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.