Business & Economics

‘Home sweet home’ no more: The ongoing housing crisis and end of an era

Robert Reich

Economic cheerleaders on Wall Street and in the White House are taking heart. The U.S. has had three straight months of faster job growth. The number of Americans each week filing new claims for unemployment benefits is down by more than 50,000 since early January. Corporate profits are healthy. The S&P 500 on Friday closed at a post-financial crisis high.

Has the American recovery finally entered the sweet virtuous cycle in which more spending generates more jobs, more jobs make consumers more confident, and the confidence creates more spending?

On the surface it would appear so.

American consumers in recent months have let loose their pent-up demand for cars and appliances. Businesses have been replacing low inventories and worn equipment. The richest 10 per cent, owners of approximately 90 per cent of the nation’s financial capital, have felt freer to splurge. Consumer confidence is at a one-year high, according to data released on Friday.

The U.S. government has not succumbed entirely to the lunacy of austerity. Republicans in Congress have just agreed to extend both a payroll tax cut and extra unemployment benefits, and the US Federal Reserve is resolutely keeping interest rates near zero.

Yet the US economy has been down so long that it needs substantial growth to get back on track – far faster than the 2.2 – 2.7 per cent projected by the Federal Reserve for this year (a projection which itself is likely to be far too optimistic).

A strong recovery can’t rely on pent-up demand for replacements or on the spending of the richest 10 per cent. Consumer spending is 70 per cent of the US economy, so a buoyant recovery must involve the vast middle class.

But America’s middle class is still hobbled by net job losses and shrinking wages and benefits. Although the US population is much larger than it was 10 years ago, the total number of jobs today is no more than it was then. A significant portion of the working population has been sidelined – many for good. And the median wage continues to drop, adjusted for inflation. On top of all that, rising gas prices are squeezing home budgets even more.

Yet the biggest continuing problem for most Americans is their homes.

Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping, and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December.

Houses are the major assets of the American middle class. Most Americans are therefore far poorer than they were six years ago. Almost one out of three homeowners with a mortgage is now “underwater”, owing more to the banks than their homes are worth on the market.

Optimists point to declining home inventories in relation to sales, but they’re looking at an illusion. Those supposed inventories don’t include about 5 million housing units with delinquent mortgages or those in foreclosure, which will soon be added to the pile. Nor do they include approximately 3 million housing units that stand vacant – foreclosed upon but not yet listed for sale, or vacant homes that owners have pulled off the market because they can’t get a decent price for them. Vacancies are up 1m from 2006.

What we’re witnessing is a fundamental change in the consciousness of Americans about their homes. Starting at the end of the second world war, houses were seen as good and safe investments because home values continuously rose. In the late 1960s and 1970s, early baby boomers got the largest mortgages they could afford, and watched their nest eggs grow into ostrich eggs.

Trading up became the norm. Homes morphed into automatic teller machines, as baby boomers used them as collateral for additional loans. By the rip-roaring 2000s, it was not unusual for the middle class to buy second and third homes on speculation. Most assumed their homes would become their retirement savings. When the time came, they’d trade them in for a smaller unit, and live off the capital gains.

The plunge in home values has changed all this. Young couples are no longer buying homes; they’re renting because they’re not confident they can get or hold jobs that will reliably allow them to pay a mortgage. Middle-aged couples are underwater or unable to sell their homes at prices that allow them to recover their initial investments. They can’t relocate to find employment. They can’t retire.

The negative wealth effect of home values, combined with declining wages, makes it highly unlikely the US will enjoy a robust recovery any time soon.

Under these circumstances it’s not enough to rely on low interest rates and make it easier for homeowners who have kept up with their mortgage payments to refinance their underwater homes. The Administration should also push to alter the federal bankruptcy law, so homeowners can use the protection of bankruptcy to reorganize their mortgage loans. (Few will actually do so, but the change would give homeowners more bargaining power to get lenders to voluntarily alter the terms.) A second possibility if for the Federal Housing Administration to offer to take on a portion of a household’s mortgage debt in exchange for an equitable interest in the home, of the same proportion, when it is sold. Such debt-for-equity swaps could help homeowners now struggling to keep up with their mortgage payments, while not adding to the federal budget in future years when housing prices are expected to rise.

But whatever is done will not affect the fundamental change that’s come over Americans with regard to their homes. It’s not clear what will take the place of houses as the major investments of the American middle class.

As written for the Financial Times and posted on Robert Reich’s blog.

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Comments to "‘Home sweet home’ no more: The ongoing housing crisis and end of an era":
    • Idol Lash

      Recovery can’t rely solely on pent-up demand purchasing of the richest 10 per cent but the scary fact still remains that there are no more jobs available today than there was ten years ago in addition to the fact that the median earnings continue to fall. Delinquent mortgages still plaguing the middle class then top that off with rising gas prices cutting even deeper into the bottom line. The average family seeing the light at the end of the tunnel has become a very difficult task. I prefer to remain optimistic but reality has made even this to be difficult.

      [Report abuse]

    • Dee

      I’m the tail end of the baby boomer generation. The bill on all this started coming due with those of us on the tail end. That being said. I work with a number of people that have paid for their children’s education by using the equity in their home, so not all the boomers were out there making money hand over fist.
      When I was lucky enough to purchase a home I did it to have some place to live, not as an investment. Same thing that my parents did, both of whom grew up during the depression. And newsflash most people did not own their home prior to WWII. Both of my parents were raised in San Francisco and lived in flats.

      Yes I do hope future generations get houses. Hopefully they learned from our mistakes as well as they have enjoyed the benefits of things boomers have invented.
      I think all generations need to take stock in what they purchase. Who needs a $50,000 or $60,000 car? $3 and up for a cup of coffee?

      Once we pull back from the mass consumerism we have all come to expect I think we will find our needs easier to meet.

      Also, time to tax the rich.

      [Report abuse]

    • Tea Party Rocks

      The government caused the crisis. You would think that a huge overall failure like this would encourage them leave us alone but apparently to Reich more meddling is the answer.

      I was at Berkeley studying Political Science in the 70’s when liberal activists were advocating meddling with the banks. In a moment of rare lack of judgement I actually thought that this was so preposterous that no one would listen to them, thinking that everyone would realize that if you start messing with banks we are all hosed.

      And here we are, we are all hosed and as I keep pointing out that Reich offers nothing, absolutely nothing but propaganda and the same old tired thinking that got us into this mess.

      For sports fans, here’s the Democrat Playbook: Reich takes the ball, makes an end run around the constitution by saying that we are all going to die if we don’t stop Republicans from whatever and don’t adopt whatever program du jour that the Democrats are proposing this week. He passes to Obama who runs into the end zone for the winning touchdown except now everybody loses.

      [Report abuse]

    • Avi Rosenzweig

      I may not have the quickest sense of humor, but even I have finally caught on and realize that “Tea Party Rocks” is doing a Colbert Report style parody — ‘The government caused the crisis’ Good one!

      Isn’t the right question to ask _which_ government made the mess? Answer: Repooblican.

      And now when real Americans have been struggling to clean up Bush/Cheney/Gingrich’s mess, the party of ‘no way’ has been pouting in a corner with pork rind crumbs littering their shirts, and they have the nerve to want to take charge and make another mess?

      We real Americans say to TP ‘turfers: Don’t piss on our shoes and then try to tell us it’s raining.

      [Report abuse]

    • Anthony St. John

      Robert, we have a problem, we keep trying to communicate what we believe in to people who don’t want to listen to the truth. I feel that my years of commenting on Berkeley Blog have far exceeded rational expectations. So, take it or leave it, I have changed my philosophy.

      I have learned that I can no longer believe in any religious, university, government and scientific institution to prevent the destruction of the human race.

      What I now believe in is the possibility for individuals and families to read, discuss and consider living by basic principles such as those recorded about the “Sermon of the Mount” whether one is a Christian or not.

      [Report abuse]

    • Val Zanchuk

      Housing is a speculative investment, especially when lenders have very loose standards for borrowers. Being highly leveraged with an unstable income future is a formula for disaster. Why is it that a country such as Germany can be so wealthy with home a ownership rate of about 40%, well below the US rate of about 68%? Wealth and home ownership do not necessarily correlate. Some of the differences can be explained by the base of social services provided by the German government. Citizens don’t need the equity of their homes to subsidize their retirements. But I think the rest can be ascribed to the economic habits of the Germans compared to the instant gratification mentality in the US. Changing US behavior and policy to replace housing as the major investment of the middle class is indeed a challenge.

      [Report abuse]

    • Tea Party Rocks

      You know, you can quote all the statistics you want but I would rather live here in America than Germany (rather ironic since my last name is German). I believe the Marshall Plan and the fact that the US paid for virtually the entire defense of the West while the Europeans were able to run around building their little socialist empires. Also, as I recall that Eastern Germany under Communism was a mess compared to West Germany. I think we deserve much of the credit for whatever wealth Germany has. Wealth and home ownership absolutely correlate, I do not care what you have in the way of statistics, it is just plain old common sense. Besides, statistical analsys is alway skewed to prove the point of the person makeing the claim rather than finding out the raw data and then coming up with a non biased conclusion. Except me, I don’t do that. Especially because I took political science at Cal and one of my professors pointed out that is not a very good thing to do, we are supposed to empirically based and objective.

      [Report abuse]

      • Avi Rosenzweig

        “Tea Party Rocks” couldn’t find a clue if it was hanging around his neck.

        I was clearly too optimistic when I guessed that “Tea Party Rocks” was a paid agitator agency spewing TP Movement propaganda — if he was, they’d be demanding their money back.

        He does, however, represent the TP movements well in the sense that he doesn’t let reality or facts get in the way of his cartoonish worldview.

        Still, if you look forward to a country run by Repooblicans, with the Wall Street conscience-free market, the Katrina compassion-free infrastructure, and the Cheney ethics-free redistribution of our resources to the 1%, then keep having those TP movements.

        [Report abuse]

        • Henry Stevens '71

          A.R., your replies to T.P.R. are nothing but name-calling and evidence-free assertions.

          You’re not actually contributing to the discussion, and you’re convincing me even more that there really must be something to T.P.R’s position if you can’t find evidence & reasoning to refute it. I guess I need to do some more reading…

          [Report abuse]

          • Avi Rosenzweig

            Hi Henry,

            You read it right — I don’t see the point of engaging in deliberative or persuasive argument with a poster who is clearly doing this as a pastime or recreational pursuit (what rhetoricians call ‘exhibitory’ argument).

            Why comment at all, then?
            Because this kind of buzzword entertainment is toxic for actual deliberation or thoughtfulness generally, so I feel obliged to puncture TPR’s hot-air thought(less) balloons.

            The American people need real debate more than ever, and they’re not getting it from the TP movement’s knee-jerk advocacy of the conscience-free market and compassion-free politics and ethics-free political candidates.

            [Report abuse]

    • timingiseverything

      My Baby Boomer generation just got to greedy, we bought our homes in the low $20’s and turned around and sold them for $200,000+. What did we expect? I highly doubt the younger generation will show us any pity, just because we can’t afford our golf course fees.

      [Report abuse]

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