As I think about the real estate market of the summer of 2009, an unnerving image comes to mind. We Americans collectively stand in the middle of our street. From our vantage point, we can see an abandoned foreclosure at one end of the block, and an overbuilt McMansion with a swimming pool on the other. And something is wrong on both ends.
Outwardly, the housing bubble brought us here. But did our ideal of an ownership society — the promotion of a dream of American homeownership as universally attainable and worth achieving through public policy — actually pave the way to the bubble and the corresponding global financial meltdown?
To answer that question, we must examine how homeownership patterns have changed since World War II. Any cursory look at the national rate of homeownership shows great consistency until the early part of this decade, when the real estate bubble began inflating in earnest. Until then, the ownership rate was consistently around 65 percent of American households. We can consider this the saturation rate, or carrying capacity, of Americans who can live in housing that they own.
What happened next? Why did we see rates of homeownership rocket to nearly 70 percent in recent years?
My personal view — and it’s not a unique one — is that the dot-com bubble set the stage for the housing bubble. Media and cultural commentator Doug Rushkoff, author of Get Back in the Box: Innovation from the Inside Out, describes this position well. In April, at the Web 2.0 Expo in San Francisco, he asserted that the global financial crisis is the web’s fault. “And it’s a good thing,” he added, noting that the collapse presents the opportunity to halt a historical pattern of extracting value from people and companies where it doesn’t exist in a true, intrinsic way.
Sloshing money finds a target: real estate
Whenever there is an economic crash, from whatever cause, a typical modern governmental response is to “loosen” monetary policy. This generally creates a pool of capital that begins to accumulate around the world, looking for something to invest in. And when your hear the sound of money sloshing, you can be sure that it will invariably to begin to coalesce somewhere, around something, whether it’s hamburgers, CPUs or real estate.
The dot-com bust of the late ’90s was no different. It created a reaction in monetary policy that sent money sloshing away from dubious technology companies toward housing, a seemingly safe and stable investment. It’s worth noting that the dot-com boom, precursor to the bust, had helped to create transparency in the housing market through new Web sites dedicated to providing unprecedented access to housing and personal finance data. The groundswell of information and analysis on the Internet created demand for innovation and marketing of real estate financial products — now everyone was an investor! Sayonara to the 30-year fixed mortgage for a decent home in a pride-of-ownership neighborhood. Hello, flipper!
The resulting run-up in homeownership lined up with the peak in home prices. And universal homeownership was declared by our government to be a worthy and attainable social goal. Unfortunately, it turns out that the policies behind the “ownership society” actually ended up increasing prices, not the reverse, as we see in gut-wrenching Technicolor now. In the end, no one can really afford the new financial products that were positioned as vehicles to created unprecedented affordability.
Which brings us back to that bipolar view of the residential street. The plain truth is that we may have surpassed an upper limit of true homeownership capacity in this country. We now have a choice to use public policy to make homeownership more affordable in the future, or to support the status quo, but not both.
Radical agenda would commoditize housing
One policy approach that will actually make housing more affordable involves a radical agenda to commoditize the housing market. In this scenario, all financial incentives must disappear: the mortgage interest deduction, property tax deduction and the (new) first-time buyers credit. The effect of this is perverse: In the short-term, only people with large stores of cash would be able to afford to buy homes. Eventually, the law of supply and demand will bring prices down. If we decide that pride of ownership is a salutary goal and therefore we want more people in houses they own, we need substantial policies that remove incentives and therefore commoditize homes.
One of the obvious long-term effects of this approach would be to erase vast amounts of home equity. It would similarly deflate homeownership professionals of all kinds. Yet it provides a mechanism to eliminate the phenomenon of the real estate bust-and-boom cycle. It’s a once-in-a-lifetime opportunity to reset a whole society.
The alternate view holds that we should instead buttress housing policies that will normalize where we’re at, and ease us out of our current crisis. In this scenario, we’ll dip below historical levels of ownership before we rise again. And we will continue as a society to view housing as the single biggest focus of our personal wealth.
Which path to choose is a question for all of us, and for our federal government. Do we have the guts to fix the problem — truly fix it, through major social re-engineering — or do we simply want to get back to “normal?” The ideas most discussed by the administration support the latter view, although its feint to eliminate the mortgage interest deduction earlier this year is an exception that suggests an undercurrent of will to do something fundamental.
Is homeownership a right or a privilege?
The debate we should be having with ourselves as a society is whether homeownership is a right or a privilege. Who “deserves” to own a home? Is there really a social good when we are all owners? We now see the consequences of stretching ourselves as a society to make housing more “available.” For most of our experience, only a certain percentage of us could save enough to successfully move into a home of our own. Does the family that overspent on a no-doc, interest-only loan for a McMansion they should never have been in deserve our help now?
One of the most visible proponents of the radical agenda is the Yale economist Bob Shiller, who refers to it as the democratization of homeownership. In his latest book, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It, Shiller argues that we should choke down our medicine and make homeownership more affordable for everyone. He also suggests a futures market for housing, which would create a space for speculation that doesn’t involve buying or dumping houses, themselves.
Without such a market, where would we choose to develop our personal wealth? Perhaps we could create a futures market for intellectual property, since we’ve become a nation of knowledge workers. Or invest in beanfields. Truly, we are at a crossroads, with the possibilities and challenges a crossroads portends.
If all this change sounds really hard in the short term, think about the consequences of trying to dial back to the elevated housing market of the first half of this decade. The law of unintended consequences holds that in addition to an action’s obvious outcome, there’s always a secondary reaction that creates more, and sometimes even greater, change. So when the dot-com collapse was addressed, it wasn’t seen at the time as potentially leading to a collapse of the world economy. And it didn’t — at least not directly — until our reaction to it set up the next bubble.
Treating the current crash as a blip to be smoothed and tamed can also have consequences we can’t predict. The current federal policy will cause more unintended consequences — inflation, deflation, stagflation. The scary thing is that we don’t even know which one right now. But we can decide, today as never before, what the true role of homeownership in the American dream should be. It may well be the most interesting debate our country has ever had about both our values and where we are going as a society.