The Two Housing Crises 33 comments
Kevin S. Price
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With the whole world watching, the U.S. housing market continues to weaken. Official Washington's insistence that the bottom was in sight many months ago seemed like Wonderland nonsense even then. Today it's simply laughable. Inevitably, the financial wreckage has been extensive: consumer spending, Wall Street's too-clever innovations, household and corporate balance sheets, employment... all have taken major hits. And the bludgeoning isn't over.
That's our acute housing crisis: The rapid, ongoing decline is residential real estate prices. But there's another, more chronic crisis out there: Our excessive allocation of resources to residential real estate in the first place. Partly a function of public policy (i.e., the home mortgage interest deduction, local governments' dependence on development fees, local officials' dependence on developers' campaign contributions) and partly (more importantly?) a function of our acquisitive culture, we've devoted far too much of our national wealth to our personal castles.
The consequences of this imbalance have been substantial. The arms race in residential real estate -- Bigger! Newer! Fancier! -- has driven prices beyond the reach of rank-and-file workers. In certain parts of the country, housing (even rental property in some cases) has become genuinely unaffordable. But people need places to live, of course, so they stretch their ex-housing budgets with leverage against their homes and, for renters and "owners" alike, the excessive use of credit card debt.
Taking a broader macro view, housing simply isn't a productive resource. In fact, it's a dead end and often (especially in the cases of far-flung exurbs) a terrible drain on public finances, to say nothing of the environmental costs of leapfrog development. Unlike investment in education, capital stock, research and development, and various kinds of commerce-related infrastructure, housing is pretty much a black hole in terms of long-term productivity growth.
And notwithstanding the realtors' absurd claims of long-term appreciation rates, housing, in most places at most times, isn't a compelling personal investment either. At times, no doubt, homeowners can and will earn a decent return on their residential assets. But most estimates wildly underestimate the true costs of ownership, and thus overestimate the financial returns to such ownership.
We understand the significant toll the recent downturn in residential real estate has taken on many millions of people here in the U.S. and around the world. But even as we try to muddle our way through the financial aftermath of yet another bursting bubble, it would be smart--no, it would be more than smart; it would be wise--to think about the true costs and benefits of our dysfunctional relationship to our real estate.
This episode calls out for wise leadership, for a kind of societal intervention. But who's willing and able to sit us down on the couch and help us think more clearly about our chronic housing crisis? Who's capable of shaking us out of our co-dependent relationship with our homes? Unfortunately, the narrow interests threatened by a rationalized real estate market are unlikely to stand idly by while we recalibrate. And, in a classic collective action problem, the broad interests that would be served by such a rationalization are too inchoate to effect real change.
In the absence of wise leadership on this issue, our process of muddling through will be more muddled than it needs to be.
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This article has 33 comments:
It is the banking system which is the root cause of this current and future economic crises. UNNECESSARY government and private debts feed off of each other and inevitably suffocate and hinder growth.
A typical 1500 sq ft house truly only costs about $70,000 to build, but pile on all the accumulative debts and 30 years later that house has cost $1.5 million. Peasantry perpetuated. The bank you just took a loan from is your Lord.
The people I admire the most are the ones who didn't leverage their residences to sustain a lifestyle, but who elected to live within their means. I work with several of them, and one gentleman has a paid off house in his mid-forties. He also has significant sums invested for his retirement, and plans to stop working in 10 years. When he does, he'll be comfortable, as will his family.
Not by a longshot, friend. Try the calculator at www.building-cost.net/ and see if you can get anything that size built in any part of the country with finished walls and a heating system.
And it's always amusing to read people rant about "their" dollar. The currency is a creation of the government and has no value without government policy. Jefferson had it right above that no form of currency exists in a vacuum; in his era when currency was issued by private banks, private banks could manipulate it's value by their policy. And read Marxes' "Communist Manifesto" at least once in your life if you want it clarified what the "value" of money is...
It is quite sad that normal people with normal jobs are priced out of many large city areas - the irony in all these proposals by DC is that in their quest to prop up housing prices - they are stopping what would help a lot more people in the long run. A much lower price that would allow normal people with normal jobs to buy normal homes at 30-35% of income rather than 45-55% like many people have been doing... and is what is now being delevered. But when you work in an ivory tower with 6 figure salaries, and federal perks you don't really realize what the normal people are struggling through - so you try to stop the short term pain of lower home prices... typical response by govt. Sacrifice long term for short term.
Think about it.
Where can you buy a residential home and immediately turn around and rent it out for more money than it costs?
You can't.
"It's always cheaper to rent".
During Clinton's first term a law was passed that allows up to $500K of real estate capital gains to be pocketed tax free if it is a primary residence. The "primary residence" qualification requires that you live in it for two years. And you can repeat the cap gains process over and over.
Here in California, many families have been moving every two years, after remodeling or building houses. It was only recently that I discovered that many of these folks have probably pocketed roughly $2M tax free over those years. More power to them! But does this make any sense as tax policy??
Based on his recent interview, a President Obama will likely have a 25% tax on cap gains (excluding primary residences, of course). Why would the rational investor waste time in stocks? Get ready for a rapid reflation of the real estate bubble.
There are a few good points, but disappointing in the myopic view and that no solution is offered; except to be homeless.
The best point is the criticism of consumerism and what is missing is a discussion on the politics of entitlements.
I remember the furor in Oregon ten years ago when Californians moved up and Oregon home owners gouged them for as much as they could bear and then everyone blamed the Californians for driving up the prices - GREED.
However, in my opinion in this case, the greatest balme is on the GREED of the mortgage/lending institutions; knowingly lending to people they KNEW wouldn't be able to make the payments two years down the road. The "low interest rates" is not the culpret as much as it is the removal of the lower rates, after two years, when wages didn't go up with the mortgage. Don't blame taxes and tax policies, BLAME the legislators who stack the deck in their favor and the people who contribute to them; and the blame lies with ALL political parties. Both the Republican and Democratic parties are corrupt in their fiscal policy making.
From the other comments you can almost tell who owns a home and who can't afford to own the home they wanted. IMO, it's a matter of priority not affordability.
I think a good point to start is to ask yourself; if I buy this house to rent it, would I have a brake even in cash flow? If not, it may be too expensive.
Gawd I love renting! The freedom is of incalculable value. Oh, and I pay $1,600 for a home that zillow lists at $525k. :)
Popcorn futures are big right now!
Now, for the rest of us, let's enjoy our freedom and the power of free market!
You hit the nail on the head..too much public policy pushing resources towards consumerism. Glad to see many readers grasp that.
The good thing that may come out of the on-going De-Leveraging is the market’s battle for equilibrium, i.e. new valuations of assets. Median home prices need to sink much further relative to median American incomes, and so far no one has figured out how to stop this sinking…though Homer at the WSJ is pushing for mass-bulldozing of excess housing inventory to rapidly speed-up the market’s search for a housing bottom.
The good thing about collapsing home prices is that it uses the market (not government) to distribute the pain (loss of paper wealth)…so everyone from Donald Trump to the Bush family to Wall Street Hedge Fund managers to the guy & gal on Main Street will potentially share in the collective loss of wealth…if given enough time. Hence, Homer’s call for a bull-dozing.
It’s an ugly process, no doubt.
The bad news is that all of the public policy and tax incentives remain in play to repeat trumpeting consumerism and center it around housing whenever a recovery starts. Those policies and incentives need to be changed.
Still, let’s face it..consumerism has huge psycho-social underpinnings. Ever hear a 3-yr-old head-starter scream, “It’s Mine !!!”. All the time.
I see no programs to derail the re-metastasizing of this mind-set once the economy starts rebounding. Besides the fact that ‘acquisitiveness’ may be basic human trait, modern America genuinely fears economic systems not built upon individual acquisitiveness; US foreign policy has been to undermine non-capitalist systems wherever found.
Our best bet may lie in a perfect storm of opportunity posed by the intersection of the sustainable building and living movement, and a long “L”-shaped recession. The latter may provide the timeframe needed for the former to gain a stronger foothold in America.
The article is revealing but how to fight the establishment. The 1968 movement was only capable to create a sexual revolution to the rejoice of the victorious establishment.
Good luck to those that try...