Middle Class/Widening Wealth Gap

Government Role In Housing/GSE

Posted on Tuesday, January 4, 2011

Social and economic mobility is what characterizes a fair society. Without it, capitalism becomes a caste system. Yet that is precisely what average Americans are now facing.

In times like these, a corporate CEO would honker down with his ‘right hand’ team at a strategic planning retreat of sorts. 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.

Why homeownership is important to that mission statement? If your stock market investment are doing fine and you’re not in default or even underwater in your home, why should you care that other folks are?

For starters, 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 markets 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 were all seeing now, the reverse is also true.

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.
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 and 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%!
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.

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.

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. 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.

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.

But the glass is half full. The next few years will be viewed in historical 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. 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. Homeownership is an essential part of the American Dream mission statement because, in many cases, it’s the only proven solution to help folks regain their rightful place on the economic ladder. What we need to eliminate is the role government’s place in housing wrongly morphed into over the years; low interest money to folks with little down payment and bad credit. Governments role should reflect important values like self-sufficiency and the goal to own free and clear. This can be done by way of tools like a tax deduction for paying down your mortgage and restrictions on cash out refinances of government subsidized loans. The goals of affordable homeownership and prudent lending do not have to be mutually exclusive.

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