Housing Crisis

Originally published 6/2008

Housing is down again. That is not really a surprise. The big surprise is the 08 candidates want to give away more money to fix the economy. I like more money too. I haven’t received anything from the latest attempt to revive the economy, though, so it might be nice to get that before they do it again. The next bailout should be directed at solving the problem rather than just stimulating the economy. The problem is too much debt, too many failed policy’s, and too much miss-direction. The problems, policy’s and missed directions are now compounding themselves. I see the current problems as follows:

On the supply side:

Baby boomers who bought houses in the70’s, 80’s, and 90’s now have kids going off to college and career, are either downsizing within metro areas, or out sizing to smaller cheaper cities, or back to rural America. This will continue to drive housing supply up for may years to come – because the last baby boomer who was born in 1964 will turn 65 in 2029. Remember, most baby boomers were born between 1954 and 1964.

Builders are still building $900,000 show homes – when relatively few people want, need, or can afford them. These monstrosities, or Mac-Mansions sit empty for years telling everyone in the neighbor hood there is plenty of availability – even if all that is available are houses no one can actually afford. When the discounted $300,000 sign comes out desperation is communicated and the problem gets worse.

On the demand side:

Retiring boomers moving out of large house are looking for smaller, with less upkeep and no lawn work requirements. This demand is dependent on the sale of a preexisting large home.

Boomers’ children who are now graduating from college are not yet old enough to afford to buy in. They are also saddled with massive college debt. It will be many years before they can land solidly on the demand side. Parents are also burdened with PLUS loans which prevent them from helping with down payments, etc..

Fixing the house

The current trend in housing is to use building materials and designs which have less than a fifty year life span. This situation is producing a generation of housing which can serve only one or two families, instead of good real property homes which are endlessly remolded, re-arranged, and serve generations of families.

Effectively today you have new houses – like in a new car, and used houses, like in an old clunker. Building codes and methods have improved. However designs and construction materials which are neither easily replaced or repaired, limit the life span of all but the most expensive new homes. This particular practice puts the mortgages on those homes at risk. Essentially the buyer is paying rent to the mortgage bank, for use of his house and lot, with the dream that one day the lot will have an inflated value totaling more than the interest and principal he has paid over the life of his mortgage loan.

If you have spent time looking at homes built since the 1960’s you can spot these guys miles away. If you can’t – then walk into a kitchen and sniff. The neighborhoods are in decay, the guy selling the house wants out – the house is smelly, cramped, and falling down around him. The only thing to be done, is to unload it on someone, or have it moved to a construction site dumpster. Effectively these homes are not “real property” they should be called “use and throw away houses.” Compare that to a 90 year old house some friends of ours moved to their vacant lot a few years ago, setup and lived in like it were new, after they did some remodeling.

Perhaps the “Use and Throw away Model” is more appropriate for our time. If so it is certainly not actually worth $150,000 on a $100,000 lot in 2008. House trailers are “use awhile and throw away”, real property stick built homes should not be. Some of the “Manufactured with some assembly on site” homes are better constructed with better materials than the run of the mill stick built subdivision home. At least the factory has some semblance of quality control. These houses are perhaps better constructed with higher quality materials than most of the stick built homes I have seen. Home builders sometimes cut a lot of corners to keep prices down.

As a society we have made great strides in reducing costs, waste, etc.. but not in home construction. That problem will need to be addressed and fixed before the housing problem is truly over.

Stabilizing Income

An obvious second step would be to fix the health care mess. Each and every American has essential and necessary health care requirements. This would remove one of the major risk factors to family finances. It could have the additional reward of helping stabilize business finances. Health Insurance is not a solution simply because the cost of providing insurance, plus the cost of dealing with insurance companies is perhaps as high as 80 percent. Many providers allow a 40% discount for those who do not have health insurance. This amounts to a charge of 40% for dealing with insurance companies, their requirements, and issues. Perhaps forty percent of health insurance premiums are for continuing operations, and profit. This leaves 20% of the premium to actually pay the provider. Eliminating this and other inefficiencies in the health care delivery system would save a lot of time, money, and get more people treated.

An obvious third step would be to pay down or eliminate college loan balances so the rising generation of graduates can actually participate in the American economy. The fixes to the college loan programs of a few years ago made for “good sound bite”, but eliminated grant and scholarship opportunities, and effectively removed these graduates from the non-rental consumer real estate markets. My republican friends are always looking to cut taxes, lets cut the taxes on housing, meals, and living expenses of American college students. Of course it doesn’t help that real-estate is so overvalued that no one – not even those with a decent income can afford it.

The process of collapsing the mortgage bubble needs to continue to push prices down to affordability, and eventually back to some rational realistic baseline value scheme, which can be supported by the incomes Americans actually make on a day to day basis.


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