How Then Shall We Live: Housing in the Wake of Generation Greed
The bursting of the housing bubble seems to have awakened some people to some realities about housing. Housing isn’t a household’s largest investment, it is a household’s largest expense, and one of the expenses that is easiest to cut. A house or apartment is a place to live, and it doesn’t make sense to lock oneself in by buying one unless one’s personal and career circumstances are very settled and they are likely to stay in one place indefinitely. Moreover, young people are the buyers of houses, while older people (and today financial institutions collecting money for wealthy bondholders) are the sellers. Young people can take back many of the financial disadvantages that older generations have foisted on them, in lower wages, higher future taxes, and future reductions in public services and benefits, by paying those older generations and financial institutions rock bottom prices for housing (and stocks). Holding out until the cost of their housing is perhaps 10 or 15 percent of their income, rather than stretching until it absorbs half. And if older generations are unwilling to sell cheap, then more jobs will be created by the young moving to new housing units in new types of neighborhoods, rather than merely paying up for the existing oversized housing in auto-dependent neighborhoods that prior generations have chosen.
And yet not everyone has absorbed those lessons, and there is no guarantee they will stick. There was a housing bubble in the late 1980s too, but only in the Northeast and in California, and many of my peers were financially crushed as it deflated, particularly those who had purchased apartments with the expectation of selling for more and buying their permanent residence later. At the time I thought a lesson had been learned and the bubble would not be repeated. Wrong. Moreover, the federal government has been going $hundreds of billions into hock, money younger generations will have to pay back, to keep the price of housing – and the value of paper wealth backed by houses -- from falling further. So what to do about it? <
First, a little housing economics. The value of a house is in two parts – the building and the place that it is located. Used houses don’t appreciate in value any more than used cars do. They fall in value continually due to deterioration and obsolescence. Buildings age more slowly than cars, with some components possibly lasting for centuries if they area well maintained. This disguises, for many people, the reality of depreciation, and few budget for maintenance and reinvestment when they buy. But in the 18 years I have owned a house, I’ve had to rehab one full and one half bathrooms and a kitchen, rewire most of two floors, and replace some plumbing. In a rented housing unit, all this would be the landlord’s problem.
While the value of the building tends to go down unless more money is invested, the value of the place it is located in can go up or down. The possibility of a decrease was lost on many people during the housing bubble, but during the mass migration of Americans from rural areas to the cities during the first half of the 20th century the value of rural and small town property decreased sharply. In some cases, the value of property fell to zero, and it was abandoned. The same pattern was repeated during the mass migration of middle class and affluent Americans from older cities to the suburbs and Sunbelt in the second half of the 20th century. Large areas of older cities, including New York, were abandoned due to the diminished employment opportunities, high crime, high taxes, and diminished public services available there. While realtors, and some politicians, present home ownership as a one-way bet, the landscape is riddled with ghost towns and abandoned neighborhoods.
If you own, rather than rent, the place you live, you also get two returns. The “income” return is the rent you no longer have to pay, since you are now in the real estate business and “renting” the house to one customer – yourself. The rent you don’t have to pay is the main value of homeownership, but it is only a plus if the cost of ownership is less than the rent that would have been paid, now or in the future. During the housing bubble, people were paying far more for houses in interest and operating costs than they would have paid in rent. They weren’t getting real value from buying. They were speculating that someone else would eventually pay more when they sold. Moreover, the largest benefit of owning only comes only when a mortgage is paid off and one can live in the housing unit rent free. Yet during the bubble many older people refinanced their mortgages to get cash for other spending. That was and is a disaster.
The other return is the capital gain (or loss), the difference between the price you sell for and the price you bought at, less all the considerable costs of and taxes and fees associated with buying and selling. These taxes and fees are particularly onerous in New York. Thoughtful long-term analyses of the expected capital gain on houses shows that it is generally close to zero after inflation, or less if you don’t re-invest to keep up the building. The whole idea that housing is a great investment was developed in a particular circumstance – in the suburbs and Sunbelt during the inflationary 1970s. The fact that housing values were plunging, in many cases to zero, in older cities at the same time was ignored.
Finally, there are two costs of housing. The rent or purchase cost of the house itself – shelter – is just one of them. Shelter, rent for rented dwellings and interest payments, home insurance, and property taxes for owned dwellings, absorbed 20.4% of average household’s spending in 2010, according to the Consumer Expenditure Survey. That doesn’t even include the principal payments to pay down the mortgage, which are considered a form of saving rather than spending.
Another 6.6% of income was absorbed by home operations, including 5.2% for utilities, fuels and public services such as water and sewer service, and 1.4% for home repair and maintenance. The larger the housing unit, the higher these operating costs are. The more the house costs to heat, cool, paint and clean. For some that extra cost is in money, while for others, with regard to maintenance and cleaning, the cost is in time, time out of your one and only life. Operating costs are the reason that in 2010 the average U.S. homeowner without a mortgage paid as much for housing as the average renter. You can look it up.
Knowing the facts, when we were younger we tried to minimize our housing costs. We lived with friends or family prior to marriage, in my case living in one room in the Bronx in an apartment shared with three other people. After marriage we lived in a small one-bedroom overlooking an expressway, the cheapest place we could find in a safe neighborhood in the New York of the time, the same neighborhood we have lived in ever since. It had to be a walkable, transit-served neighborhood so we would not have to have a car. Having a child meant a move to a two-bedroom apartment.
When another child was coming, our life situation was stable, and the 1980s housing bubble had finally deflated, we purchased a home to lock in our housing costs. We wanted a brick rowhouse to minimize the operating costs and maintenance work, a house with little exterior painting, heat loss on only two sides of the building, and very little outdoor maintenance. With regard to cleaning, the motto is she does 40 percent, I do 40 percent, and we skip 20 percent, spending no more than part of one weekend day. I spend one day on outdoor maintenance in the spring, and one in the fall. That’s it.
We generally handle cooling with windows open at night and closed during the day, ceiling fans, and a window fan to suck out warm air and bring in cooler night air. It is a matter of fighting against the one-way lifestyle ratchet – we didn’t have AC in the 1960s so why do we need it now? Although the record heat of two summers ago did induce us to buy a room air conditioner for the worst days. Generally, my view is that you don’t want to cause your body to lose its ability to acclimatize and be comfortable in warm and cool conditions until old age requires it. Otherwise, you end up spending all your time indoors in artificial air.
Our choices brought us to live in Brooklyn, where the amount of square footage we currently occupy per person is probably well above average locally, but below the national average. But those choices were out of step with the country at the time.
For most of the period from the 1970s to the mid-2000s, most Americans chose to spend more and more of their income on housing, both as a form of luxury consumption and in the hope of selling for a profit later. Incredibly, not only were people buying more housing than they needed, they were also buying more than they even wanted in order prepare for a future sale. As the era went on, sheer square footage began to take precedence over quality of construction, as the number of bedrooms in U.S. housing units soared far past the U.S. population. People stopped saving so they could buy bigger houses. They went into debt to buy bigger houses. They reduced spending on other things so they could buy bigger houses. They sacrificed hours out of each day, adding up to years of their lives, in longer commutes so they could buy bigger houses located in far off places where land was cheaper.
Many of them also spend their weekends maintaining their houses. And increasingly, in something that is a shock to me, well down into those who would consider themselves middle class, they hire others to clean their houses and mow their lawns. Back in the 1960s and 1970s, the ongoing decrease the domestic service industry was seen as a sign of economic development and equality. These were the least desirable jobs, and the fact that people had better choices than doing them was thought of as progress. But starting in the 1980s, the number of domestic workers started to rise, or of off the books.
In pursuit of housing as luxury consumption or an investment, moreover, many people disrupted their lives, moving for no other reason than to get a bigger and fancier house. These moves sever friendships and connections with community, and disrupt the children’s education – like a divorce but with the same parents. During the bubble, many young couples and even singles purchased houses or condos before they were settled, hoping to sell for a profit but burdening themselves with a mortgage that limited their options. And over the past 30 years many affluent families made one final move in late middle age as their income peaked, pulling their children out of their schools during the difficult adolescent years to move into a final extra-large “move-up” house. An extra large house they ended up rattling around in a few years later, when the kids had left.
The final phase was the McMansion. Here is one economist’s take on the situation, in a Washington Post article from the mid-2000s.
“We Americans seem to be in the process of becoming wildly overhoused. Since 1970 the size of the average home has increased 55 percent (to 2,330 square feet), while the size of the average family has decreased 13 percent. Especially among the upper crust, homes have more space and fewer people…The long-term consequences of this housing extravaganza are unclear, but they may include the overuse of energy and, ironically, a drain on homeowners' wealth.”
“By and large, the new American home is a residential SUV. It's big, gadget-loaded and slightly gaudy. In 2001 about one in eight homes exceeded 3,500 square feet, which was more than triple the average new home in 1950 (983 square feet). We have gone beyond shelter and comfort. A home is now a lifestyle.”
The author blamed keeping up with the Jones. “The impulse to announce more success by having more home seems to span all classes…(another economist) sees a ‘cascading effect’ of imitation all along the social spectrum. The super-wealthy influence the wealthy, who influence the upper middle class -- and so on. People constantly enlarge their notion of ‘what kind of a house does a person like me live in.’”
But he also blamed government policy. The federal subsidy from the mortgage interest deduction is greater the higher one’s income (and thus their marginal tax rate) and the larger the mortgage (and thus the house). Since the election of Ronald Reagan in 1980 and the start of the “small government” era, no type of federal spending has been cut more than subsidies for low cost rental housing. Meanwhile the cost of the mortgage interest deduction has soared even though most people in the working and middle classes – who end up taking the standard deduction – get no benefit at all.
State and local policy also plays a role. For most of the last 50 years, better off people have wanted to live near other better off people – and as far away from those who were less well off as possible.. To keep down their local taxes, by keeping the less well off and their burdens out of their local communities. Due to fear of crime. And to increase or maintain the value of their houses. City planning was corrupted into exclusionary zoning, with large lot sizes and in some case large buildings mandated to keep the cost of housing high.
That is why housing has remained expensive despite all the excess supply. Were it not for regulations, there is so much square footage in this country, and so many extra bathrooms, that property owners could easily and cheaply add additional housing units simply by adding a few walls and kitchens. Housing units that could be as good or better than those of the 1960s – and as large. Housing units that would provide rental income. With that much possible competition, housing ought to be dirt cheap. But zoning single family zoning makes such subdivisions illegal in most of suburban America.
To me, all this has been nuts. Don’t people have something better to do with their time or money? And with the bursting of the housing bubble, many younger Americans seem to be thinking the same way. They are choosing smaller housing units, trying to locate in transit-served locations, living with friends, living with their parents or having their parents live with them. And even though most young people still say they want to be homeowners someday, more of them are renting until they can settle down.
The supersizing of housing hasn’t taken place to the same extent in the New York area, where most housing units were built before 1970. And exclusionary zoning is less of an issue in New York City, outside of a few neighborhoods such as Tribeca and Soho with minimum unit sizes. In fact, New York City has perhaps the most liberal zoning in the country.
But there are still housing affordability problems, problems that might affect my own children when they seek to move out on their own someday soon. Now that a rising share of households want smaller housing units in walkable, transit-served neighborhoods close to where they work, there is a shortage of them. The rent and sales prices in places like Brooklyn has soared relative to more typical suburban and exurban housing all over the country, in many cases barely deflating from the peaks of the housing bubble. Economically and socially viable urban places have become scarce relative to the demand for them, while suburban and Sunbelt housing has become over-abundant. And housing prices and rents reflect this.
In 1994, for example, the 1915-built rowhouse we purchased in the Windsor Terrace area of Brooklyn, a 1940-built rowhouse with garage in Forest Hills Queens, and the kind of detached house my wife grew up in after her family left Brooklyn, built in the late 1950s or early 1960s in North Wantagh, Long Island, all cost about the same. Today the Windsor Terrace house would cost far more than the Forest Hills house, and at least double and perhaps triple the cost of the North Wantagh house. This shows a massive shift in the relative value of different types of locations. And as a result the next generation may be priced out of the types of housing and places that are (or at least ought to be) less expensive to live in!
Could more viable urban places be created to meet the demand?
All across the country, the central areas of older cities are seeing extensive reinvestment. It is farthest advanced in places like San Diego or Chicago, but even in dying cities such as St. Louis and Detroit, the cities with the highest murder rates in the U.S., the Downtown area has had an increase in middle class housing, a residential renaissance. Downtown Detroit, in fact, is the most active real estate market not only in the city of Detroit but also in the entire Detroit metro area.
The problem with most older cities, however, is the government – the taxes it charges and the services it can provide. The suburbanites of a prior generation left social and fiscal burdens behind when they moved out, often keeping the local government jobs as sinecures and not doing them well. The result is high taxes for past debts and pensions, bad schools, and collapsing services – including collapsing transit systems. The cost of housing is thus intertwined with the cost of education and transportation, which will be discussed later, with under-funded and/or ripoff public education continuing to drive people out of urban areas who would otherwise choose to live there.
In addition most of the new urban housing, while smaller than the McMansions, is not built to be cheap. Architects have not produced an urban equivalent of Frank Lloyd Wright’s Usonian House, intended to provide a better life for the masses in the suburbs. The sale price or rent of most new urban housing is new high, and all those glass exteriors tell me there isn’t much regard for operating costs, either. Nor has there been too much innovative thinking about how people can live together in communities in ways that are different and cheaper, but not necessarily worse. Most people who are doing so are living in neighborhoods that were built before 1950, rather than in new neighborhoods with different designs.
The way most affordable housing has been produced in this country for 100 years, however, is not through the construction of new “affordable housing.” As in the market for automobiles, developers have provided affordable housing by producing new housing for the better off, who then left the older housing to the less well off at lower prices. That older housing will increasingly be found in the suburbs. Can the suburbs be rebuilt into places with a lower cost of living? Because that is where most Americans will have to live.
That too is happening, but with community opposition. When developers propose multifamily mixed-use projects in the suburbs, as they are in metro areas from Boston to Los Angeles, they claim the new housing forms will accommodate people who drive and park less. But older opponents claim everyone will still want one car per adult and drive as much as before, and more density will just mean more traffic and more parking scarcity. They went to want to keep multifamily housing out of their communities.
The conflicts could get even greater as desperate homeowners, and speculators, try to get some value out of existing houses by converting them to businesses, or mixed homes/workplaces, or adding housing units within existing buildings. In fact, the purchase of foreclosed one-family homes by investors, and their use as one-family rental units, has the potential to cause social conflict in the coming years. With older generations with older attitudes dominating many stressed suburban communities, I wouldn’t be surprised to see racial overtones to conflicts over the FHA, Fannie and Freddie selling houses to speculators who rent them out.
Recent articles have pointed to a near panic that younger generations are not buying the previous generation’s housing at high prices, to benefit older folks and banks. The response has been a series of policies to try to keep up housing prices, all of which have made younger generations worse off. You had an $8,000 first time homebuyer tax credit. The median existing home sales price fell by $12,000 as soon as it expired, so all that tax credit did was cause the buyers to pay the sellers more – and then pay again in taxes to pay back the federal debt associated with the tax credit. You have regulators, Fannie and Freddie keeping homes off the market to slow the falling value of housing (despite the falling value of labor).
Everyone in government, finance and business seems to be pushing for higher housing prices, and trying to get younger people to buy at higher prices And as a result according to one Reuters article, “more than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth because of “home values still falling in many parts of the country.” The decrease “raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.” Of course they are. That’s the idea. “Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America. Even for loans taken out in December - less than four months ago and the last month for which data is available - nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.”
In trying to reduce their future housing costs, therefore, younger generations face a battle –against both public policy and public and private propaganda. The only response is to organize, hold out, don’t overpay, and re-imagine and reorganize more places into the kind of places that can be afforded. And in the mean time live with others rather than alone – with your family if you have a good one located where you want to be, with friends otherwise – to keep housing costs down.
The likely direction of the battle was summed up in this Boston Globe article based on this paper. “Basically, we have mismatch, with an epic number of Baby Boomers, numerically the largest generation in history, heading into retirement and looking to sell their homes. But there is a dearth of 30-to 45-year-old buyers available or even interested in moving on up into these big Boomer suburban palaces. The numbers, as Lucy lays them out, are startling. There are now five homeowners 55 and older for each potential first-time buyer between 30 and 44. That's a 5-to-1 ratio today, compared to 3.5-to-1 in 2000 and 3-to-1 in 1990.” And the older sellers are richer than the younger potential buyers.
The Globe doesn’t’ think suburban housing prices will collapse. “Aging Boomer homeowners hold the trump card here - they don't necessarily have to sell and won't unless they get a price they like. Instead, Lucy sees a future where the housing market is far less fluid than it has been in years past. Hence his prediction we were entering the ‘Fix-Up, Remodel, Expand and Condominium Era.’ Instead of settling for long commutes to bigger homes in the outer suburbs, the up-and-coming generation of buyers in their 30s and 40s is more likely to prefer the convenience of the inner suburbs, even if that means fixing up an older home or buying a condo.”
There you have it. Of course even if they do not choose to sell, the aging suburban homeowners will eventually pass on. And if their heirs (or lenders) are elsewhere, they may want to dump the property. The bottom line is, communities are going have to figure out ways to become cheaper and economically viable places to live for the younger generations that older generations have impoverished, or become NORCs (naturally occurring retirement communities) and then declining rapidly as prior generations pass on. Eventually, some of them will have to deal. And some of the cities will have to deal too, perhaps exempting new housing or even new people from the burdens of the past to avoid being abandoned, as New York City did when it exempted new housing development from property taxes in the 1970s.
Not buying an existing house unless and until it hurts for someone to sell it is the only trump card younger generations have. They should not give it up lightly. And they should ignore social pressure to have, maintain and operate more square footage than the really need, in far out locations where they will lose lots of gas money out of their pockets and hours and hours out of the their lives on the road.
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