In the United States a man builds a house to spend his latter years in it and he sells it before the roof is on.
Alexis de Tocqueville - Democracy In America, Volume 2 - 1840
Observations - 2011-2012
Mr. Tepper's $43.5 Million Mansion makes way for his dream mansion
Cleveland covets mortgage settlement money for demolition of abandoned homes
Is This The End Of Wall Street As They Knew It, NY Magazine:
Consciously or not, as a city, New York made a bargain: It would tolerate the one percent’s excessive pay as long as the rising tax base funded the schools, subways, and parks for the 99 percent. "Without Wall Street, New York becomes Philadelphia" is how a friend of mine in finance explains it.
Inspiring stuff, huh?
Several years ago, in conversation with a senior executive at one of the largest US construction contractors, I related this story told Danny Hillis:
I think of the oak beams in the ceiling of College Hall at New College, Oxford. Last century, when the beams needed replacing, carpenters used oak trees that had been planted in 1386 when the dining hall was first built. The 14th-century builder had planted the trees in anticipation of the time, hundreds of years in the future, when the beams would need replacing. Did the carpenters plant new trees to replace the beams again a few hundred years from now?
As an inherently conservative woman, I love that story. A builder with so much foresight and pride in his work that he constructed a building to last for hundreds of years. The executive laughed and said, “We build to last twenty years. After that, we get to tear it down and build a new one. That's how we make our money.”
Yet, that's not how people view houses. Houses are part of The American Dream. A home for life. A dream that came its closest to reality in 1970. Consider California:
In 1970 the median price for a house in California was $23,100. The minimum wage was $1.60/hour (annual full-time $3,328). The median house price to minimum wage ratio was 7:1. That median house price adjusted to 2000 dollars was $88,700. The actual median price in 2000 was $211,500 and the California minimum wage was $5.75/hour (annual $11,960). That median house to minimum wage ratio was then 18:1. Oh, sure everybody said it was crazy, but it cemented the psychological shift from "a house is a home" to "a house is a great investment." Whee, I'm rich!
What's troubling is that even after the bursting of the US housing bubble that led to the Great Recession, we still believe that housing, once new construction gets going, will fix the economy and become a great investment again. Still talk as if trillions of dollars in homeowner equity was real and was lost. And public policymakers encourage and support boosting home ownership. As noted in 2009 in The Economist
In mid-February Barack Obama proposed a $275 billion plan to support America’s housing market. Outside the Anglo-Saxon world Nicolas Sarkozy, who campaigned for the presidency to turn France into a property-owning democracy, has expanded zero-interest housing loans for the poor.
The main economic argument for home ownership is that, in the words of Thomas Shapiro of Brandeis University, “it is by far the single most important way families accumulate wealth”.
The Economist disagreed and preferred:
“Given the way US policy favours owning over renting,” writes Paul Krugman, 2008’s Nobel laureate in economics, “you can make a good case that America already has too many homeowners.” Edward Glaeser, an economist at Harvard University, talks about “the madness of encouraging Americans to bet everything on housing”.
Is Krugman right? And if so, would lower rates of home ownership, to less economic security and less wealth for more Americans? The answers are yes and no as I'll present in Part III.