At the peak of the housing boom in 2005, my pal Mitch asked me, "Does someone truly own a house when they put nothing down?"

His question gets at the core problem with the U.S. housing market: a disregard for the rule of law. Fundamental rules of real estate have been dismissed, such as requirements around good credit, full disclosure, transparency, a meaningful down payment, rational fees, common-sense loans and personal responsibility.

And at the extreme, consider the number of falsified loan applications in the last five years, sometimes making ordinary homeowners criminals and real estate professionals their enablers.

Short-term responses such as assigning blame, prosecuting the bad guys, shoring up Fannie Mae, and helping homeowners in foreclosure are necessary to stop the bleeding.

But to fix the housing market long term, bigger changes must be applied up and down the value chain, from individual accountability and enacting laws to tougher regulators who better police institutions and professionals. This is about bringing back trust in home ownership.

Outside of real estate, a classic case of the failed rule of law is urban lawlessness. If the mayor is known to be corrupt and the police are beating up its citizens, then it should not be a surprise that people double park without considering the consequences for others. There is no trust.

The same breakdown occurred when some financial institutions and Realtors encouraged borrowers to put nothing down and take out whacky mortgages because housing values "will always go up." Walking away from a mortgage because home prices are declining just continues this pattern of irresponsibility.

This behavior is part of a systemic problem in our culture in which entitlement, greed, overconsumption and blame drive economic habits. This was manifested in the housing market with monster homes, real estate flipping and homeowners tapping home equity as bank accounts.

In 1950 the average household size was 3.4 persons — today it is 2.59. In 1950, the average new house was less than 1,000 square feet and today it is more than 2,500 square feet.

When every child has a master-bedroom suite, does a little boy miss out on learning patience, waiting for his sister to get out of the bathroom?

Instant gratification is also a characteristic of these times.

In 2001, a junior employee of a company run by a friend of mine said he was leaving the firm because he expected to be a millionaire by then. The company was two years old.

Sensible aspirations turned into irrational expectations, a trend that started in the early 1960s when the United States began to prosper.

In the Emmy award-winning television series "Mad Men," advertising guru Don Draper is pitching an ad campaign and says "less is more" no longer applies. The show depicts the advertising industry in 1960.

Indeed, frugality became known as cheap, savings became prudish, and indebtedness was the ticket to happiness — a state of mind driven by careless consumption.

What economic wisdom could there be in using home equity as a bankroll to purchase depreciating assets such as home theaters, oversized grills, RVs and other things that lose value the day you walk them out of the store.

Conversely, tapping home equity for education, home improvements or starting a business represent wise economic choices as people leverage home equity into greater, not lesser, value.

Historian Correlli Barnett in his book "The Collapse of the British Empire" describes how the British moved away from being a reason-based society. Lack of reason characterizes the recent U.S. housing boom.

Fixing the housing market does not require anything fancy, but instead returning to fundamentals such as teaching people how to maintain good credit instead of showing them how to get a loan with bad credit.

Leadership is also important. President Bush should not implore the public to spend their tax rebates; instead he should encourage them to put it in savings accounts or to pay off high-interest credit-card debt.

A story in yesterday’s Parade magazine has the right idea — the headline reads: "How America’s Thriftiest Families Save Money (and still have fun)!"

Large down payments and therefore higher savings rates are a prerequisite for a housing market recovery. And more rigorous laws are necessary on the disclosure front, regulatory licensing and transaction fees.

But other steps should be taken. For example, lawmakers should consider requiring Realtors and mortgage brokers to be regulated like stockbrokers. A stockbroker has an obligation to disclose the various risks and level of risk of an investment recommendation.

Transparency is the solution. In an industry in which secrets still abound, market recovery depends on a new openness about loan terms, transaction fees, borrower qualifications and the risks associated with buying and borrowing.

Until steps like these are taken and the underlying asset is treated with more respect, liquidity will be slow to return to the housing market.

Seven years ago when the tech sector collapsed, venture capitalists stopped investing in consumer-driven Internet companies. With Google’s success, that changed. But the powerful search-engine company also set a new standard: Companies should have a clear business model, revenue and profits.

Restoration of the housing market will take years as well.

Quick political financial solutions will not fix the problem. Old-fashioned values about home ownership are required. It cannot be treated like a short-term asset, because it is not. Home ownership is an achievement that takes work, earnestness, savings and responsibility. And consumers should work only with responsible institutions and professionals who treat home ownership as something sacred that deserves protecting.

Brad Inman is founder and publisher of Inman News.


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