Dad29 (one of my few regular commenters, so automatically one of my favorite bloggers) comments on this post saying, in the words of Pogo, "The enemy is us".
He says we've all been greedy:
I mean, really! A house worth $150K in 1980 merely lasts until 2008 and is worth $380K?
Now, you know I like you, Dad29 (though we've never met), but I'm not sure I understand what's so outrageous about that. It's an increase of about 3.3% per year. Considering that inflation has averaged at least that much over the past couple of decades, that was just barely staying even.
To tell you the truth, I really don't think the enemy is us, if by "us" you mean the average responsible American.
Take our family as an example: We worked hard (my husband in the job force, me at home raising and educating the kids), built up a modest 401K account, took out a reasonable mortgage and paid it faithfully every month.
We pay our taxes and all our bills and donate to charity. We have no other debt beyond the mortgage.
We never looked for the latest greatest investment scheme; we tried to be reasonable and moderate in our earnings goals.
We hang on to our cars for years and years, and we've had hand-me-down furniture until just recently (after 21 years of marriage).
We were chumps.
Obviously there were plenty of other Americans who didn't follow that game plan. They spent like crazy, piled up credit card debt, bought houses far too expensive for their incomes, took on mortgages they couldn't pay. Is the enemy "them"? Yes, partly.
It's also the managers of financial institutions who didn't have a clue what they were buying or what the risks were.
Listen to Mayor Bloomberg from this morning's Today Show:
In fact, the managements of a lot of these companies, I'm convinced, never knew what their traders were buying and what the risks were. And they, every day, wake up not having any idea what's going to happen to them. When things were going up, it was great, nobody paid attention. We were all comfortable with letting that situation continue. Now, all of a sudden, things are going down for a variety of reasons. It started with maybe the increase in oil. It started with overbuilding in the real estate residential part of the market. It started with just the end of a cycle. Nothing goes up for ever. And then all of a sudden we've said, you know, "What's happening here?"
(Of course, Bloomberg also said we have worse health care here than they do in Western Europe, which is just plain wrong. We have the best health care in the world and I'm tired of politicians promoting the baloney that countries with socialized medicine are doing better than we are.)
Then add in the political mess I mentioned in that earlier post, where Democrats were busy blocking proposals by President Bush in 2003 that might have prevented this economic melt-down, were shaking down banks to give loans to people who had no business taking on mortgages, and had their hands in the Fannie Mae / Freddie Mac cookie jar.
Did we worry about what we were seeing over the past few decades? You bet. We saw the huge McMansions going up in the exurbs and wondered who on earth could afford them. (Clearly, not as many people as thought they could.) We were concerned about the increasing level of debt of many Americans and the negative savings rate. We also talked about the insane amount of Federal money going to debt service, Medicare, Medicaid, and Social Security. It's just not sustainable, not by a long shot.
But what should we have done, exactly? Other than put our money in shoe boxes so as not to feed the stock-market / investment monster?
So is the enemy us? Depends on what the meaning of "us" is, I guess.
4 comments:
Hmmmmppphhh.
The value of a house is determined by a few different measures. Arguably the most important measure is the "Price/Rent" ratio.
That's almost as simple as it sounds; if you rented the same square footage and amenities, what would THAT payment be vis-a-vis a house payment?
Here's the more lengthy 'splanation:
http://www.frbsf.org/publications/economics/letter/2004/el2004-27.html
Note that price/rent is usually around 1.0, which makes sense (!!)--except that in the graph, beginning around 1998, the ratio simply took off and was hanging around 1.25 by 2004 (the date of the article.)
Supply/demand also impacts housing values. And that's not good news, because at this time, supply FAR outstrips demand. Perhaps in three years it will balance again, but between now and then, there will be a lot more houses available than there are buyers.
"Inflation" is not sufficient to overcome both price/rent AND supply/demand. In a market which is perfectly supply/demand balanced, housing value would grow precisely in accord with inflation.
But it ain't so.
Finally, of course, there were two differing Gummint influences. One stimulated price (lending to anyone who could breathe), and the other stimulated price-inflation: the Fed's monetary excess.
Monetary excess and the lending policies stimulated prices beyond their natural level (which is the rent/price parity.)
You can postulate that your house's value should rise based on inflation, but that's not the operative factor in house prices.
Rent/price is. All the gains from artificial demand-stimulation as well as monetary debasement are illusory until about 3 years from now.
We haven't even gotten into the relative value of the USDollar to such minor goods as petroleum, steel, or aluminum--but that has an effect, too.
Note well, however, that the Midwest's situation is FAR better for homeowners than that of the Southwest and Florida.
So your home's price will not deteriorate too much, if at all.
Thanks for the excellent comment, Dad29! Just a note: I wasn't implying that houses "should" be matched to the rate of inflation, just that I didn't think the increase in value of the house you mentioned was excessive compared to the rate of inflation.
I agree, the situation here is much better than on the coasts. I think everybody knew that prices on homes in CA, for example, were out of control and not in line with any measure of reality.
Are you an economist by training? I'm not (as is probably painfully obvious) but I do enjoy learning more about how this incredibly complex system works. Or doesn't work, as the case may be.
Heh.
Took Econ 101 and 102 from a fellow you may have heard of: Les Aspin.
Did several years in the Bank racket.
All the rest is hardscrabble econ--learn the hard way, or never learn at all--
Just read a lot of WSJ articles, but don't trust them too much; read the oppo research rags, too.
Ah, yes, Les Aspin. Interesting.
I took Econ 101 at MU, also, from a prof whose name I don't even remember. That's about the extent of it for me, other than reading what I can in various places and talking to people who know something about it.
Post a Comment