Much has been heard in the press lately about the end of the great American dream of homeownership but what the press has missed is that what has really died in the crash is a perversion of the American dream. The perversion of getting rich exclusively through homeownership. That perversion really started in the 1970s and died in the great real estate crash that began in 2007.
In the decade of the 1970s inflation turbocharged real estate and values rose a blistering 8.12% a year, the greatest rise in history and in the 1980s values rose an additional handsome 5.86% a year. These two decades convinced millions of American homeowners that they could now get rich solely through homeownership.
Their home they were now convinced was the truth, the light and the way to getting rich.
People adore owning real estate. They lust for the stability and permanence of the land. They can roll around in the stuff and as the saying goes they are not making any more of it. What’s more everyone knows or rather knew that you can’t lose money in real estate. People have always had an exaggerated notion of how profitable an investment real estate has historically been. This opinion is based to a great extent on the enormous leverage that is common in homeownership. If your down payment is 5% you are employing leverage of 20:1. Wall street speculators would kill for this kind of leverage.
But there was more to it than that. By the 1970s the American people had changed. They were for the most part no longer willing to make the sacrifices that their parents and grandparents had made.
Scrimping and saving and living below your means was too tough for them. Instant self-gratification was in. What was attractive to them was blowing every dime they had on a big-beautiful home and get rich while they were wallowing in their big-beautiful home like a pig wallows in slop. Saving and sacrificing was for dummies. As for the stock market it was way, way to risky. They were far too smart for that crazy gamble. Risk taking was for dummies. Their home was the perfect investment it required zero risk and zero sacrifice. Which was just what they were looking for.
An interesting component of this belief was an amazing lack of interest in any real estate other than their home. When there was enough equity in their home to support an investment in any real estate other than their home for the most part they turned it down flat. After all any investment outside their home would require a sacrifice on their part. We couldn’t have that happening now could we? Instant self-gratification always comes first. The smart career move from their point of view was to shoot for the Mcmansion. Boy could they pig wallow in that baby.
In 2007 their big-beautiful homes imploded on their heads. It is hard to overstate the financial devastation that the housing crash has had on the American middle class. The unemployment rate that everyone is whining about is almost a side show. For millions of middle class, home owning Americans their home was their only financial asset. In a matter of months millions of home owning Americans went “upside down.” They went from having $100,000 to $250,000 or more in equity in their homes and often much more. To being that much or more underwater.
About one-third of all the homes in America are paid off and have no mortgage. The remaining two-thirds of all homes have mortgages. An amazing 25% of homes with mortgages are underwater. The outstanding mortgages exceed the value of these homes.
Then there is the seldom reported vacant housing crisis. There are 126 million housing units in this country or about one housing unit for every 2.38 Americans. That is an awful lot of housing for each American. The classic 3/2 American home is overkill if there is only 2.38 people rattling around in it.
The chickens have come home to roost. There will be no quick recovery. We are not only broke but we have a mountain of inventory hanging over our heads. It will take us years to work our way out of this mess.
Prior to the 1970s homeownership was regarded as a key asset in the accumulation of wealth but it was never considered the only asset. Real estate values rose too slowly to accomplish that mission. In fact it is surprising how little real estate values have risen over the long term. According to the economist Robert J. Shiller, the recognized economic expert on this matter from 1890 when accurate records began to the crash year of 2007 residential real estate rose only 3.44% a year. Far less than most people would assume. Then the rise in inflation rates changed everything.
In the decade of the 1970s inflation turbocharged real estate and values rose a blistering 8.12% a year, the greatest rise in history and in the 1980s values rose an additional handsome 5.86% a year. These two decades convinced millions of American homeowners that they could now get rich solely through homeownership.
Their home they were now convinced was the truth, the light and the way to getting rich.
People adore owning real estate. They lust for the stability and permanence of the land. They can roll around in the stuff and as the saying goes they are not making any more of it. What’s more everyone knows or rather knew that you can’t lose money in real estate. People have always had an exaggerated notion of how profitable an investment real estate has historically been. This opinion is based to a great extent on the enormous leverage that is common in homeownership. If your down payment is 5% you are employing leverage of 20:1. Wall street speculators would kill for this kind of leverage.
But there was more to it than that. By the 1970s the American people had changed. They were for the most part no longer willing to make the sacrifices that their parents and grandparents had made.
Scrimping and saving and living below your means was too tough for them. Instant self-gratification was in. What was attractive to them was blowing every dime they had on a big-beautiful home and get rich while they were wallowing in their big-beautiful home like a pig wallows in slop. Saving and sacrificing was for dummies. As for the stock market it was way, way to risky. They were far too smart for that crazy gamble. Risk taking was for dummies. Their home was the perfect investment it required zero risk and zero sacrifice. Which was just what they were looking for.
An interesting component of this belief was an amazing lack of interest in any real estate other than their home. When there was enough equity in their home to support an investment in any real estate other than their home for the most part they turned it down flat. After all any investment outside their home would require a sacrifice on their part. We couldn’t have that happening now could we? Instant self-gratification always comes first. The smart career move from their point of view was to shoot for the Mcmansion. Boy could they pig wallow in that baby.
In 2007 their big-beautiful homes imploded on their heads. It is hard to overstate the financial devastation that the housing crash has had on the American middle class. The unemployment rate that everyone is whining about is almost a side show. For millions of middle class, home owning Americans their home was their only financial asset. In a matter of months millions of home owning Americans went “upside down.” They went from having $100,000 to $250,000 or more in equity in their homes and often much more. To being that much or more underwater.
For those who have twenty years or more before they retire recovery is possible but for the millions who are approaching retirement there is very little hope. The statistics are so grim that many of them are hard to believe. According to the famous Case-Shiller Housing Index home values hit rock bottom in the depression year of 1933 with a decline of -30.5% from the 1920s peak boom period. As hard as it is to believe according to the latest Case-Shiller findings we have just broken that record in the 2nd quarter of 2011 with a decline of -32.7% from the 2006 market peak.
About one-third of all the homes in America are paid off and have no mortgage. The remaining two-thirds of all homes have mortgages. An amazing 25% of homes with mortgages are underwater. The outstanding mortgages exceed the value of these homes.
Then there is the seldom reported vacant housing crisis. There are 126 million housing units in this country or about one housing unit for every 2.38 Americans. That is an awful lot of housing for each American. The classic 3/2 American home is overkill if there is only 2.38 people rattling around in it.
The census figures tell the tale. When I first read these numbers they were so bad that I could not believe that they were true. The 1990 census reported that there were a staggering 10.3 million vacant homes in this country. It gets worse, in the 2000 census that figure had risen to 15 million vacant homes and in the 2010 census that figure had risen to 19 million vacant homes. About 15% of all the housing stock in America is vacant. You could level 19 million homes and there would still be housing for every American. This is not good! What were we thinking? We were thinking that you can’t lose money in real estate. Every new home is money in the bank.
The chickens have come home to roost. There will be no quick recovery. We are not only broke but we have a mountain of inventory hanging over our heads. It will take us years to work our way out of this mess.
Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309
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2 comments:
Very insightful comments, but I take issue of your characterization of homeowners as "pigs wallowing in slop" in their McMansions.
Many homeowners were naive. I'm over 50, and my whole life, the majority of the messages I've gotten (from t.v., movies, etc) have been to consume, and borrow to finance my dreams (college, car, house, vacation). Even the posters on the wall in the bank... none of them say anything about saving. They are about using home equity to pay for a vacation, a new boat, etc.
Have a little bit of empathy for financially unsophisticated homeowners, who were misled by the media, and persuaded by mortgage brokers to buy more house than they could afford (bigger mortgage means bigger commission).
Some of these uneducated investors have also been tricked into ARM mortgages. They lose their houses, and their dreams. Have a little empathy.
You are probably right, but I was sneered at way too many times by proud McMansion owners for investing in the stock market
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