I've been thinking a lot about the global mortgage crisis that's been unfolding over the past few years. Typically, I see the usual suspects trotted out as the reason: profligate consumerism, greed, banks, politicans, and the like. I thought I would assemble the data, and try to make sense of it from there.
data from: http://www.census.gov/ 1 2 3 http://www.infoplease.com/ http://www.data360.org/
|Households, Owner, th (Ho)||40834||46423||52223||56152||60248||64739||71250||74553|
|Households, Renter, th (Hr)||22806||25462||27415||31736||33976||35246||34470||33678|
|Households, Vacant/Other, th||6137||6896||8101||9446||12059||12669||10439||11916|
|Population, th (P)||203302||215973||226542||237924||248709||262765||281422||296000|
|median home price, $||23400||39300||64600||84300||122900||133900||169000||254389|
|median income, $||8000||13719||21023||27735||35353||40611||50732||55823|
|change in pop, th (ΔP)||12671||10569||11382||10785||14056||18657||14578|
|change in home ownership, th (ΔHo)||5589||5800||3929||4096||4491||6511||3303|
|change in rentals, th (ΔHr)||2656||1953||4321||2240||1270||-776||-792|
|pop per household (P/[Ho+Hr])||3.0||2.8||2.7||2.6||2.6||2.7||2.7|
|ratio change pop/change households (ΔP/[ΔHo+ΔHr])||1.5||1.4||1.4||1.7||2.4||3.3||5.8|
|home ownership, % households (Ho/[Ho+Hr])||65%||66%||64%||64%||65%||67%||69%|
|home price as multiple of income||2.9||3.1||3.0||3.5||3.3||3.3||4.6|
|rise in home price, % annualized||14%||13%||6%||9%||2%||5%||10%|
|rise in income, % annualized||14%||11%||6%||5%||3%||5%||2%|
The important number set, that I highlight above, is what I would like to call ΔP/ΔH. This is the change in population, and how the change in housing is responding to it. ΔP in the above table represents the change in population- plus people are born, minus people who die, plus people who immigrate, etc. They have to live somewhere, and the change in housing suppy is represented by ΔH. There are a lot of net effects aggregated into these numbers. For example, newborns don't tend to move into their own houses, so there's going to be some lag in housing change relative to population change. Conversely, other life changes might mitigate that- parents of a newborn might decide to get their own place, etc. Therefore, it seems acceptable to make the comparison as I have. Each set of data represents the change over the previous five years.
As you will observe, something started to happen circa 1990. The value of ΔP/ΔH begins to increase dramatically, doubling, and then doubling again, exponentially growing. I think that this could be viewed as a kind of pressure on the housing market- as the number rises, there is going to be a pent up demand. Increases in demand, naturally, are going to result in increases in prices. Beginning in 2000-2005, we begin to see the effect of this- the ratio of median home prices to median income begins to skyrocket, increasing by 50% from longer term averages. Typically this is blamed on the twin evils of low interest rates and increasing speculation, but in comparison to ΔP/ΔH, is seems entirely reasonable and explainable based upon simple supply and demand economics.
What is the source of this incresed demand, and why has it been a problem?
One explanation, which I feel is both needlessly xenophobic as well as insufficient, is that uncontrolled immigration is the source of the problem. I have not collected enough data, but a cursory examination has shown me that up to half of ΔP is driven by immigration. I've also noticed a spike in news reports of "spanish language" realtors taking advantage of people, writing adjustable contracts when the buyers are seeing only the immediate 0% teaser rate and not the 8% or higher long term rate, and buying much more house than they can afford.
Clearly, buying "too much house" is an obvious contributor, and is often reported as the cause of the bubble- people buying mortgages well beyond their means, and then subsequently needing to churn the paper or declare bankruptcy. Personally, while I might agree that this is perhaps the immediate cause, this is not the root cause. There's definitely a supply problem: people have to live somewhere, and either the occupancy/density must increase, or more supply must be built (or you'll see what we're seeing, that is, good housing can't be bought at any price!)
The strong message everyone's been getting is "don't rent: BUY!" This is part of the problem: we are learning, through endless hours of Suze Ormond and the like, to become masters of our own destiny. We want our own little slice of America. We want to be part of the ownership class. This is perhaps a sound message, but it requires a good supply of these slices.
We're also quickly approaching a series of big generational changes. As the "Boomers" grow older, they are retiring (meaning fewer workers to prop up social security) and needing more health care (meaning increased stress on Medicare and our health system). These are the sirens we have expected Ship America to be dashed upon, but there's another worry. As the boomers age, many are selling their homes to either trade up, out, or down. They still have to live somewhere, so their movement typically does not affect supply. Howeer, the cash to "cash them out" does need to come from somewhere, and my biggest fear is that Boomers are cashing out at the cost of Generation X, turning their equity into our debt. This is not a new concern: if it's not the warmongering or the environmental damage wrought by the Boomers, it was the massive deficit spending. Now, they're looking to cash out, and expecting many twenty through forty somethings to acquire the debt to pay them for the privilege. But: we X'ers just can't afford it. First of all, this is quickly showing us that there's not enough supply to go around for everyone, even if we could buy it. Second, it's unreasonable to ask us to take control of it at multiples of the levels they assumed. Third, if we're already getting screwed on retirement age, pension, and healthcare, does the Boomer generation expect us to bow over and take it on this as well?
There are solutions. We can live denser, but we can also build more supply. Even here in the Bay Area of CA, I see lots of idle and barren lots. We don't need to level the forests or destroy the farmlands- we do, however, need more housing, desperately. We also need ways to make better use of what we have. We need novel financial structures and new habitation models. We need better values, not just greater supplies, for rented housing. There's a renovating, "flip this house" fever that's caught many people into the property value trap- we need ways to harness this energy to renovate and revive planned/rented housing in ways that benefit tenant as well as landlord. Remodeling shouldn't be about pushing out lower incomes, but making the market accessible to everyone.
In conclusion, the current market crisis is not about bad debts. It's about a paucity of good choices and options. People are trying to make do with the paltry means they have: we don't need tighter regulations or irresponsible spending. We need new ideas, and leaders with vision and drive. We need to find ways to make more efficient use of what we have. And, we need to stop spending our children's inheritance.