Posted on Wednesday, December 15, 2010
We can safely assume that everyone knows something about the trouble with real estate, housing and foreclosures today. In fact most folks who are not in default or foreclosure or underwater on their own homes personally know someone else who is. And yet, as I learned at a South Florida university presentation I recently gave, miraculously, most young Americans still dream of owning a home someday. For these students, homeownership is not a matter of „if? but „when.? To them, the Dream is still about pride, opportunity, personal responsibility, self-sufficiency, hard work that pays off, independence, and upward mobility, and homeownership is still an important cornerstone.
Of course they realize things are changing. But, not unlike a company facing challenging times, they also realize just how important our collective vision of the American Dream is. In times like these, a corporate CEO would honker down with his „right hand? team at a strategic planning retreat of sorts. (If it were AIG five years ago, the retreat would no doubt have been in some sexy, exotic place like Maui. At the Ritz Carlton. In the Presidential Suite. With everyone arriving in their private jet. But that?s another story.) The leadership team, typically guided by a professional facilitator, would engage in serious, focused dialogue about the company?s mission statement. The mission statement would, of course, first serve to unite these leaders by reflecting their common ground and their shared vision for the company?s future. But the mission statement would also serve as the starting point, a foundation of sorts, for clarifying company goals and then for crafting actual strategies to achieve those goals. And, just as important, the mission statement would communicate to all of the other folks inside and outside of the company exactly what the company values and stands for.
The American Dream is essentially our country?s mission statement. But why is homeownership for everyone so important to that mission statement? Why should we care if our neighbors own their homes rather than just rent? Why does homeownership matter? If it?s looking as if $13 million folks will lose their homes to foreclosure, $13 trillion in wealth will be lost, and 30% are underwater on their homes anyway, maybe the homeownership for all goal just doesn?t work. Lest we forget, that the flip side of this equation is that a third of the homes in America are owned free and clear altogether. And of those with mortgages, 90% are not in default or foreclosure. 70% of Americans are not underwater. Put another way, if relatively speaking the vast majority of folks seem to be ok then what?s the big deal? Or, as CNBC?s Larry Kudlow is always asking, “If the stock market is doing fine, why the heck should we care about housing!?”
The University students I spoke to came up with 8 good answers to that question.
First, unlike stock, home equity wealth is more broadly held across all demographic lines. 7 in 10 families own their home. Only about half of all Americans own stock and most of that is held indirectly through funds folks tend to feel far removed from anyway. But even more important, even those average Americans who do own stock own very little of it. In fact, three quarters of all the stock market wealth is held by the highest income earners. The top 1% own almost 40% of the privately held stock. And the lowest third of American earners own almost no stock at all. So when the market?s doing well, sure our country?s top earners are happy but most of the folks in this country all barely even know it. On the other hand, when home values generate equity wealth, A lot of families across a lot of socio-economic groups benefit and respond in ways that help us all. Unfortunately, as we?re all seeing now, the reverse is also true.
Second, the gains and losses folks suffer in the stock market tend to be viewed as temporary. But folks tend to see their gains and losses in home equity as being more permanent. Consumer spending is likely to experience a longer term „wealth effect? or, conversely as we?ve seen, an “I?m feeling awfully poor effect” when we experience a gain or loss in home equity. Which of course translates to our country?s GDP. Even if you?re not personally underwater or in foreclosure, if other folks are, it?s a problem for all of us. Not only in terms of the spending that confidence produces, but also each home purchase in and of itself produces about $60,000 in direct and indirect spending into the overall economy.
And here?s the students? reason three. Our country?s middle class is the „poster child? for the vision that is the American Dream. They symbolize the opportunity for upward mobility that has defined us and distinguished us from so many other countries. A whopping two thirds of homeowners have historically been from America?s middle income. Home equity wealth at one time comprised 70% the average middle classers? personal wealth, the single biggest safety net most middle classers had. Which begs the question; even if the stock markets doing great, if much of that home equity is now gone, what the heck?s going to happen to our middle class when the „expected unexpected? things like divorce, unemployment or a medical or other emergency comes their way? With no financial safety net, they?re certainly not positioned to move up the ladder. The number folks living below the poverty line is already 43.6 million. Suburban poverty is up 37.4%!
Reason four. Thanks, largely to home equity, before the bubble the average homeowner had a net worth that was 22 times that of the average renter. Admittedly, dollar for dollar homeownership may not be the best investment around. In a perfect world, assuming you know how to invest, can find that illusive „sure thing,? and have the self-discipline to actually save and do it, you could see a better return on your investment in other ways besides owning a home. But the fact is the world?s not perfect, and folks tend to spend most of the money they?re not forced to invest.
We?re already on track for $6.6 trillion retirement deficit. Folks facing retirement are likely to need more assistance than ever before. And with aging baby boomers there are already more of those folks to begin with. Already credit card debt among those 65 and older is up 26%. That?s the biggest jump in any age group, meaning they can?t make ends meet even before they retire.
Five, and here?s another cruel twist, these added costs we all face helping other folks make up for what they?ve lost, thanks in large part to problems in housing, would presumably be borne by government and tax dollars. But homeowners pay for around 85% of all income taxes. Just like the sales taxes folks pay when they?re confident about spending covers a huge chunk of state budgets. That means we all may be facing higher taxes or government service cuts, thanks to the housing problems.
Six, adding insult to injury, each foreclosure costs local government around $20,000. The tab is more like $80,000 if you include costs to the bank. We all know what supporting housing has cost the federal government at last count, the Treasury number was around $5 trillion. Compared to that, the AIG and auto industry bailouts were a bargain at $5 and $17 billion.
And rumor has it that each foreclosure results in a 1% value hit to all of the surrounding homes. This spillover effect will strip the rest of us of an estimated $1.9 trillion in home equity by 2012. Even those folks who own free and clear or are not underwater or in default. Neighbors bear the burden of unpaid HOA and condo association costs, not to mention crime, eye sores and blight.
Reason number seven is a more warm, fuzzy, Kumbaya sort of factor. Economic decline has important implications on stigmatization and inter-demographic-group relations. Competition for resources engenders frustration and aggression towards out-group members and towards the policies that benefit them. African Americans and Hispanic homeownership rates increased, proportionately, the most during the recent real estate bubble and these folks have likewise borne a disproportionate share of the economic losses. And the impact that housing problems have on neighborhoods, children and families is well documented. Anyone who reads the blogs knows that there?s plenty of anger and passion to go around on both sides of the foreclosure rift.
Finally, historically every economic recovery has been lead by real estate.
You?ll be happy to know that the students I spoke with remain optimistic. For them, the glass is half full. They embrace the idea that the next few years may very well be viewed in retrospect as the “Great American Do-Over” as folks leverage this once-in-a-lifetime chance to modify a mortgage, power through a foreclosure or bankruptcy, settle a credit card debt, business line of credit or judgment, down-size, get back to basics and start fresh, without the usual social stigma. And even with our blessing for taking responsibility and moving forward. And for our country?s leaders to address crucial structural challenges in employment, the banking and mortgage industries, and bring securitization and foreclosure procedures into the 21st century.
Social mobility is what characterizes a fair society. Without it, capitalism becomes a caste system. Yet that is precisely what America threatens to become, even in spite of it's self-image. The U.S. now has less opportunity for upward mobility than Canada, Finland, Sweden, and a host of other nations. Americans born into the middle class have an equal chance of ascending or descending the economic ladder. Those born poor are likely to stay poor. The Great American Do-Over is about to change all of that. To be effective long-terms our nation’s ‘mobility agenda’ will need to incorporate those factors statistically proven to enhance or inhibit mobility such as discouraging teen pregnancy, increasing rewards for work, encouraging wealth building and saving, discouraging reliance on credit, enhancing entrepreneurship, improving infant and child health, improving quality education and increasing high school graduation and college attendance rates.
President Obama said when he was first elected, that it would be a “shame to waste a good financial crisis.” At the time he was of course foreshadowing health care reform. That statement rings true today. So many people have suffered so much. It would be a true shame if we did not consider the Great American Do-Over the equivalent of a nationwide strategic planning retreat to re-examine our own values and put some serious thought into our own vision of the American Dream.
Over the next few years the Dodd Frank Act will be implemented, the GSEs will be reformed one way or another and Elizabeth Warren will help redefine where government protections end and personal responsibility begins.
If the American Dream is still about financial responsibility, knowing that our hard work will pay off, and sustainable homeownership, then policies reflecting that vision would also seem appropriate; Policies that discourage folks from walking away from obligations like strategic mortgage defaults. Policies that encourage responsible lending and sustainable homeownership -using taxpayer money to help folks own and build a safety net for emergencies or a nest egg for retirement is one thing, but getting folks into homes so they can cash out the equity for flat screen TVs is something else. Uniform default and foreclosure procedures folks can understand and prepare for if all else fails, but just as important, policies that reflect whether or not foreclosure is here with us to stay - a culturally accepted institution (a notion that just a few years back would have shocked most of us). Maybe a requirement that mortgage payments be escrowed in contested foreclosures to discourage folks from trying to „live for free.? Or how about a tax incentive for Americans to honor their obligations, pay down their debts and strive to own their homes free and clear?
One thing we know about our housing and economic crisis is that eventually it will come to an end. The question is what will the American Dream look like when it does?