bank somewhere approved the mortgage as the buyer had great credit history other than the foreclosure, good income, and a very large down payment. Which is much easier to do if you can go two years without paying for housing, by the way.

Combine the two, and I truly believe that the stigma of foreclosure and the moral sanction against strategic default are now history. Watching the government bail out big banks and then not penalize people who simply walked away from their mortgages would make anybody wonder why he should be a fool.

Pull the Strands Together

So here we are in 2020 A.C. (After Coronavirus). So many of our social, cultural and even moral norms are so much history. We have an unprecedented crisis on our hands, and as a result, we have unprecedented government action — like just sending a check and offering forgivable loans (i.e., a gift).

Tens if not hundreds of millions of Americans are going to receive that check and immediately spend it on a new widescreen TV. Or the latest video game console. Or a new handbag, as the example above says.

Should they have paid their rent instead? Of course. Should they keep up with mortgage payments? Of course.

But let’s think about this….

When this crisis is finally over, and things return to normal, and landlords demand four months of rent at once from tenants who don’t have the money, but do have a nice new dining room set, what do you really think the politicians are going to do?

Side with Wall Street landlords against millions of voters?

The advice above literally says, “Your landlord has bills to pay too.” That’s true, of course, and we in the real estate industry know that the landlord might be an old lady living off the rental income in her golden years. Most renters do not know that. They just know they’re sending checks to some property management company, and they see stories like the New York Times doing everything but calling corporate landlords the scum of the earth. Some Senator is going to vote against a bill prohibiting landlords from “screwing over” their poor, low-income tenants in order to protect Black Rock and Donald Sterling? Really?

If you can think of a less attractive group of people politically than landlords, I’d like to hear who that might be. Maybe big cat private zoo operators and pedophiles, but….

“Pay your mortgage!” is excellent advice, and one that people should follow. But again, after 2008 and the bank bailouts and the hundreds of billions being made available to big corporations and banks, do you really think the politicians are going to side with them against tens of millions of low-income, working class American families?

Major foreclosures are going to come from this? Are we sure about that? Are we so certain that Congresscritters will vote to impoverish their own voters to make sure that mortgage bond holders make their coupon rate? Really? After 2008?

While it may be true that those who spend their stimulus checks frivolously might find themselves evicted, with no power, which makes their big screen Ultra-4K television useless, how likely do you really think it is that the government won’t step in again to make sure such things don’t happen? Just what in the government’s response to COVID-19 gives you such faith that the government will one day enforce basic personal financial responsibility ?

As for me, I’m an old guy now. I can’t help but live by the old rules, the B.C. rules. Most of you are also old folks, since the average age of a REALTOR is 56 or so, and “youth” in real estate means Gen-Xers in their 40s. So we’ll do the responsible thing, and tut-tut about those people going out and acting like the stimulus check is a gift from Santa Claus.

But that doesn’t mean I can’t make out what the new rules are and see what’s coming down the pike. My vision ain’t what it used to be when I wore a younger man’s clothes, but that don’t mean I’m blind.

Don’t be surprised if the excellent, reasonable advice under the old rules turns out to be terrible advice under the new rules.

-rsh

 

 

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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