The Home Finance Arms Race
posted by Frank Pasquale
A growing consensus seems to be emerging that we can borrow and spend our way out of the current subprime mess. The “stimulus package,” the Fed’s interest rate cuts, and new moves to increase the limit on “jumbo loans” all seem based on this assumption. Given that the U.S. is already racked with debt, I can’t quite see the logic here. Moreover, as Harold Meyerson noted recently in Congressional testimony, there’s a much simpler explanation for the current housing woes:
The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, “forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.” And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.
Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.
If economic policies focus solely on allowing the middle class to borrow more, they may well be setting us up for yet another arms race of housing finance that we can ill afford. Consider, for instance, the effects of inequality in New York City, a bellwether for trends likely to affect more of America:
[I]t’s not just real estate. It’s everything, or near everything, and it’s ratcheted up even more in the last few years. As the value of homes and stocks and salaries has spiked, there’s been a kind of arms race of acquisition that has touched every little facet of our lives. You don’t just go to the store and buy groceries, like a regular person; now you fetishize [them] . . . [at] Union Market, where among other preciously presented items there’s a loaf of raisin-walnut bread that isn’t quite as fresh and delicious as the raisin-walnut bread the Lopezes used to bake. But it is three times as expensive.
Wine. Jacques Torres chocolates. Kiehl’s skin creams. Kids’ clothes! . . . Why do we dress our kids like Johnny Depp and Kate Moss? We’ve all gotten pulled into this slipstream of wealth. We have some friends who have a friend who chartered a jet to fly 50 or so of his closest friends to a Mexican resort to celebrate his birthday last year. There’s no way they can repay that in kind, obviously, but the pressure’s on a little at the next dinner party he comes to, you know what I mean?
This is all tricky to talk about without seeming laughably self-absorbed, and I want you to know that I know how loaded we are, comparatively speaking, and not just loaded in that abstract compared-with-the-developing-world way; we’re loaded compared with most of the people in this city. But that too is part of the problem. You don’t feel connected to anyone, in a way, not to the people who have so much more than you and not to the people who have so much less. Money has stretched us all apart from one another.
Real estate’s “two americas” may be proliferating into many more tiered options, but the bottom line is that inequality is eroding social ties (and economic hopes) in many ways. The “cheap money” solution to the housing crisis may be less panacea than poison, leading more people to take on more risk in the hopes that ever-rising housing prices may cushion them financially–and thereby risk major losses if those hopes fail to materialize. The next bubble to pop may be far more painful.
February 14, 2008 at 8:45 am
Posted in: Consumer Protection Law, Culture, Economic Analysis of Law, Law and Inequality
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Responses (5)
Freddie Moorer - February 14, 2008 at 9:25 am
Thank you for taking the time out to look at the whole picture. The pressure to keep up with the Jones seems to consume everyone’s life. Lending institution is laughing all the way to the bank as we struggle to stay afloat. Time will tell if this “Stimulus Package” is cure all end all or just another band aid.
Freddie Moorer - February 14, 2008 at 9:25 am
Thank you for taking the time out to look at the whole picture. The pressure to keep up with the Jones seems to consume everyone’s life. Lending institution is laughing all the way to the bank as we struggle to stay afloat. Time will tell if this “Stimulus Package” is cure all end all or just another band aid.
Freddie Moorer - February 14, 2008 at 9:25 am
Thank you for taking the time out to look at the whole picture. The pressure to keep up with the Jones seems to consume everyone’s life. Lending institution is laughing all the way to the bank as we struggle to stay afloat. Time will tell if this “Stimulus Package” is cure all end all or just another band aid.
Joe Blow - February 14, 2008 at 10:35 am
All this proves is that people are too stupid to make important life choices. I guess it is time for the government to step in.
Lori Ringhand - February 14, 2008 at 10:41 am
This is interesting, but it seems to me that you raise two different problems, and I am not sure how you intended them to intersect. The first problem is that real wages have flatlined and that many families have to borrow to maintain a middle class lifestyle. The second is that that lifestyle itself has become absurdly inflated and status conscious. I agree with both of those things, but they seem to pull in opposite directions in terms of remedying the current crisis. The first framing of the problem is sympathetic to a middle class that can’t keep up because of wage stagnation. The second is not, in that it seems to imply that we should raise real wages so more people can buy more overpriced things they don’t need. I think you meant to focus on the first problem, but would be interested in hearing more about your understanding of the intersection of the two.
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