Homes Still Cost Too Much
You would think with home prices still dropping like hailstones in most areas, that homes would be bargains.
The present buyer's market obscures a key fact about the housing crisis though: millions sought the refuge of cheap credit, subprime and adjustable loans during the boom because they were the easiest routes to homeownership in a time when house prices far outpaced income growth.
The sad fact is that the Great American Dream is still out of reach for far too many and it was the declining affordability of decent houses that was one of the triggers of the housing bust.
It's not that home prices haven't plummeted as banks unload foreclosed homes at fire-sale prices. The national median home price fell to $169,000 in the first quarter, according to the National Association of Realtors. Bank-owned properties are selling at 20 percent to 50 percent discounts.
"Contrary to popular belief," says Jeffrey Lubell, executive director of the Center for Housing Policy, "the recent decline in home prices has not resolved the nation's housing affordability problem."
Homes cost too much even before the bubble, so home buyers were willing to do anything to get into the domicile of their dreams. After all, homeownership is an American birthright, or at least that promise was sold to Americans starting in 1946. "Buy as much house as you can afford!" That's what the bankers and real estate agents were telling us for generations because of generous tax breaks and easy, often government-guaranteed financing.
Unfortunately the cost of land, homebuilding, taxes and homeownership far exceed what millions of households are able to cover with nearly stagnant personal income growth in this century. Inflation simply ate away at wages that just weren't enough to pay ever-rising bills for property taxes, maintenance, health care, education and energy.
Even at the height of the boom, Harvard researchers at their Joint Center for Housing Studies found that almost 18 million households were paying more than half of their incomes for housing (about one-third is considered reasonable). They were also hit hard by rising energy costs, which rose twice as fast as total spending from 2004-2006.
That wasn't always the best advice. The Harvard group last year found that "nowhere in America does a full-time minimum wage job cover the cost of a modest two-bedroom rental at 30 percent of income." Those stranded in the low-wage service economy, left behind by the technological revolution of the 1990s, could barely afford to rent a decent place in most cities, much less buy.
Those families who are paying more than half of their budget for housing have little to nothing left over for healthcare, food, clothing and education. That hurts more than 14 million children living in low-income households, whose families had less than $600 per month on average for other essential expenses.
So was anyone surprised when brokers and subprime lenders targeted minority and low-to middle-income neighborhoods then walked away when they sold trillions of these mortgages to Wall Street and the largest banks? They were selling the American Dream!
From sparkling new suburbs in the Sun Belt to inner cities, cheap money and neutron-bomb adjustable loans meant nobody had to be house poor -- at least for a year or two. Then the explosion hit and we're still feeling the aftershocks.
Further exacerbating the affordability crisis was the tendency for municipalities to favor upscale, sprawling home developments over middle- and low-income housing. Since home values are directly fueling property tax income in most places, nearly every community can get more money for schools and public services. When you base property tax revenue on home valuations, bigger price tags translate into better-equipped schools, fire stations and libraries.
Yet building McMansion subdivisions only inflated the housing bubble and reduced the stock of affordable homes. From 2002-2005, home prices soared 45 percent in areas restricted to upscale building, versus 24 percent in unrestricted areas. Moreover, by creating these "spurbs," sprawling urban areas unconnected to transportation and city centers except by endless highways, homeowners' costs rose to catch up with needed infrastructure, schools and other public services.
The housing crisis has given us a rare opportunity to re-evaluate and re-invent the American Dream. As I note in my new book The Cul-de-Sac Syndrome, if we're to increase the homeownership rate, government will have to create incentives to build more affordable housing.
We'll also have to find a way to de-link property taxes from funding local services to reduce the number of overpriced homes in a handful of areas. Perhaps even eliminating tax breaks for mortgage interest would keep prices at realistic levels because you wouldn't be subsidizing ever-larger mortgages.
Ultimately, though, the American home and community will have to be re-invented. Houses will need to be ultra-energy efficient to reduce long-term ownership costs and even produce their own energy. This can be done with factory-built, green homes.
Then we'll have to build -- or re-build -- high density, walkable communities that are close to jobs and retail outlets. This is already happening throughout the U.S., although building and zoning codes need to change to allow this to happen on a large scale. Even more federal incentives are needed for green building.
We've just experienced a great teaching moment in history. The American Dream as we know it was not sustainable. Now we have the chance to make it affordable, ecologically sound and socially beneficial. It's a rare opportunity.
©2009 John F. Wasik, author of Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream
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I'm on board with Mr. Wasik. I'd like to ask how we take the opportunity for change and this teaching moment in history and change the culture of spending in this country. It seems that when we reduce the expense in one area, most people simply spend their surplus in another area. Will "Green" construction and communities as well as increased government considerations for these communities be enough to change over consumerism? Will this change our awareness for purchasing environmentally irresponsible products? We must also change the culture of spending. Perhaps it begins with the American Dream.
I'm on board with Mr. Wasik's ideas. I want to ask how we take the opportunity to change this cycle and utilize this teaching opportunity to change the culture of irresponsible spending. As consumers, when we reduce an area of expense we seem to simply spend it some place else. I would like to think that "Green" construction and communities will also foster behaviors that moderate over consumerism, educate consumers to purchase environmentally sound products and increase participation in the protection of our land. The culture of spending must also change, not simply the irresponsible behavior of the bankers.
You are right on about eliminating the mortgage interest deduction.
How come we are subsidizing the housing expenses for the very rich with these lucrative tax breaks?
these tax breaks also encourage people to own more house than they need.
Is it good for society to encourage people to live larger than they need to?
Americans live in McMansions and drive huge SUVs and what happens - the rest of the world wants to emulate us! Who can blame them? Its clearly not sustainable. If, as John suggests, we build affordable, ecologically sensitive and sustainable housing (and communities) then guess what - so will the rest of the world. I agree, its an opportunity to move in the direction of a sustainable future for all of us.
John is always timely and insightful. Everyone should take an afternoon and read this book. You don't have to live in the belly of the suburban beast to be affected by its ramifications.
John's article and book cut right to the heart of the housing matter. The imbalance between home affordability and cost of living vs. median income is staggering. It has created a situation where, all too often, extreme debt becomes the only, albeit temporary, way to close that gap. This leaves too many people at the mercy of extortionist lenders, and Wall Street bankers who push lenders to be that way. Unfortunately, in the face of this growing economic instability and lack of American dream sustainability of which John speaks, the federal government continues to throw trillions of dollars toward subsidizing the exploitative banking system. This, at the expense of promoting more affordable housing, healthcare, energy and education needs for the greater population.
Wasik summarizes the current situation and key problems so clearly, one wonders why so many still cling to an obviously broken model. How can we get everybody on board now for the kind of sustainable living communities Wasik describes? As a 30-year-old with student loans, making an above average yearly income, I currently hold no hope of owning my own home, yes, despite falling home prices. This doesn't seem right.
This should have made the front page. Excellent article.
Housing prices have been astronomical for decades. If you need 30 years to pay off anything, it costs too much, but because of the way we've set things up, it has been an acceptable loan to get and make. And housing prices would have continued to go up if adjustable rate mortgages were simply renegotiated with the homowners who have already committed 30 years to paying it off. It's their place of residence, so it is a very important expense. But interest rates and ballooning mortgages forced hundreds of thousands of people out of their homes--creating losses for the banks and troubles for the residents, lowering house prices everywhere, and we haven't hit bottom yet. So, what are we going to do? Are we going to make housing affordable for all people? Or are we going to renegotiate with those who have already committed to 30 years of payments? Then again, maybe it's time to realize that all people have the right to have decent shelter and shouldn't have to pay for it. After all, we are a rich country, and we have ample resources. One month of war spending should cover it.
Wasik is right on with analysis and recommendations.
I don't think Americans have learned a single thing, and as you said, the American Dream of owning a home is still out of reach for many Americans. Lax credit standards hastened the problem, but I'm not sure that we've found any kind of real solution yet.
The real problem is that people insist upon having more house than they can afford, or need.
Houses are twice as big as they were 50 years ago.
Go back to those houses, and we would be fine.
Where have I been? I always thought a house was a home, not an investment opportunity. Geez, I am glad I missed the class, "Your house will make you rich - 101."
Bought my house, stayed in it for 20 years, sold it and downsized. Ended up with a some cash, socked it away for a rainy day. Good thing, it's pouring out there.
its a little foolish to not consider the buying of real estate an investment decision. that line was sold to you by the real estate industry. a house is just a house. a home is where your heart is.
We also had a rare opportunity in the '70s with the Arab oil embargo but we blew it big time. Let's not make the same mistake.
When the treasury's toxic asset public-private partnership kicks into gear, we'll see just how over-valued the US housing stock still is. In 6-12 months, home prices will plummet again.
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