Wednesday, September 29, 2010

Not Keeping Up With the Joneses

The revelations about the financing of single-family homes that have come out in the last five years, and particularly in 2009, must have changed the cultural meaning of houses in a way that will affect the housing market for the rest of our lifetimes.

To my mind, the gee-whiz statistic about housing in the United States is the one about average home equity. At one point, in 2007 if I remember correctly, the average home equity fell below 50 percent. For all the houses combined, not just the ones that have mortgages, the banks’ share of equity is greater than that of the homeowners. Imagine that homeowners own all the houses west of the Mississippi River, while the banks own all the houses east of the Mississippi — the actual situation is a little bit worse than that.

If that statistic didn’t sink in, the large numbers of foreclosures and short sales surely did, making the same point. Americans, in general, do not really own their houses.

Before the public discussion of the housing market that has taken place since 2005, I have to think that many Americans had a mistaken picture of the financing of houses. Many homeowners, we now realize, had no idea how much they owed on their own houses. But among those who did know how deep in debt they were, they may not have realized how their houses compared to the houses around them, financially speaking. If you owe $395,000 on your $425,000 house, and sometimes have trouble making the payments, it’s easy to feel like an imposter. When you know your own financial situation, but don’t know the details of anyone else’s, you can imagine that most of your neighbors have mostly paid off their homes. How many households were secretly, shamefully in financial distress in 2004 or 2005, thinking that they were the only ones?

Of course, no one could imagine that now. If there is financial distress connected to the mortgage on your house, you now know that it’s not just you. It’s a problem that’s repeated in approximately half of the houses in the country. It isn’t really much comfort to realize that, but it does put the situation in a different light. This change in perspective has to affect people’s future home-buying decisions.

When you look at what might affect the housing market, perhaps the most profound implication is this thought: If I felt pressure to buy a house to keep up with everyone else, I was probably aiming too high. Most of the people I thought I was keeping up with can’t really afford their houses either. The people who are sitting pretty right now are not the people with the biggest or nicest houses, but the ones who have their houses paid for — along with the ones who don’t own a house at all. The next time I buy a house, I’m going to make sure it’s one I can easily afford.

It is not just people who dug themselves into a financial hole who may be reaching this conclusion. Those who considered doing so and decided against it may be even more emphatic about it. The thought might be: It is so much better to looking at ways to pay off a mortgage than it would be to be living in a house with an underwater mortgage and trying to find a way to get back to zero. The next time I buy a house, I hope I don’t have to borrow any money at all.

I have previously mentioned the lifestyle considerations that are leading people to look for smaller houses. Now, here is a separate reason that may be pushing people in the same direction. The result is a lasting, or essentially permanent, reduction in demand for housing. And, as this won’t show up until people move to a new house, it’s an effect that might continue to exert downward pressure on housing for the next 10 to 15 years.