No Longer Home Sweet Home: The Ongoing Housing Crisis and the End of an Era

Economic cheerleaders on Wall Street and in the White House are taking heart. The US 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.


[I wrote this for the Financial Times, where it appears today]

This post appeared at Robert Reich’s Blog and is posted with permission.

2 Responses to "No Longer Home Sweet Home: The Ongoing Housing Crisis and the End of an Era"

  1. marblehead   March 4, 2012 at 12:43 am

    There is a fundamental problem with the housing market that is still proceeding toward correction. That problem is that people have assumed that their homes are an investment. They are not investments; they are homes…the places of safety and security where you shelter your family and take reprieve from the rat race. To call you home an investment and assume that its value will always be on the rise is folly.

  2. Devasa   March 14, 2012 at 5:30 am

    Housing was the only physical industry which was propelling the economy along.

    Bankers have admitted that well being of Google or Facebook does not affect US economy, Job situation. They are in a parallel universe.

    Physical industries, like manufacturing of cellphone instruments creates employment, economic regeneration, not Android. Now it increases employment in china and not the west.

    Small matters when it is physical and not the cloud. Small manufacturing industries can create employment. More importantly they create employment for the "not nerds" population, which forms the majority.

    But small can only exist when big exists. A cell phone manufacturing company or an auto manufacturing company creates and sustains millions of smaller physical industries.

    Millions of these industries with great talent pool, innovate. May be gradual, may be revolutionary.

    There was a show on BBC where Bosses work anonymously, as a worker in their organisations and are pleasantly surprised at the clever, hard working people they discover. These people are real. They are clever. They need jobs. they are willing to work hard. They are the people who can strike out on their own and create more jobs..

    So the innovations will come in China and not the West, if manufacturing is not rediscovered immediately in the West.

    A small percentage of 26 trillions given to the Banks could have sparked an industrial revolution again in the US.

    It is not too late. Housing can never reignite US economy in a long time.

    Chinese factories aren’t really sweatshops anymore — rather they’re some of the most sophisticated high-tech manufacturing plants in history. This is not because their workers assembled more and better cars every year. It is because China’s government, emulating that of Japan and Taiwan and Korea before it, subsidized industries that required rapid, constant change. And by doing that, China created a working class that is no longer so impoverished that it’s also powerless. Economic growth isn’t always pretty, but if you can legitimately make things better than they were for the majority of the population, it’s worth it.

    US should emulate other countries and make substantial investments in regenerating industries in places like Detroit and Pittsburgh.