Doug Poretz

The Housing Blame Game, Redux

Fascinating article, and comments by Prudentinvestor and Lok Sang Ho. However, I think this discussion misses another major point: in addition to the financial instruments and policies that certainly exerted major influence on the housing bubble, they existed within the context of a cultural phenomenon.

From 1986-1990, I was VP at NVR, working closely with co-founder and then Chairman/CEO Dwight Schar -- a brilliant businessperson who also happens to be a very close friend of George W. Bush, and for years one of the major fund raisers for the Republican party. In addition to working with him, I attended and made the company presentations to financial analysts (at the time NVR was the nation's largest homebuilder), so I got to see all the other builders make their presentations over a period of a boom and into the real estate crash of the early 1990s. It occured to me then that there was a fundamental change happening:

The fundamental rule of real estate had always been: location location location. In the mid-80s, that rule changed (at least for a while) to: product producty product. Location wasn't irrelevant, but take a look at the advertising and marketing of the new home builders. They stressed bigness, open space, tubs so big that the water got cold by the time the tub was filled, extensive upgrades, customizing etc. At the same time, the market began to be segmented so that there was no longer just a "move-up" market but there was a "first time move-up," a "second move-up," and then the McMansion market. Product became king. So what if the house was located in the far suburbs requiring an awful commute? Look what you could live in once you got home!

Whereas the real estate crash of the early and mid-1990s did pop that bubble, the culture that gave rise to that boom only went to sleep -- it was resurrected with incredible vigor in the late 90s and into the first few years of the 00's. The marketing that was use to turn-on the market could not have succeeded unless the market itself was susceptible to that pitch. And that is my point: the market itself (our culture) also must assume a major burden. The house became the most important evidence of wealth and evidence of wealth became a priority to Americans -- even if you didn't actually have wealth, you could still look like you had it. Remember the TV commercial that showed the guy with all the props of wealth who admitted that he was "in debt up to my eyeballs"? Yes. The appearance of wealth not only became more important than actual wealth, it became so important that debt would be assumed that actually undermined the reality of wealth for the sake of giving the appearance of wealth.

That, I believe, was a cultural phenomenon. Certainly it was helped by financial instruments and government policies. However, it was fueled by the culture and priorities that dominated our society and nation at the time. To take that out of the equation would be a major mistake because if we do not sensitive to it, we will not observe the changes in culture that will arise as fundamental values are reshifted to work in the current economic and political environment. And I think those cultural changes will exert at least as much influence as any new mortgage instruments that may be appear on the scene.