Saturday, March 24, 2012

The Housing Bubble vs. The Higher Ed Bubble

There are many parallels between the US housing bubble of the 2000s and the US higher education bubble. Let's look at them.

(1) False premise in housing: higher home ownership is a good thing. False premise in education: more people going to college is a good thing. It is not. Too many people go to college. So many, in fact, that there are 17 million college graduates in jobs that do not require college degrees, as of 2010.

(2) False premise in housing: a home is an investment; home values never go down nationally. False premise in education: a degree is an investment that will make you more valuable with higher earnings over a lifetime and lower unemployment rates. This is cannot be statistically proven as there is NO control group (people admitted but not enrolled, with the same test scores as college graduates).

(3) Special class of credit involved in housing:
mortgages are typically non-recourse, government-guaranteed (for the ultimate holder of FNM/FRE paper), non-market based product (30-year, fixed-rate is not a "free market" product). Special class of credit involved in education: student loans are also non-free market products, many given directly by the Dept of Education, covered by the taxpayer, with income-based repayment, artificially low rates, and inability to discharge in a normal bankruptcy

(4) No skin in the game for the originators in housing: the "originate to sell" model of the subprime mortgage brokers meant that they had no risk once the loan was sold regardless of what happened to it. No skin in the game for the originators in education: no university president, no admissions or financial aid officer, nor an Ed Dept bureaucrat will lose a dime if the loans do not perform.

(5) Low underwriting standards in housing: because of the collateral and "long" history of rising RE prices, some people felt that the usual precautions (downpayment, income and credit history) could be relaxed. Low underwriting standards in education: no one is turned down for a student loan, and there is no change in terms for different schools, majors or test scores. One widely-publicized disturbing article describes how for-profit colleges enroll homeless and otherwise vulnerable people to get the grant and loan money.

(6) Extensive subsidies in housing:
not just mortgage interest deductability, think 2nd level: road space demands by single-family housing; utility work (length of pipes and wires required). Extensive subsidies in education: at the individual level, you can start with grants, deductions of various expenses, and loan forbearance. At the institutional level, you have tax-exempt status both for operating budgets and endowments, aggressive/abusive use of eminent domain by private and public institutions, federal and state grants, and many other forms of aid.

(7) Credit product hides the true cost in housing: teaser rates, option ARMs, etc. "innovations" brought low introductory payments. Credit product hides the true cost in education: both via subsidized rates and no repayments until after graduation.

(8) Disconnect between price and productivity in housing:
the price-to-rent ratio almost doubled vs. the normal levels during the bubble. Disconnect between price and productivity in education: student loan balances just hit $1 trillion. Think about it, if education- in its current form- was such a value-added activity, would you be seeing such drastic indebtedness?

(9) Homeownership expansion was a mission: the emblematic Angelo Mozilo, founder/CEO of Countrywide, said in a 2007 Business Week interview "let me just tell you that Countrywide for 40 years has been on a mission to lower the barriers of entry for the American people to have the opportunity of home ownership." Education expansion is a mission: look no further than professional educrat Obama who proclaimed that "It’s time to make education America’s national mission” and that the "country is not producing enough people with college degrees." With friends like these...

The tide is already turning at the margins (as it did with housing): law schools. Law school graduates have caught on that they were taken for a ride, quite possibly with fraudulent promises, so twelve TTTs ("third tier toilets") are getting hit with class action lawsuits. Good luck to the plaintiffs.

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